Cryptocurrencies have experienced explosive growth in popularity since its introduction to the world in 2009. Even with its immense popularity among institutional and retail investors, the world is still exploring the limits of its utility and adoption.
While the information on cryptocurrency can be found all over the Internet, there are also many myths and misconceptions surrounding the space. It is important to do your own research (DYOR) so that you are able to make informed decisions when trading cryptocurrencies.
Here are some of the common misconceptions about cryptocurrencies and why they have been proven wrong:
- Cryptocurrency is a get-rich-quick scheme
While investments in cryptocurrency may yield high returns, especially during a bull market, this asset class is very volatile and the market may quickly move against you. The cryptocurrency space is still heavily influenced by macro news such as new regulations and adoption. There may be months when the entire space is experiencing a bearish market, and the tokens could fall in value for an extended period of time.
Despite being obvious and straightforward, thinking that crypto is easy money is one of the most common crypto trading mistakes of new investors. Therefore, it is essential that all investors do their own research before investing and find a suitable entry point instead of emotional trading.
- Cryptocurrency is a hoax/scam
The Bitcoin network manages approximately $10 billion worth of transactions every day. There are an increasing number of merchants and retailers accepting cryptocurrency, and governments are debating on how to manage and regulate cryptocurrencies. As more and more large corporations and governments continue to explore and implement cryptocurrency and blockchain technology in their operations, it is safe to say that cryptocurrency is here to stay.
- Cryptocurrency is the replacement for fiat
To put it simply, cryptocurrencies are backed by developers and investors while fiat currencies such as the dollar, by contrast, are backed by a centralized authority such as the U.S. government. Therefore, investors will still trust the dollar, even in a financial crisis.
Now there are new cryptocurrencies called stablecoins that are pegged to the U.S. dollar for the purpose of conducting digital payments. However, the value of stablecoins comes from their backing by government-issued currencies.
So, while there is a possibility that dollars might become less important in making payments, the primacy of the U.S. dollar as a store of value will not be challenged. Governments will not discard fiat currency for cryptocurrencies lightly because of the established system of controls in place for collecting taxes and funding government-sponsored programs and services. Therefore, we can say that the replacement of fiat currencies with cryptocurrencies is still a distant future away.
- All cryptocurrencies are bad for the environment
While some cryptocurrencies, especially those with a Proof-Of-Work (PoW) mechanism consumes a huge amount of energy to maintain their network, by verifying and validating transactions, there are many newer tokens that are being developed with more environmentally friendly mechanisms such as the Proof-Of-Stake (PoS) mechanisms.
The Proof-of-Stake mechanism is gaining popularity compared to Proof-of-Work as it consumes far less energy, appealing to potential investors with those concerns. Cryptocurrency and blockchain technology are always evolving, with many taking steps to reduce their environmental footprints to avoid being targeted by regulations. Today, at least 39% of Bitcoin mining is powered by renewable energy, with more to come.
- Cryptocurrency is only used for illegal activity (e.g., money laundering)
Another common misconception is that cryptocurrencies are only used for illegal activity such as purchasing illicit items over the dark web. As opposed to the general perceptions, most cryptocurrency transactions are conducted with legitimate and legal intentions. In fact, research shows that there are less than 1% of Bitcoin transactions are related to the black market or other illegal activities. Thanks to blockchain technology, if law enforcement is investigating a crime that involves crypto, it can be traced across the entire blockchain.
Since the Silk Road raid event in 2013, governments have taken action on making the use of cryptocurrency legal and secure. KYC or Know Your Customer policy has been introduced. The policy helps the authorities to verify the cryptocurrency account holder by asking them to submit or upload a verification ID online. This helps to detect and reduce risks of financial fraud and money laundering. As more regulations are set in place by centralized authorities instead of outright banning them, cryptocurrencies will continue to be used by the mainstream market with real-world utilities.
When it comes to financial investment, the golden rule is to do your own research to understand your investments. . Investors should never blindly follow trends, instead needing to understand the purpose and utility that led to the development of the project to avoid emotional trading. The crypto space is complicated and innovative with numerous concepts that cannot be defined by public sentiment on the Internet. While it’s impossible to completely eliminate scams in the cryptocurrency space, conducting the fundamental analysis can help you reduce the chances of it happening to you.
It is important to keep yourself updated with the facts and trade on a reputable platform that ensures the safety of its users. Keep in touch with Tokenize Malaysia for more knowledge sharing like this and enter the world of cryptocurrencies safely with us.