Misconceptions about Cryptocurrency

Misconceptions about Cryptocurrency

Some people love cryptocurrency and see a decentralized digital future as the natural evolution of banking. Others see crypto as a passing fad designed to bilk people out of their savings. And then there are the rest of us, nodding politely as we quietly wonder why anyone would invest thousands of dollars into a digital currency based on a dog meme. So today we’re debunking myths about cryptocurrency.

We’ll discuss Bitcoin’s pseudo-anonymity, explain how these cryptocurrency relate to NFTs, and debate whether 99 percent of bitcoin is really owned by a handful of users. Let’s get started.

There’s an infinite supply of Bitcoin

There’s an infinite supply of Bitcoin

Part of what makes it so hard for people to even wrap their minds around cryptocurrency is that it’s not tangible. There is no physical cryptocurrency. (Well, there are some people who have tried to make such a thing, but it’s all a bit convoluted—in general, when we talk about cryptocurrency, we’re talking about a digital asset.)

The paper money in our wallets holds a certain value, and there’s only so much of that money in circulation at any given time. This, in theory, keeps that value in check. Print too much money, and the value drops and inflation rises.

But cryptocurrencies seem to be the opposite—they exist solely in the digital world and aren’t monitored or printed by a government. So, in theory, something like Bitcoin can be mined and bought in perpetuity by individuals until it’s essentially worthless. Well, turns out that’s not quite right.

Bitcoin was designed specifically to have a limited supply in order to prevent inflation and retain its value. And the complex system in place to maintain that limited supply is pretty ingenious. When the creators of Bitcoin—who operate under the Satoshi Nakamoto pseudonym—thought up this whole enterprise, they knew they needed to put a cap on their digital currency to preserve its value.

They settled on a grand total of 21 million units—that’s all the Bitcoin that will ever exist before the world hits the end of the road. But those 21 million units weren’t given to the public at once—each new batch of Bitcoin first needs to be mined before being released.

That requires a high-end computer mining rig, or multiple rigs, to solve a complex math puzzle. These puzzles have been described as both guesswork and a lottery. Even after trying four billion times, according to data scientist Kirill Eremenko, you have an estimated chance of success of .0000000001%.

So, as you can imagine it takes a lot of computing power to successfully mine. The first miner or group of miners to solve a given puzzle is rewarded by the Bitcoin network with a set amount of coins, which in April 2022 was around 6.25 coins, equivalent to about $130,000 as of July 11th, 2022.

That reward is only part of it: The mining process also creates new blocks for the blockchain, a kind of digital ledger for all Bitcoin-based transactions to be recorded and stored. Around 144 blocks are added per day and each contains around 500 transactions. Adding new blocks to the blockchain basically works to verify any Bitcoin transactions in progress.

Think of it as a replacement for your bank verifying all of your credit card purchases. Instead of a central authority like JP Morgan, it’s a peer-to-peer system without borders and without any one entity in charge. There are an untold number of miners out there working around the clock, so transactions—like one person sending Bitcoin to another—are typically verified within 10 minutes or so, depending on the volume.

So, yes, mining does yield new Bitcoin, but it also makes the whole blockchain system go ‘round by verifying the transactions taking place. To fight against inflation, blocks are designed to yield 50% fewer Bitcoins after every 210,000 blocks are released. That usually takes around four years or so.

Basically, the more we squeeze the orange, the less juice we’re getting. The creators were apparently thinking decades ahead when coming up with this strategy because while we’ve already mined more than 19 million Bitcoins, it’s estimated that the entire supply won’t be fully available to the public until 2140, thanks to the decreasing yields.

And that’s just the way Bitcoin works—other cryptocurrencies operate completely differently, from the way the blockchain is verified to the real-world assets that back them. But we’ll get to all of that in a minute.

Crypto is Guaranteed to Go Up

Crypto is Guaranteed to Go Up

While Bitcoin’s self-imposed scarcity is designed to preserve its value over the long haul, it’s not a guarantee that prices will go up, despite what passionate crypto evangelists might say on Twitter.

If there’s no demand for a coin—say, if it never becomes a universal payment option, or if speculative interest dries up—it won’t appreciate in value, no matter how tightly the supply is controlled. Scarcity alone does not guarantee value.

Let’s look at it in a way we can all understand: Through dog poop. If all the dog poop on the planet disappeared tomorrow, except for three handsome little logs, and all dogs stopped pooping, it’s hard to imagine those three dog poops would suddenly be worth millions of dollars. Right? … Someone, please tell me that’s right.

All Crypto Has An Equal Environmental Impact

pic credit: Financial Times

Bitcoin mining is an incredibly fascinating system, but its impact on the environment can’t be ignored: Those crypto miners out in the world all use beefy computer rigs that need to perform complex computing. That requires time, storage space, and, most importantly, energy.

