Five popular misconceptions about cryptocurrencies

Per­cep­tions of cryp­tocur­ren­cies range from the ful­some­ly enthu­si­as­tic to the out­right scep­ti­cal. Cryp­to is var­i­ous­ly viewed as a spec­u­la­tive fad or a tech­ni­cal break­through that will irrev­o­ca­bly change the bank­ing sys­tem, but it’s impor­tant for investors to sep­a­rate fact from fic­tion to avoid expen­sive mis­takes. Here are five com­mon mis­con­cep­tions about cryp­to.

Myth #1: All cryptocurrencies are the same

There are around 18,000 cryp­tocur­ren­cies, and 300 mil­lion cryp­to users across the globe. The term cryp­tocur­ren­cy is used to describe a wide vari­ety of coins, sys­tems and net­works, many of which have dif­fer­ent prop­er­ties, own­er­ship struc­tures and lev­els of volatil­i­ty.

“One of the key mis­con­cep­tions in main­stream media – and, as a result, pop­u­lar under­stand­ing – is that Bit­coin and cryp­to are one and the same, when in real­i­ty this is far from the case,” says Julian Lin­iger, CEO and co-founder of Bit­coin invest­ing app Relai.

“The fact is, Bit­coin has been around for many years, where­as the wider cryp­to world is very much in its infan­cy. To put it into per­spec­tive, oth­er cryp­tocur­ren­cies are star­tups and should be treat­ed as such by investors.”

He sug­gests that before invest­ing in a cryp­tocur­ren­cy you should look at the indus­try land­scape, make sure you under­stand it, and research the back­ground of the founders, their past projects, and the expe­ri­ence they have in the sec­tor. In effect, you should approach a cryp­tocur­ren­cy invest­ment in the same way as if you were con­sid­er­ing putting your mon­ey into a fledg­ling com­pa­ny.

“Ask your­self the ques­tion: is this project solv­ing a prob­lem that actu­al­ly needs solv­ing or is it just hype?” he says. 

Myth #2: High returns are likely

Cryp­to is not a one-way street to rich­es. The myth has been per­pet­u­at­ed by enthu­si­as­tic male cryp­to investors (known as ‘cryp­to bros’), threads on Red­dit, and posts from influ­encers and rap­pers.

“The sec­ond thing that needs address­ing is the get-rich-quick myth,” says Lin­iger. “Due to the dom­i­nance of the ‘cryp­to bro’ nar­ra­tive, Bit­coin has this lin­ger­ing rep­u­ta­tion as an all-or-noth­ing asset class that bull­ish investors pur­sue in order to dou­ble their mon­ey – essen­tial­ly a gam­bling exer­cise.”

Jere­my Cheah, asso­ciate pro­fes­sor in decen­tralised finance at Not­ting­ham Busi­ness School, says that it is a com­mon­ly held belief that every­one involved in cryp­to will make mon­ey. 

“Cryp­to trad­ing, like all oth­er trad­ing, is a zero-sum game. You make mon­ey at the expense of oth­ers,” he says. 

There is also a per­cep­tion that min­ing cryp­to is a quick way to get wealthy.

“The set up (entry) cost can be very high,” he explains. “Min­ing for cryp­tos is expen­sive busi­ness and so not every­one with a lap­top can mine cryp­tos. The algo­rithm under­ly­ing the process requires greater com­put­ing pow­er as more cryp­tos are mined.”

Myth #3: All stablecoins are backed by US dollars

Giv­en the volatil­i­ty of Bit­coin and oth­er cryp­tocur­ren­cies, demand has grown for prod­ucts that have some of the pos­i­tive aspects of cryp­to with­out the swings in val­ue and the volatil­i­ty that puts a lot of investors off.

Sta­ble­coins were devel­oped to com­bine the con­ve­nience and speed of dig­i­tal pay­ment sys­tems with the sta­bil­i­ty of tra­di­tion­al finan­cial trans­ac­tions. They offer a dig­i­tal cur­ren­cy alter­na­tive to cryp­to and are designed to have lim­it­ed price fluc­tu­a­tions. 

