[Feature image by Hitesh Choudhary]
Jennifer Xue is a Forbes contributor who has written on the topic of blockchain, and she has also authored a blockchain white paper
Imagine: you’re at a party or dinner, or some combination of both. Suddenly, that self-proclaimed “hacker” who loves retweeting TechCrunch articles starts veering the conversation toward crypto. Oh boy, here we go…
He brags that blockchain will make him multimillions one day, and you have the itch to call him out on his BS.
There are many myths surrounding cryptos and investing in them. In this article, we’ll provide a base knowledge on what cryptocurrencies and blockchain are so that you can talk about the space with accuracy.
Myth 1: Bitcoin and blockchain are the same thing
Fact: Bitcoin is one application of blockchain technology. There are many other ways to use this technology.
Concepts to know:
Bitcoin: a virtual currency that only exists electronically
Blockchain: the technology behind bitcoin. It is also the technology backbone of other cryptocurrencies, including Ethereum, Litecoin, Ripple, and others. Blockchain itself is not a currency.
Fiat Currency vs Cryptocurrency:
Fiat currency, according to The Motley Fool, is legal tender whose value is backed by the government that issued it. The Dollar, Euro, Renminbi, Rupee, and Won examples of fiat currencies, which sovereign governments issue.
Cryptocurrency can be used to buy and sell something, including but not limited to physical and virtual goods and services, just like a “fiat currency.” However, it only exists electronically. There are no paper bills or metal coins. No sovereign governments issue or manage this currency.
Fiat currencies have existed for centuries. And now, there are cryptocurrencies. One significant difference between fiat currencies and cryptocurrencies: cryptocurrency is usually limited in the total circulation.
Fiat currency, on the other hand, might be limitless. It’s based on supply and demand, as well as the government’s need to print money. For example, a physical asset, such as gold, does not back the US Dollar.
Cryptocurrency has intrinsic value because, for instance, a network of computers worldwide need to mine Bitcoin (the way people once mined for gold). Satoshi, the creator of Bitcoin, has pre-determined the number of coins available to be mined.
The Birth of Bitcoin:
Bitcoin was first introduced to the world in 2008 by Satoshi Nakamoto. He authored a white paper about bitcoin on the cryptography mailing list at Metzdowd.com. This is a mailing list for developers of encryption technology, including cryptography.
Satoshi may or may not be an actual person’s name, so let’s not dwell on who he is and what he does. The point is Bitcoin, which uses blockchain technology, is relatively new, and it came about as a response to the 2008 economic crash. After the crash, people’s experienced mistrust in financial institutions.
Thus Satoshi (or a group of geek activists) felt the calling to save the world from future crashes with a peer-to-peer virtual currency, which cuts out banks.
So now you have the history of bitcoin and what it is. And how it’s different than blockchain technology.
Sound smart by explaining:
- Bitcoin is a single use case of blockchain technology. When blockchain is used in peer-to-peer virtual currency, the assets are called cryptocurrencies. Bitcoin is one of these cryptocurrencies.
- Other industries can use blockchain technology, including but not limited to finance, manufacturing, legal, healthcare, IPs, and security
- Blockchain, being an immutable and incorruptible technology, can be used to secure anything that requires confidentiality. For instance, it can safeguard against duplication and forgeries. Or it can secure confidential medical records.
Blockchain technology can be used to secure anything that requires confidentiality.
Myth 2: Blockchain technology is not secure and full of fraud
Fact: Blockchain technology itself is extremely secure. However, there is a lot of fraud around selling cryptocurrencies, which we will get to later.
Why do Bitcoin and other cryptocurrencies rely on the blockchain technology for security and encryption?
Because blockchain technology is tamper proof, immutable, and incorruptible, which is ideal for virtual currencies.
According to IBM
“Transaction histories are becoming more transparent through the use of blockchain technology. Because blockchain is a type of distributed ledger, all network participants share the same documentation as opposed to individual copies. That shared version can only be updated through consensus, which means everyone must agree on it. To change a single transaction record would require the alteration of all subsequent records and the collusion of the entire network. Thus, data on a blockchain is more accurate, consistent and transparent than when it is pushed through paper-heavy processes.”
Basically, blockchain records all your transactions publicly. Kinda like a shared google doc with history turned on. But it’s even more secure than that. In order to make a single change on a blockchain ledger, everyone on the public ledger would have to agree to the change.
A single change takes an entire group. This prevents the possibility of fraud by an individual.