It’s estimated that the combined energy usage of Bitcoin miners is 91 terawatt-hours of electricity every year, which is more than what is used by the entire nation of Finland annually, according to the New York Times.

But not all cryptocurrencies are created equal. Bitcoin’s system of using miners to solve math equations to verify and add to the blockchain is called Proof of Work. It makes for an extremely secure currency, but it’s also a big-time energy drain. Other cryptocurrencies—like Solana, Terra, and Cardano—use a system called Proof of Stake.

In this system, individuals who own a certain amount of a specific cryptocurrency can offer to validate blocks of transactions to add to that currency’s blockchain. As the name suggests, they do this by joining a group of randomly selected validators and putting their own coins at stake—like collateral—until the validation is confirmed.

Once confirmed by the consensus, the validators might get some cryptocurrency or a portion of the transaction fees associated with the transactions in the block as a reward. If a validator doesn’t do their job—if they go offline or try to attack the network, for example—some or all of their stake can be taken away in a process called “slashing.”

By depending on individuals with actual skin in the game, it’s theoretically supposed to be an honest system. Both methods use computer algorithms to validate transactions on the blockchain, but since Proof of Stake doesn’t require millions of miners competing with each other with the biggest machines possible, the energy usage is far lower.

Some estimates put it at more than 99 percent lower. Even amongst proof-of-stake cryptocurrencies, though, there can be a significant deviation in energy consumption. The way networks are set up and the specific hardware used to validate transactions can all affect the environmental impact of a given coin.

Cryptocurrency always functions as a currency

Cryptocurrency always functions as a currency

When Bitcoin first hit the mainstream, the general thought was that it would eventually stake a claim as a truly digital currency that cut out banks and allowed people to easily make transactions anywhere in the world. But despite gaining in value over the years, it hasn’t quite become that—no cryptocurrency has.

It still isn’t a readily accepted means of payment in the U.S. or around the globe. Even in El Salvador, where Bitcoin is legal tender, only one-fifth of businesses accept it. If you’re looking to spend your Bitcoin or Ether on real-world goods or services, you’re probably stuck going through a third-party app like Flexa. And even then, you’ll likely be hit with high fees and transaction times of up to 10 minutes or more.

Right now, the most convenient thing to do with crypto is to buy more crypto or liquidate it for a more traditional currency. Because crypto doesn’t exactly act like a currency, the U.S. government has settled on classifying it as a commodity.

Now, the definition of a commodity is pretty broad, but crypto does meet certain requirements: Like other exhaustible resources, many have a fixed supply and you can engage in futures trading with them, meaning you can have a contract to buy or sell specific crypto when it hits a certain price at a future date.

To many people, crypto is simply an investment like a stock. And a highly speculative one at that, subject to large swings. All that said, remember that a commodity today could evolve into a currency down the road, and there’s still a possibility that crypto will eventually become a convenient way for people around the world, especially in developing countries, to engage in traditional purchases without the need for a centralized bank. Or it might not. I don’t know. Neither do you… Leave me alone.

All cryptocurrency is bitcoin

All cryptocurrency is bitcoin

We’ve talked a lot about Bitcoin so far, and that’s only natural because it’s by far the most popular cryptocurrency. But there are thousands of different coins out there, each with its own quirks and rules. Some have a limited supply, some don’t.

Some have more interesting capabilities, like Ether, which is named after the blockchain it lives on that can be used to create NFTs. And some are just gimmicks, like the unauthorized Coinye modeled on Kanye West that was cease-and-desisted basically out of existence. Then you’ve got the less-litigious Cthulhu Offerings, based on the public domain character from H. P. Lovecraft. The world is not ready for a season 2 of Lovecraft Country all about crypto bros.

10% of bitcoin owners own 99% of bitcoins

10% of bitcoin owners own 99% of bitcoins

One highly publicized report from Bloomberg back in November 2020 stated that researchers at Flipside Crypto found that 2 percent of accounts control 95 percent of all Bitcoin. Other sources have listed those 10 percent and 99 percent figures we quoted at the top of this section.

If true, those whales could manipulate prices at will with shady pump-and-dump schemes and absolutely control all aspects of the market. But those figures are vastly overstated, according to Rafael Schultze-Kraft, a researcher for Glassnode, which describes itself as a “blockchain data and intelligence provider.

“ According to Schultze-Kraft, the report Bloomberg referenced looked at Bitcoin addresses, which are different from an individual person’s Bitcoin account. A single exchange address, for example, could hold the funds for millions of users, meaning a lot more individuals involved than you might realize. You can debate how meaningful that difference is.

Theoretically, in an unregulated market, a large exchange could unilaterally move its users’ crypto around if those users weren’t holding their assets in locally stored hardware “wallets.” The risks of hackers getting access to an online wallet system are real, as you might have seen in stories of crypto theft.

