The 5 most discussed myths regarding cryptocurrencies

Whenever the value of a cryptocurrency increases dramatically, the discussions of whether or not cryptos are valid start all over. Let’s see which arguments are valid and which are not.

In the first few years after the creation of Bitcoin, there were not really any myths regarding cryptocurrencies. If there was any speculation and uncertainty it was mainly about the identity of Satoshi Nakamoto, the anonymous founder of Bitcoin. 

Since the hype in 2017, the number of rumours and myths has grown considerably. Most of these new investors as well as the general public were only interested in its potential for financial speculation and not in the technical aspects of blockchain technology. This created the perfect platform for rumours. 

Nevertheless, not all of the heavily discussed topics have been created out of thin air. In this article, we will introduce the 5 most famous myths and discuss how valid they are – or whether they can be busted completely.

Cryptocurrencies are a giant pyramid scheme

This is not true.

The harshest critics declared cryptocurrencies as a scam in which only early adopters can benefit. They even call it a pyramid scheme. A pyramid scheme is a fraudulent business model which promises astronomic profits to attract as many new members as possible. 

In reality, a pyramid scheme is a zero-sum game. Early adopters profit from the expenses of late adopters. Late adopters can only win if even more individuals decide to join. The problem is, such a scheme cannot go on forever. Over time, fewer and fewer people want to invest and the system will collapse.

Cryptocurrencies work differently. They can have a win-win outcome, even when early adopters benefit massively. For instance, in 2010 a Bitcoin was not really worth anything. For example, a British man decided to buy 2 large pizzas for a man in Florida and got 10,000 Bitcoins in return. Today, these coins are worth over 81 million Euros. At the time the chances were high that Bitcoin would simply have vanished, leaving the British man with 10,000 worthless coins. In that case, he would have lost his whole investment.

The same is true for early investors in more conservative businesses. Someone who would have invested 900 Euros in the initial public offering of Microsoft back in 1986 would now have 1.5 million Euros. Remembering that at the time Microsoft had already released MS-DOS and Microsoft Windows and was the dominant player in the software market. Compared to Bitcoin, this is a much smaller profit but the risk would also have been much smaller. The initial public offering for Bitcoin created three billionaires and an estimated 12,000 millionaires.

In both cases late adopters do not depend on the future development of the organization to get something of value for their investment, unlike in pyramid schemes. They get a share of the company or coins in return which enables them to get a fair percentage of the profit over time. 

Cryptocurrencies are a ‘bubble’ waiting to burst

True and not true.

This statement can neither be verified nor completely denied. It can only be discussed on the basis of different phases of their use.

Bitcoin price development over time. Source: coindesk

Looking at the first 8 years after the creation of the first digital currency, the famous Bitcoin, it displayed all the traits of a typical bubble.

In the beginning, there is a phase in which an asset does not draw much attention. The price is very low and it is subject to very little fluctuation. At a certain point – for cryptocurrencies it was the year 2018 – the asset gains massive popularity and the price rises with increasing intensity and speed. Simultaneously, the more people join in, the greater likelihood that the price drops at some point. A short time of declining prices can trigger panic-selling resulting in a total crash of the asset’s price.

Such a crash has never happened in the history of cryptocurrencies. It is true that there was a time in which bubble-like features were obvious. In those periods people tended to only see the speculation potential of these currencies. 

Despite the heavy fluctuation, which implies cryptocurrencies have no consistent value, there are a lot of traits why people have not abandoned it completely. Ethereum for instance, has become famous for its use in decentralized apps. It enables developers to create assets directly on the blockchain. In that case, even if the coin itself is not a physical good, it still has unquestionable value.

Cryptocurrencies are mostly used for illegal transactions

This is not true.

The often proclaimed anonymity of cryptocurrencies makes it appear to be an attractive option for illegal transactions, giving Bitcoin and others the unpleasant reputation of being the currency of gangsters.

However, this anonymity is an illusion and the opposite is true: These are the most transparent currencies that have ever existed. Unlike fiat currencies, all transactions with cryptocurrencies like Bitcoin, Litecoin or Ethereum are recorded in a public ledger in the blockchain. Because of its decentralized nature, it is impossible to corrupt the database.

Also, a report of the UK Treasury in 2017 stated that there is no evidence supporting illegal transactions with Bitcoin. In fact, only 0.61% of the money entering conversion services were from verifiably illicit sources.

Even if the system was completely anonymous, it would still be difficult to use cryptocurrencies for criminal purposes. Fiat money is mostly used without leaving any traces and federal agencies are still able to target criminals. They do it on the basis of the lifestyle. If someone is living in wealth without a legitimate income, there is a high chance that they will be monitored.

Cryptocurrencies have no intrinsic value

This is not true. 

To define the value of a single coin in isolation is not appropriate. More important is what value it has in combination with the global network. Without it, it would be like judging a telephone without the communication service.

A coin enables its holder to embed a large number of short transaction messages in a timestamped and globally distributed permanent data store. Up to now, there is no other data storage which can compete with the blockchain. 

For instance, Litecoin processes 56 transactions per second and Bitcoin Cash up to 100 per second. This means that every Litecoin block can store 8400 and Bitcoin Cash up to 60.000 messages per block. If we consider that an electronic notarization service charges about 10 Euros per document, it would give a Litecoin block an intrinsic value of 84.000 Euros and a block of Bitcoin Cash a value of 600.000 Euros. This is greater than what the coins obtained by its mining are worth.

Other tangible commodities have a much smaller intrinsic value than what they are traded for. Let us consider gold for instance. It gets its value because it is an inflation-proof store of value. If people would price gold on the basis of its industrial usefulness and demand, it would be much cheaper. Even though it is declared a rare resource, its supply is much higher than the demand.

Even if cryptocurrencies would have no intrinsic value, it would still be a good value product. In fact, the intrinsic value is not important at all. Commodity money has no intrinsic value either. It is attributes like divisibility, fungibility, scarcity and durability that make it a great medium for exchange. Cryptocurrencies surpass commodity money in all of those aspects.

Anyone with enough computing power can take over the network

True in theory, false in practice.

In the beginning, it was comparatively easy to attack the network with a so-called 51 percent attack. In this case, someone needs to own at least 51 percent of the network’s computing power to take over the network. As the network grows, it becomes harder and harder to accomplish a takeover. Currently, it has surpassed the computing power of all supercomputers combined.

Nevertheless, it does not need a supercomputer to obtain this computing power. It would be possible that a governmental organization uses its influence to take over server farms. This might be impossible in democratic regimes but not in authoritarian systems. This is unfortunately the problem that Bitcoin faces. The majority of Bitcoin farms are located in such politically suppressed areas.

What exactly would happen if an attacker was able to take over the networks? Even in such a scenario the options would be rather limited. Such an attacker would not be able to create counterfeit coins, fake transactions, or take anybody else’s money. The only option would be taking back the money they had recently spent and stopping other people’s transactions from receiving confirmations. On top of that, this attack scenario would only be feasible for as long as the attack lasts. In general, the costs of such an attack surpass the benefits that could be gained.

If someone gains this much computing power other targets would be much more reasonable. For instance, financial institutions would be quite a rewarding target. They rely on cryptography as much as blockchain driven technology. They would not only be able to create money out of thin air but also cause chaos on the global financial market.