The more experienced you are in a certain field, the more annoyed you get when the easily accessible media reproduce mistakes, incorrect facts and misconceptions about cryptocurrencies, deliberately misleading readers to draw attention to them.
You are probably familiar with the terms: fake news and clickbaits. In this article, we want to take a look at and concretely verify the following 5 main mistakes or misconceptions, which are often, but not always, spread by people or well-known media companies
1) Mistake: Spelling
Have you ever misspelled Bitcoin, Ethereum or any other cryptocurrency? We have repeatedly come across misspellings of various cryptocurrencies. The first and most important is the word ‘Bitcoin’. Bitcoin with a ‘b’ describes the Bitcoin network. Bitcoin with a lowercase ‘b’ denotes a unit. Professional literature adheres to this simple rule. The media are often unaware of this difference. This spelling was recently corrected in the book ‘Cryptoassets’ by Chris Burniske and Jack Tatar.
Bitcoin and Ethereum
Bitcoin, Bytecoin, Bittcoin – obviously a mispronunciation of the word ‘Bitcoin’. Also often found: etherium, ethereum or athereum – and here this is a mistake, as it should be correctly called ‘Ethereum’.
Blockchain – what?
Finally, the term ‘blockchain’. Since the English word ‘chain’ already means ‘chain’ in English, this tautology makes no sense and should only be used for fun. Do you know any other funny spelling mistakes about cryptocurrencies? Let us know in the comments at the end of the article!
2) Cryptocurrencies do not have an internal equivalent
Let’s start this section with a simple counter-question: does it have a counter-value?
What is the function of a currency?
The function of currency has two main aspects. On the one hand, it serves as a means of storing value, which should keep for a long time. On the other hand, currency serves as a unit of exchange because it essentially simplifies the transport of larger goods over long distances.
The price of bitcoin
Cryptocurrencies follow a very similar approach.
However, due to decentralization, it is not the state that is trusted, but the blockchain and the underlying algorithms.
This makes bitcoin a better fiat currency. The production of bitcoin requires mining, which is based on a PoW (Proof-of-Work) algorithm. Mining, on the other hand, uses a different value. These values represent the hardware and computing power required in the form of energy. This means that bitcoin can be assigned an intrinsic value, which can also be quantified.
More details here: How is bitcoin price determined?
The advantage of bitcoin
Ultimately, bitcoin has an advantage over fiat currency because it has a tangible value in addition to its credibility. The only criticism that needs to be addressed is that bitcoin’s credibility is not yet on par with a fiat currency like the euro or the dollar. Of course, this takes time. However, it can be seen that this gap is narrowing, not least in the context that bitcoin, with a limited maximum of 21 million bitcoins, will behave more inflation-resistant and more stable in value than most fiat currencies around the world.
3) Cryptocurrencies are only used by criminals
Until a few years ago, almost every second article was about the criminal use of bitcoin or other cryptocurrencies. There were often articles about the use of the Darknet, the extortion of ransomware via Trojans or ransom demands in connection with cryptocurrencies. But what about the misuse of cryptocurrencies for criminal activities?
2 types of criminal activity
There are two types of criminal activity mainly carried out with bitcoins. On the one hand, there are shady activities such as Internet pornography, drug trafficking, terrorism, arms trafficking or document forgery. The anonymity of the bitcoin network should mainly be used to pay for these illegal goods or services. The second is the concealment of financial activities, which mainly concerns tax evasion, money laundering and the concealment of profits from financial markets. The anonymity of the bitcoin network should also be exploited here. It is a fact that all the listed criminal activities have been carried out using bitcoin in the past. It is also a fact that many cases have been solved, otherwise we would not be as well informed as we are by reading so many articles and attestation trials.
Bitcoin = Anonymous or Alias?
The reason is simple: bitcoins are not anonymous, but aliases. The properties of the bitcoin blockchain make every transaction on the bitcoin network public and uncontrollable. Anyone can view transactions, although at first glance a bitcoin address cannot be associated with a name. However, if a name is linked to an address, any additional transactions can be unequivocally proven. Insofar as no name can be linked, financial investigators and the bitcoin community have repeatedly shown that transaction patterns can very clearly refer to persons or companies. At the latest, when transactions take place on exchanges, names can be linked to transactions. It follows that bitcoins are no more profitable for criminals than traditional fiat transactions in euros or US dollars. On the contrary, due to the obviousness of the blockchain, they are rather negative.
However, today there are truly anonymous cryptocurrencies, such as Monero or Zcash, that have the characteristics desired by criminals. Proving transactions is not impossible, but it is much more complicated than with the bitcoin network. The percentage of criminal use of bitcoin and other cryptocurrencies is currently lower than their legitimate use. Therefore, the media hardly ever report negative headlines about the use of cryptocurrencies for illegal activities.
4) Crypto is a bubble
The surge in cryptocurrency prices in recent years, especially in late 2017 and early 2018, has been repeatedly linked to the concept of bubble formation. The Dutch tulip bubble of the 17th century, the dot-com bubble at the turn of the millennium or a quote from Jamie Dimon, CEO of JPMorgan, stating that Bitcoin is a ‘fraud’, are all cited as symbolic references.