In practice, though, large exchanges like CoinBase don’t really operate like a single power user in the way that Bloomberg stat might suggest. A significant percentage of a token being held by millions of different users on CoinBase is not really the same thing as one person owning half of all bitcoins. That being said, crypto whales are out there, and Bitcoin is certainly no exception.

These whales buy up an inordinate amount of these currencies and do play a big part in their value. When Schultze-Kraft went through the data, he found that whale activity is indeed increasing but the figure is more like 2 percent of network entities control 71.5 percent of all Bitcoin. It’s still a lot—but it’s not as dire as some reports would have you believe.

And for what it’s worth, the concentration of ownership is not a problem unique to crypto. For comparison, it’s estimated that the wealthiest 10 percent of Americans own 89 percent of all U.S. stocks.

Cryptocurrencies aren’t backed by anything

Cryptocurrencies aren’t backed by anything

If you’re concerned that cryptocurrencies aren’t backed by any assets to help them maintain their value, you may be interested to learn about Stablecoins. These cryptocurrencies are usually backed by some sort of real-world commodity, like traditional currency or precious metals. The most notable examples are Pax Gold and Tether Gold.

These are gold-backed cryptos that are worth the same as one troy ounce of gold, according to Fortune. A troy ounce is a unit of measurement dating back to the Middle Ages when it was supposedly used in Troyes, France. One troy ounce equals about 31 grams or so, and when the value of gold goes up in the real world, so does the Stablecoin.

The interesting thing about gold-backed crypto is that you can exchange it for actual gold. This is actually reminiscent of the decades the United States spent on the gold standard, where you could trade in $20.67 for an ounce of gold. FDR put the kibosh on that in 1933 and all remaining ties to the gold standard were put to bed in the 1970s.

Since then, the U.S. has operated on a fiat money system, which basically means the U.S. dollar is backed by the assets and power of the government itself. Having a digital currency backed by a physical commodity might sound counterproductive, but asset-backed coins like this exist to cut down on the unpredictable nature of crypto. That’s the theory anyway.

In May 2022, as crypto values dropped across the board, Tether, a Stablecoin that’s supposed to have a 1-to-1 value with the U.S. dollar, dipped down to $.95 in value. Others fared far worse. terraUSD, an algorithmic stablecoin—which meant it wasn’t backed up by physical assets—had a similar $1 peg, but fell dramatically.

As of writing this article, one terraUSD coin is worth about five cents. TerraNickle isn’t such a bad name.

A dip in the crypto market proves the doubters right

A dip in the crypto market proves the doubters right

In November 2021, the crypto market was valued at $3.1 trillion, and enthusiasm around the world for digital currency had never been higher.

Fast-forward to May 2022, and the bottom dropped out, resulting in a $2 trillion loss across the entire industry on the back of inflation woes and other assorted economic fears. It was a staggering crash, one that many cryptocurrencies likely won’t ever fully recover from.

So, is that it? Did the bubble that so many people were waiting to burst finally blow? While no one knows for sure what crypto will look like even a year down the road, all you have to do is go back to 2018 to realize that a volatile market like crypto has bounced back from crashes before.

That year, Bitcoin shed 37 percent of its value at one point, losing $70 billion and falling below $4,000 per coin in the process. It was declared dead then, just as it was declared dead in May 2022. But if you had put money into Bitcoin when it hit rock bottom in 2018, you could have taken advantage of a historic bull market that rose from the crash’s aftermath and peaked in November 2021, when Bitcoin topped out at $68,800 a share.

Anyone move in a coin’s price—even a dramatic move that causes very real financial hardship for many people—is not necessarily a death sentence. Now, let me be 100 percent clear: just as a major dip isn’t a guarantee of a coin going to zero, it’s also not a guarantee that past recoveries are going to repeat themselves.

You might think you’re buying low, only to see prices continue to drop all the way to zero. There are no guarantees in investing and I think a very wise rule of thumb is that you shouldn’t put in anything that you can’t afford to lose. If it wasn’t obvious to you already, and I pray that it was, I am not a financial advisor. In fact, I have no idea what a 401k is, and I do not know what to put in each line of a check.

Whether the source you’re listening to is bullish or bearish on crypto, be wary of anyone who says they know for sure what the future holds.

All crypto transactions are eternally anonymous

All crypto transactions are eternally anonymous

Contrary to cliches, your crypto transactions are all somewhat publicly visible on the blockchain, which, again, is like a digital ledger. If you move your funds to a different account or buy anything with it, there’s a record of it. Crypto’s anonymity pertains to the digital wallets used to send, receive, and store currency.

Let’s use Bitcoin again as an example: To make a transaction, you would send the agreed-upon crypto to a recipient’s digital Bitcoin wallet through a digital address created by the wallet.