Some sta­ble­coins are linked to tra­di­tion­al (fiat, or gov­ern­ment-issued) cur­ren­cies such as the US dol­lar, euro and yen, and are priced on a one-to-one basis. Oth­ers are backed by gold or oth­er com­modi­ties, such as prop­er­ty, which exist in the phys­i­cal world.

This has led to the per­cep­tion that all sta­ble­coins are teth­ered to a real-world asset. This is not the case. 

“Not all sta­ble­coins are backed by fiat cur­ren­cy or pre­cious com­modi­ties but [instead] use some kind of algo­rithm mech­a­nism,” says Cheah.

In these cas­es, sta­ble­coins main­tain their price sta­bil­i­ty through algo­rithms that reduce or increase sup­ply in the mar­ket to match demand. So if the price is ris­ing, more sta­ble­coins will be released into the mar­ket to damp­en price volatil­i­ty. 

Myth #4: Blockchain is safe and secure

The mis­con­cep­tion that blockchain is bul­let­proof comes from investors’ under­stand­ing that a large ledger of data held in a block can­not ret­ro­spec­tive­ly be altered or tam­pered with. Blockchain cre­ates a data­base that is secure and held by a mul­ti­tude of users, rather than a sin­gle third par­ty. How­ev­er, this does not mean that blockchain is immune to sophis­ti­cat­ed and con­cert­ed attacks.

“It is a com­mon­ly held view that blockchain is safe,” says Cheah. “It is true that trans­ac­tions held and writ­ten into the blockchain can­not be changed or erased, but attacks on blockchains can hap­pen and suc­ceed. For exam­ple, for the blockchain to remain secure, val­i­da­tion by users is cru­cial. But if the major­i­ty of users are being held by the attack­er, the attack­er can mali­cious­ly influ­ence the ver­i­fi­ca­tion process.”

Such an attack might take place if hack­ers suc­ceed in cre­at­ing numer­ous fake iden­ti­ties, or by mass­ing resources and tak­ing con­trol of more than half of the net­work. 

The oth­er source of vul­ner­a­bil­i­ty is human error. There is still an ele­ment of the ‘Wild West’ in the cryp­to land­scape, says San­jay Wad­hwani, founder and CEO of blockchain media com­pa­ny MetaFrames. 

“Investors are mak­ing big mis­takes in the way they inter­act with blockchain,” he says. “They fall vic­tim to phish­ing attacks, they give away the keys to their wal­let and they don’t always under­stand the plat­forms.

“There are plen­ty of bad actors who are ped­dling get-rich-quick schemes, and they prey on the fear of miss­ing out. A lot of new launch­es are face­less and name­less. It is impor­tant always to know who is behind the cryp­to or exchange that you are using.”

Myth #5: Crypto is anonymous

While some cryp­tocur­ren­cies are designed with pri­va­cy at the core, these are not usu­al­ly the type used by retail investors, says Wad­hwani.

“It is a myth that cryp­to is pre­dom­i­nant­ly used for illic­it, nefar­i­ous and dark pur­pos­es,” he says. “There was a time when the ear­ly adopters were using it on the dark web, but it is like say­ing that the mobile phone sys­tem is cor­rupt because it is used by 1% of peo­ple for crim­i­nal pur­pos­es.

“Peo­ple think that cryp­to is anony­mous and that it is a great place to stash wealth, but every­thing in blockchain is open and trans­par­ent,” he adds.

Ben Reeve, part­ner at Oliv­er Wyman’s glob­al finan­cial ser­vices prac­tice and dig­i­tal assets plat­form, says ana­lyt­ics providers such as Chainal­y­sis and Ellip­tic can map address­es on blockchains to iden­ti­fy trans­ac­tions that might be asso­ci­at­ed with crim­i­nal activ­i­ty. This infor­ma­tion is used by gov­ern­ments and banks to iden­ti­fy high-risk trades.

Also, the flip­side of anonymi­ty can be a risk for the retail investor.

“A cryp­to asset is entire­ly secured by a pri­vate key, so it is essen­tial to pro­tect this,” he says. “In tra­di­tion­al trans­ac­tions, if you for­get your online bank­ing login you can call your bank. With cryp­tocur­ren­cy accounts, no one else has access to your pri­vate key and there is no recourse if you lose it.”

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