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3 Top Popular Crypto Myths

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May 15, 2020 | 

Dan Mitchell |  0 Comments| 

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One of the greatest roadblocks obstructing mainstream adoption of cryptocurrencies and blockchain is a common lack of understanding. The problem is that a lot of people don’t thoroughly know what cryptocurrencies are with regards to: how they work, the underlying blockchain technology, and the economics.

These misunderstandings have led to the emergence of a number of common crypto myths.

What are these myths, and where did they come from? Read on to find out our top three crypto misunderstandings.

#1: Cryptocurrencies Have No Value, Because They Are Not Physically Backed

One of the most common crypto myths, due to the fact that (the majority) are not backed by real-world tangible assets, that cryptocurrencies do not represent a reliable store of real world value.

Whilst the value of many cryptocurrencies are based on speculation, this is very much the same for a large number of fiat currencies also. For example, the US Dollar (USD) has not been backed by material assets since the abolition of the gold standard (Bretton Woods).

Along with many other cryptos, the token value (and market cap) of Bitcoin is indeed influenced by trader speculation - however this is also the case for traditional stocks, and even fiat currency itself as most are not physically backed by underlying assets.

Just like with fiat currencies however, speculation itself reflects value in cryptocurrency. As such, statistics such as value and market cap is representative traders’ level of confidence in the token - and the value which they believe is worth paying.

Tokens like Bitcoin (BTC) and Litecoin (LTC) also draw worth from their value as ‘virtual currencies’. Others such as Ethereum network (Ether, ETH) and its many user forks can be considered as ‘utility tokens’ due to their value being derived, in part, due to the purpose within an internal ecosystem.

#2: Cryptocurrencies Use Too Much Energy

Another common misconception about cryptocurrencies is that they use up a lot of energy and thus, are bad for the environment. This was not entirely untrue and this concern originates with Bitcoin (widely considered as the first ‘cryptocurrency’) which was created by along with its whitepaper ‘Bitcoin: A Peer-to-Peer Electronic Cash System’ in 2008 by Satoshi Nakamoto.

The reason for this is because Bitcoins are created using a consensus mechanism called ‘Proof-of-work’ (also known as cryptocurrency mining). A consensus mechanism is the system of determining which - out of all potential validating nodes - deserves to receive the ‘reward’ for mining a new block.

With Proof of Work (PoW), cryptocurrency is created through a process called ‘mining’ in which ‘miners’ compete using devices (often a series of dedicated hardware devices) with a high combined computational power. There is also a high energy cost traditionally associated with this method.

The miner whose device setup successfully determines the answer to a complex algorithmic equation first out of all nodes receives the block reward - potentially leading to a perpetual ‘arms race’ with regards to processing power.

Despite this: we have come a long way from the days of Bitcoin’s early origins, and there is a much wider range of options for achieving consensus in signing a public ledger than just ‘proof-of-work’ available now.

Proof of Stake (PoS), for example, is one of many which do not require a large amount of processing power used competitively to achieve consensus. With PoS, mining (and network voting) priority is based on how many tokens are held by the node (aka their ‘stake’).

#3: Cryptocurrencies Are For Criminals

Cryptocurrencies have garnered a negative image due to the prevalence of stories in more mainstream general and financial news publications pertaining to criminal behaviour. Scams and fraudulent tokens made up a sizable quantity of ICOs during the 2017 bubble, this number has reduced greatly for example. This is for a variety of reasons…

Investor scepticism has increased since 2017 due to the bubble bursting. Another reason is that the high notoriety attained by high profile scams such as BitConnect have contributed to an increased level of awareness to such illicit activity amongst investors.

Additionally, because the number of new retail investors entering from outside crypto has dropped since the boom and bust of 2017 to 2018: the main base of token holders and investors are those who already have experience in crypto trading.

Another issue pertains to money laundering as the early adoption of digital currencies by shady entities on the dark web (namely dark web markets such as Silk Road) tarnished its early name.

It must be noted that now, many of these markets have been broken up by authorities such as the FBI. Also, the number of use cases for the technology (which has even been adopted by blue chip corporations such as IBM and Microsoft) far overshadows this early reputation.

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