The addresses themselves use a combination of numbers and letters—no names—and they detail the transaction and the remaining balance. This transaction is public, but it only shows the nonsensical address, not a username. That said, if anyone could link your wallet to an address, through hacking or other means, they’ll be able to see your transactions out in the open on the blockchain.

This kind of visibility is an important tool when the government pursues crypto-related crimes. In February 2022, Ilya Lichtenstein, 34, and his wife, Heather Morgan, were arrested in Manhattan on conspiracy charges that they intended to launder $4.5 billion in stolen cryptocurrency.

This was one of the most high-profile crypto-related arrests in the U.S., and in a statement, Assistant Attorney General Kenneth A. Polite Jr. of the Justice Department’s Criminal Division stressed that “we can follow the money through the blockchain, and that we will not allow cryptocurrency to be a safe haven for money laundering or a zone of lawlessness within our financial system.”

So, yes, it’s far harder to track crypto transactions than traditional digital banking transactions, but if the right kind of information ever got out, then every move you make is open for the world to see. Especially the government.

NFTs are Cryptocurrency

NFTs are Cryptocurrency

NFTs and cryptocurrency often get conflated into one confusing digital stew, but they are not interchangeable terms. The NF in NFT stands for “non-fungible,” which is the whole reason people are drawn to them. That and endless internet hype about apes, I guess.

A fungible asset can be replaced or traded for another of equal value: A $1 bill can be replaced by another $1 bill and it still remains worth $1. It can then be split into four quarters or 10 dimes. NFTs are digital assets—most famously images, but sometimes music, domain names, or almost anything else you can dream up—and they all have unique digital signatures, so each one holds a specific value.

The easiest way to equate it to something in the real world is to look at baseball cards. If you have a mint-condition 1973 Carl Yastrzemski baseball card when he had the big sideburns, you could sell it for an estimated $1300 or so.

Imagine you loaned it to a friend for a few days. They come back with two cards featuring players with normal-sized sideburns. Even if the monetary value of the two cards combines to be 1300 dollars, it’s not the same thing. Even a different copy of the same card might not have the same value. They’re not interchangeable assets with a fixed value—same with NFTs.

A Bitcoin, on the other hand, will always be worth just as much as any other Bitcoin. In that way, it is fungible, just like BurnsCoins, the new crypto coin I just invented that celebrates Yaz’s sideburns…or maybe Homer’s boss on the Simpsons. White paper forthcoming.

Governments aren’t recognizing (or taxing) cryptocurrency

Governments aren’t recognizing (or taxing) cryptocurrency

Governments around the world are still feeling out the whole cryptocurrency thing, and that’s led to a lot of confusion over what’s legal to do with crypto and where you can do it. In some places, like China, Egypt, Morocco, and Bangladesh, cryptocurrencies are banned outright—meanwhile, in Europe, many countries are embracing them.

In the Swiss city of LuGAno, for example, you can now use Bitcoin and Tether to directly pay taxes and for goods and other services. It’s a small experiment, but it could be a glimpse at how these currencies will be integrated by governments at a larger scale across the continent.

In the United States, cryptocurrencies are legal but are not legal tender, meaning that the government hasn’t recognized them for settling debts. However, that doesn’t mean the U.S. doesn’t still want in on the action.

In February 2022, Colorado governor Jared Polis announced that the state plans to be the first in the country to accept crypto payments for taxes and other fees like hunting licenses. To actually get the money, the state will have an intermediary convert the crypto to dollars. More states, like California, have proposed similar bills that would allow people to pay for DMV fees and other government-associated expenses using certain cryptocurrencies.

As the states figure out how they want to utilize crypto, Uncle Sam is sticking to his classic playbook: He’s going to tax it. In the eyes of the U.S. federal government, any gains you see from selling crypto will be treated like any other stock or property you sell. It has to be reported on your federal income tax, and you will be charged by the IRS accordingly.

And if you happen to run a business that accepts Bitcoin as payment, you’d have to know how much Bitcoin was trading on the days you were paid in it and convert it to U.S. dollars on your tax return. In short: Prepare to do a whole lot of work if you’re fully embracing the crypto lifestyle.

Bottomline

Cryptocurrency is a subject that inspires some strong opinions, so I’m curious: what did we get wrong, in your eyes? What other misconceptions about crypto are out there? And why did anyone ever think those Bored Ape NFTs were cool? I’m begging someone to explain it to me. They don’t look good.

Also Read:

SOLANA vs Ethereum: Which Is Better and Why

What you should know about the top 5 most expensive crypto hacks in history

The 5 Crypto Billionaire Kevin O’Leary is Buying During the 2022 Crash!

Is Bitcoin broken? The Controversial Bitcoin Fix

Are your crypto securities? For Solana fans, it’s unclear

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