Sound smart by explaining:
- The blockchain technology itself is very secure
- Fraud occurs, for instance, when someone with no actual connection to blockchain simply lies about having access to a new coin, which may not even exist. They may ask for your money to invest in this imaginary coin and take off.
Myth 3: Bitcoin is a risk-free investment and investors can become rich overnight
Fact: Absolutely not. Like all investments, it involves risks.
You’ve probably read about the volatility of cryptocurrencies. The value of some cryptocurrencies skyrocketed overnight, making owners rich in an instant. But recently, Bitcoin has lost a lot of its value.
Like investing stocks, investing in cryptocurrency involves risks.
Sound smart by explaining:
Investing in cryptocurrencies can be riskier than in investing in fiat currencies and other financial products. This is because many governments haven’t acknowledged cryptocurrencies as forms of money since they’re still in an early stage.
In addition, there are 9 other risks related to investing in cryptocurrencies according to Forbes.
- Wide entrance, narrow exit
- It’s easy to invest but hard to sell in the future due to technological constraints.
- Intangible, illiquid, and uninsured
- Unlike fiat currencies, cryptocurrencies aren’t liquid. So it’s an asset instead of cash. Crypto deposit accounts are also uninsured. The FDIC usually insures cash deposit accounts at banks.
- Mark to market
- Most cryptocurrency owners are just looking for ways to cash out with fiat currencies instead of making long-term investments.
- Extortion and manipulation
- The newness of cryptocurrencies makes them prone to social engineering, fraud, and misinformation.
- Care, custody, and control
- Crypto heists did occur, despite blockchain technology’s inherent security and incorruptibility.
- Cyber threats
- Like any other online presence, cryptocurrencies’ virtual existence is prone to cyber threats, despite the resilience and security of the blockchain technology.
- Human errors
- Losing a password due to “forgetfulness” is a real risk.
- Lack of clarity on regulation, financial, tax, and legal treatments
- It wasn’t until 2017, when Bitcoin enjoyed its meteoric rise, that governments considered legal and taxation provisions for cryptocurrencies.
- Technological risks
- There are always risks regarding cryptocurrency mining, particularly Bitcoin. Mining requires a large amount of computer power, and this can limit other energy consumption.
Myth 4: Cryptocurrencies aren’t legal
Fact: Cryptocurrencies are legal in the USA and in other countries. However, some U.S. states have their own detailed taxation and investment provisions.
What bodies legalize cryptocurrencies?
In the USA, cryptocurrencies are legal tender in individual states. However, the Federal Department of Treasury categorizes them “not as legal tender.”
In 2013, the federal government accepted Bitcoin as a decentralized virtual currency used for transactions. And it was classified as a commodity by CFTC in 2015.
Sound smart by explaining:
The IRS does not consider cryptocurrencies as real currencies. Instead, cryptocurrencies are considered properties.
Myth 5: You should invest in cryptocurrencies and ICO coins right away
Fact: There is no good timing. Just do your due diligence well and decide whenever you’re ready.
What are popular cryptocurrencies?
In general, there are 6 major cryptocurrencies: Bitcoin (BTC), Litecoin (LTC), Ethereum (ETH), Ripple (XRP), Bitcoin Cash, and Ethereum Classic. They are big players in the crypto world, but there are also hundreds of other currencies that are much more volatile and risky.
Are cryptocurrencies also called “coins”?
One shouldn’t confuse cryptocurrencies with coins. In the blockchain domain, there are blockchain-based coins, called “coins” or “ICO coins.” Just because an entity has “coin” in its title doesn’t mean it’s a cryptocurrency like Bitcoin and Litecoin.
What is a “coin”?
A “coin” is an ownership stake in a blockchain-based business, and the fundraising event is called ICO or Initial Coin Offering. This coin serves as a “stock” or “share” in a regular company. One might also use this “stock” in exchange for other cryptocurrencies.
Sound smart by explaining:
It’s wise to proceed with caution.
This applies to all investments. Make sure you understand the business philosophy, the solutions provided, the management team, and the history of past success. However, remember that past favorable performance isn’t a guarantee of future success.
In conclusion, investing in cryptocurrencies can be a roller coaster since we’re still in the early stage of the blockchain revolution. Just make sure to diligently research what you’re getting into and discern the myths from the facts.
What goes up must come down and frequently. So whether you’re considering to invest yourself, or you’d just like to poke at someone’s overinflated ego with a swift fact, proceed with stealth.
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