Cryptocurrency is one of the most known components of web3. The technology is seen as the future of finance, providing value and utility.
As a new wave, crypto has its share of misconceptions, oftentimes more prevalent than the facts. Together with its boom, the technology has seen its fair share of myths and rumors based mainly on users’ misunderstanding of how it works. With its multitude of use cases ranging from being used as a medium of stored value to a form of investment, it is important that users fully understand the fundamentals of how crypto works.
Fortunately, just with a few clicks it’s easy to go beyond the clickbait and separate fact from fiction about this interesting new technology.
1. Crypto is unsafe because it’s untraceable
One of crypto’s main features is its pseudo-anonymity. Accounts are turned into online addresses or “wallets” composed of a unique combination of numbers and letters. The beauty of this feature is that it makes transactions transparent. By nature, crypto transactions are viewable through what is called a public ledger. Public ledgers record all transactions effectively making them traceable. Any user can monitor or view transfers through blockchain scanners, and they can even track where their coin is going after being used for online transactions.
This level of transparency is even more evident with crypto exchange platforms which are required to collect information that can then be attached to digital wallets. Having this level of transparency discourages any illicit use of crypto on these platforms and allows more safeguards to be put in place protecting users and making transactions safer than ever.
Companies and groups like Chainanalysis also utilize crypto’s transparency to detect illegal activities. Data collected from these methods are provided to law enforcement and have led to the arrest of major perpetrators and even the recovery of lost or stolen funds such as the recent Curve incident where global players like Binance helped recover 83% of stolen funds.
2. It is not good for the environment
One common argument against crypto is that it is harmful to the environment. As it is a digital currency, crypto is produced through a process called ‘mining’. Computing power is used to solve cryptographic equations, which produces ‘rewards’ in the form of crypto tokens. The amount of computing power is usually said to be very high but recent developments in the industry make the technology a lot more greener.
Major tokens like Ethereum (ETH) are switching over to the ‘proof of stake’ protocol which consumes significantly less power than the traditional ‘proof of work’ method. Through proof of stake, users can stake their tokens to verify transactions rather than the ‘proof of work’ method which straight up uses computing power. For those who are interested in the Ethereum merge, you should also do your own research on what the “triple-halving” event refers to.
Green and sustainable crypto are also on the rise like Cardano (ADA). The crypto network’s founders initiated the Cardano Forest program, planting trees with the goal to become a climate-positive blockchain. The program has already planted 1 million trees and it continues up to this day. There are also other chains which use a proof of staked authority (POSA) consensus protocol which aims to minimize the tradeoff between decentralization, security, and scalability. The BNB chain has completed more than 3 billion transactions since inception and consumes less than 1% of the energy used by some other Proof of Work protocols.
3. Crypto has no actual use
Utility is at the heart of crypto ever since its inception. Bitcoin (BTC), which is considered to be the first cryptocurrency, was created to allow internet users to transact without little to no limitations present in traditional financial institutions.
Companies like Bitpay provide services that allow merchants to accept Bitcoin as a form of payment. WordPress, a popular website hosting company, also allows payment in cryptocurrency for various services.
As a peer-to-peer form of digital currency, crypto users are also able to enjoy overseas transactions less to no worry of any fees or exchange rates. Crypto transactions like transfers and remittances are more direct between users. It is not limited by factors such as bank cut-off times or the sometimes dizzyingly different transfer fee rates of money couriers.
Countries all over the world are also making steps in providing a regulatory framework for crypto which will help boost its utility and allow more tokens to be used as more efficient means of exchange value.
4. It is only used for ‘get-rich-quick’ schemes
The value of tokens can quickly change depending on a lot of factors, and part of it is due to having thin liquidity on exchanges that list smaller market cap tokens. Rather than focusing on the short term gains of investing in volatile tokens, investors should do their own research and understand the utility and tokenomics behind the tokens issued.
Token value is dictated by its utility and the strength of its utility which is often detailed in the whitepaper which gives additional insights into the mission of the project, the team behind it, the governance principles, the utility and economic benefits behind the usage of tokens and how the tokens will be allocated. Careful examination of whitepapers allow users to quickly spot red flags which include a disportionate amount of tokens allocated to advisors/founding team with a very short vesting period.
Crypto prices also tend to be correlated to overall macroeconomics conditions and the amount of liquidity in the money markets while the other fundamental driver would be the technology behind the coins and the real-life use cases… Inflation and the ongoing global conflict prove that the currency is not completely independent from outside factors. It can however provide an economic cushion through additional liquidity and utility.
5. It can’t be regulated making it a huge risk
Because of its pseudonymous features and decentralization, many are led to believe that Cryptocurrency can never be regulated. This belief is starting to change thanks to the efforts made by exchanges like Binance. We’re beginning to see comprehensive crypto regulatory frameworks being announced in the EU and countries such as France, Italy and Spain have started accepting registrations for companies looking to operate virtual asset related exchanges. Canada has also included cryptocurrency in its taxation laws while Switzerland has started adopting crypto as legal tender.
Regulation will build more trust amongst users and will in turn help drive mass adoption of crypto. Through regulation, better integration with traditional financial institutions becomes possible, providing more accessibility for this new asset class and offering more visibility to regulators and security for its users.