Five Myths about Cryptocurrency
MYTH NO. 1
A cryptocurrency is a real money that can use for payments.
Payments may be made using cryptocurrencies like bitcoin and Ethereum rather than with paper money, plastic cards, or paper checks. The bitcoin white paper that sparked the cryptocurrency revolution proposed a decentralised electronic payment system in which “any two willing parties can transact directly with each other without the need for a trusted third party.” This would allow individuals to bypass centralised financial institutions like banks. According to Payments, the blockchain technology that supports cryptocurrencies “IS the future of the payments industry.”
In reality, utilising cryptocurrency for financial transactions is already prohibitively costly and time-consuming. A single Bitcoin transaction takes roughly 10 minutes to be verified and costs, on average, about $20. Ethereum, the second biggest cryptocurrency, offers quicker transaction processing but has higher fees.
Furthermore, most cryptocurrencies’ value fluctuations render them untrustworthy as a payment method. A Dogecoin was worth 20 cents at the end of April. Within the next two weeks, it increased by a factor of three before dropping by half a month later. It’s as if ten dollars would buy you nothing but coffee one day and a three-course dinner at a five-star restaurant the next. An important cryptocurrency like Ethereum may have daily price swings of 10% or more, even on a regular, quiet day, making it impractical for any serious use. After accepting bitcoin as payment early this year, Tesla CEO Elon Musk recently reversed course and said the company would no longer take the cryptocurrency. Soon after, the value of a single coin began to decline rapidly. The price dropped by a third in a day as China cracked down on cryptocurrency trading.
MYTH NO. 2
Cryptocurrencies are a good investment.
Bitcoin and other cryptocurrency investment funds have mushroomed recently. Goldman Sachs and Morgan Stanley, two of the largest banks in the world, have also joined the fray. And if you invested in any leading cryptocurrencies last year, you would have gotten a terrific return. Whether or not cryptocurrencies are a good investment is the traditional topic of discussion in a Motley Fool article, but rather “which one is perfect for you.” Business Mole’s website states, “even with changes, Bitcoin and Ethereum remain pretty lucrative. It is that easy.
Warning, however. The supply of most cryptocurrencies is carefully regulated, much like gold, which is part of their appeal (by the computer programmes that manage them). For example, as of this writing, around 18.5 million Bitcoin have been mined, and only 21 million Bitcoin will ever exist. The computer software that controls the cash supply has placed a limit at this level.
MYTH NO. 3
Bitcoin is fading. Meme coins are the future.
Investors (or speculators, to be exact) are pouring money into lesser-known cryptocurrencies like Dogecoin due to Bitcoin’s rise to prominence. Investopedia said bitcoin is “losing its strength as the driving force in the cryptocurrency sector” in 2019. According to a recent article published by Forbes, “Dogecoin Is Leaving Bitcoin and Ethereum in Its Wake.”
Dogecoin and similar meme-based cryptocurrencies don’t even pretend to be used as currency; its Shiba Inu dog mascot references the “doge” meme. In addition, the quantity of these currencies could be more precise, leading to wild price swings due to unpredictable factors like Musk’s tweets. Meme currencies seem to be valued only based on the “greater fool” principle, in which one need only find a bigger fool prepared to pay more for the digital coins than one originally paid.
Compared to newer cryptocurrencies that provide more anonymity for users, process transactions more quickly, and have more advanced technological capabilities that allow for the automated execution of complicated financial transactions, Bitcoin’s technology needs to be updated. However, despite its faults, bitcoin has maintained its market dominance: Its worth is over half of the whole cryptocurrency market.
MYTH NO. 4
Cryptocurrencies will displace the dollar.
Morgan Stanley’s top global strategist, Ruchir Sharma, has said that bitcoin “poses a major challenge to [the] greenback’s supremacy,” if not the dollar’s absolute dominance. Even more dire is the claim made in the headline of the Financial Times: “Bitcoin’s surge indicates America’s demise.”
There is no guarantee that the value of a cryptocurrency will retain its value; its value is based only on the confidence of its owners. In contrast, the U.S. government fully supports the dollar. Even under challenging circumstances, investors have faith in the dollar. For example, even with low-interest rates, local and international investors continue to purchase trillions of dollars in U.S. Treasury securities enthusiastically.
Efforts are being made to create new cryptocurrencies known as stablecoins with stable values that facilitate digital transactions. Diem, Facebook’s planned cryptocurrency, will have an enduring value since it will back it one-to-one with U.S. dollars. Stablecoins are valued digital currencies because they are pegged to fiat currencies issued by governments. However, the U.S. dollar’s status as the world’s preeminent reserve currency is unlikely to be threatened even if its role in everyday transactions declines.
MYTH NO. 5
Cryptocurrencies are just a fad and will fade away.
Warren Buffett has likened the cryptocurrency boom to the Dutch tulip mania of the 17th century, while the governor of the Bank of England has warned, “Buy them only if you’re prepared to lose all your money.” Economist Nouriel Roubini has questioned the technology behind bitcoin and referred to it as “the mother or father of all frauds.”
To what extent cryptocurrencies endure as speculative investment vehicles remain to be seen, but regardless, they are bringing about profound shifts in how money and finance are conceptualised and operated. Stablecoins will speed up the transition from paper cash to digital transactions as the underlying technology improves. Central banks all over the globe have been inspired to create digital copies of their currencies due to the threat of competition from private currencies. Central banks in the Bahamas have already released a digital currency, while other nations, including China, Japan, and Sweden, are experimenting with their forms of digital currency. If you still have any paper dollars, they may become historical artefacts in the future.
There is potential for cryptocurrency-based computer algorithms to eventually handle even complex financial transactions like purchasing a vehicle or a home. Electronic transactions involving the transfer of assets and payments are made more complex when reliable third parties, such as real estate settlement lawyers, are not involved. In the future, the software may replace traditional intermediaries like bankers, accountants, and attorneys, yet governments will still be necessary to uphold contractual responsibilities and property rights.
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