Definition of a bubble
But what does a speculative bubble really mean and does it apply to cryptocurrencies? From a scientific and macroeconomic perspective, a speculative bubble refers to a market situation in which a commodity increases in value in the shortest possible time without a fundamental change in the product. Such strong growth is often accompanied by very high volatility. The price trend in the cryptocurrency market mirrors the definition of a bubble. However, a clear distinction must be made between well-established coins such as bitcoin or Ethereum and other altcoins that have a smaller market capitalisation and can be found on CoinMarketCap outside the top 50 cryptocurrencies. In particular, smaller coins with low trading volumes have shown exponential price growth, despite the fact that these projects have not generated much profit.
Moreover, many cool cryptocurrency projects that raised a lot of money in 2017 and 2018 have often been associated with bubbles. In many cases, rightly so, as their base value was low and did not change in proportion to the rise in prices. Established cryptocurrencies such as bitcoin have an intrinsic value, as discussed in the article in section 2. The price increase of bitcoin has not been as extreme as that of many alternative currencies, and neither has the volatility. Bitcoin is also used and applied, e.g. as a ‘store of value’, as in the case of the commodity gold. Bitcoins are also used to make multiple transactions to transfer money from point A to point B at low cost.
Are cryptocurrencies being used?
Currently, many cryptocurrencies have no direct use and are based on pilot projects, proof of concept and potential use cases. Every major company in the world is involved in the underlying blockchain technologies. Implementation in technical constructs by, for example, financial, technology and logistics companies is probably only a matter of time. These potential use cases are already being priced by investors, as with any business plan in a free market economy, reducing revenues. Due to the novelty of the technology, the scenarios for these plans are extremely broad, so mispricing, information noise and subsequent FOMO (fear of missing out) can occur in a very short time. Ultimately, the cryptocurrency market is a free market and the price is determined by supply and demand. Any immature market has an implicit bubble forming behind it, so it is crucial to attract attention, capital and talent for blockchain application visions to improve the quality of life for all of us.
5) Crypto is a pyramid or a ponzi scheme
A snowball or pyramid scheme are business models in which no value is created, only money is redistributed to users. In most cases, money from new users is used to pay old users and often also to repay them.
High profitability without risk?
The promise is often the same: high return, short duration, low risk. Usually, a ‘product’ is offered that must fulfil this promise. There is usually no interaction with the creators of the financial pyramid. Payments often take the form of a one-off or recurring fee.
In most cases, there is an elaborate marketing system whereby a commission is received for referring friends, increased profits or benefits. This marketing system also likes to extend to multiple levels, so it can also benefit if friends who have been specifically recruited also refer their friends, who in turn recruit other friends and so on.
More money, more scams
A financial pyramid scheme works as long as more money is deposited in the system than is withdrawn. When a tipping point is reached, where the old users can no longer be paid back by the new ones, the house of cards often quickly collapses and the scam comes to light. The system collapses.
Differences in the token economy
Recognised cryptocurrencies do not have these characteristics. When you buy cryptocurrencies, you receive a reward – a token. This token has a different and special purpose. A distinction can be made between ordinary currency tokens, utility tokens and shares. A utility token, like the ‘Ether’ in the Ethereum network, can serve as fuel for a specific task in the blockchain network. Without it, the network will not function. A share token represents the right to a valuable asset or company, just like shares. Especially in the case of share tokens, it is relatively easy to determine whether there is actually a valuable asset behind it. With utility tokens, however, the situation is more difficult to assess. Utility tokens on large platforms such as Ethereum, IOTA, EOS, Tezos or Cardano are fundamental to the entire ecosystem of their blockchain. However, there are also utility tokens that cannot be attributed to a platform, but rather to a cryptocurrency project, which usually comes from an ICO.
The hype around cryptocurrencies
These tokens peaked in 2017 and 2018, with many people attracted to them because they thought they were missing out on the next ‘big thing’. The hype around them was promoted by clever and extensive marketing on social media channels, celebrities and established media houses. In this case, there was a perception that it was a financial pyramid scheme, because the returns were extremely high for a number of investors. So far, the only financial pyramid based on cryptocurrencies was Bitconnect. It promised that a trading bot would give away bitcoins and guarantee a return of 1-4% per day. To participate, a utility token with the abbreviation BCC was created. It had no function other than to collect funds, which were redistributed according to the logic of a financial pyramid scheme. Investors suffered significant losses of around $1 billion. Fortunately, projects such as Bitconnect represent only a fraction of all cryptocurrencies.
Cryptocurrencies are not pyramid schemes, despite similarities in the potential for quick profits. Some of them have a real and long-term economic value. By dispelling the top 5 crypto mistakes, we aim to provide a clearer understanding of the subject. It’s crucial to acknowledge that mainstream media’s limited understanding of cryptocurrencies often leads to sensationalized reporting. With the information available on ecoinomy, you can form your own informed opinions, uninfluenced by media speculation.