For those who are new to the “rabbit hole” of cryptocurrencies, this world may not be what you think it is. Below are 5 common misconceptions.
Wealth creation potential
What I think: Cryptocurrency will make me rich overnight
The idea that cryptocurrency can change one’s life overnight is an advertisement of many KOLs who are paid to “shill” for meaningless projects. Trading and investing in cryptocurrencies can help people make a lot of money, especially in the early stages, but nowadays, it rarely happens to newcomers to the market.
Cryptocurrency trading requires a lot of dedication, effort, and frankly - luck.
Some people have made a lot of money, but they are usually the exception, not the rule.
As Jeremy Cheah, Deputy Professor of Decentralized Finance at Nottingham Business School, said: “Cryptocurrency trading, like all other trades, is a zero-sum game. You make money from others’ losses”.
The reality is: Cryptocurrency is not a get-rich-quick scheme
Investing in cryptocurrency can be a good way to make money in the long run, but it is not a get-rich-quick plan. You must have heard stories of investment accounts multiplying a hundredfold, but in reality, you must be mentally prepared to hold your investments for a long time and be comfortable accepting all the associated risks.
The cryptocurrency market is very volatile, with prices changing constantly, or as we have seen recently - completely plummeting. When entering the market, it is important that you do your own research (DYOR), read quality sources of information, and only invest what you can afford to lose.
What I think: Cryptocurrency is very safe
Many newcomers believe that cryptocurrency is safe because data on the blockchain cannot be altered or forged. The blockchain creates a secure database held by countless users, instead of a single third party. However, this does not mean that blockchain is immune to sophisticated attacks.
Many newcomers also believe that because cryptocurrency can be stored on a computer, phone, digital wallet, or hardware wallet, it is as safe as money in a bank account. But the truth is not entirely so.
Fiat money - despite some of its drawbacks - is insured and protected by banks. Meanwhile, unless your cryptocurrency is insured by a third party - which is extremely rare - it is only as safe as an online password. And nowadays, for some people, this entails many risks.
The reality is: Cryptocurrency is the target of many attacks
Cryptocurrency is a target for hackers and criminals because in many cases, users’ wallets and keys are connected to the internet. Since there is no supervisory authority - one of the reasons why cryptocurrency has become so popular - there is no one to protect users’ money or guarantee for them if anything goes wrong.
Hackers can and often exploit “backdoors” and common security flaws for their benefit. Stealing money or infiltrating trading platforms is not a rare phenomenon. Therefore, when trading in the market, consider whether the wallet or trading platform you plan to use to store cryptocurrency has ever been attacked in the past, or if it provides a good security infrastructure?
Moreover, you should also be cautious about platforms of unknown origin. Sanjay Wadhwani, founder and CEO of blockchain communication company MetaFrames, said:
“Investors are making a big mistake in the way they interact with blockchain. They share their wallet keys and don’t always understand the platforms they’re trading on. It’s important to always know who’s behind the cryptocurrency or trading platform you’re using.”
Ability to replace fiat money
What I think: Cryptocurrency will replace fiat money
Cryptocurrency is relatively new, while fiat money has existed for centuries. It is commonly thought that China issued the first fiat currency around the year 1,000 AD. For cryptocurrencies to replace fiat money, people would have to accept them en masse in place of the currency they have been familiar with and understood to this point.
However, once value and purchasing power are established, this could occur. If merchants start pricing in cryptocurrency and more people start using them to buy goods and services, a new trend could begin.
However, governments and officials will not easily give up fiat money because they have worked hard to set up control systems to collect taxes and finance government-led programs and services. Without taxation, social programs that people rely on would disappear, and other sources of government funding could be depleted.
The reality is: There is no way to control inflation in cryptocurrency
If cryptocurrency could replace fiat money, it’s unclear how one would speed up or slow down inflation trends. It may take many decades to find a solution to this problem.
Moreover, due to the decentralized nature of cryptocurrency, there would be no way to control inflation through monetary policy. The modern tools that central banks use to fight inflation and unemployment while stimulating economic growth have taken more than 100 years to develop.
Meanwhile, blockchain technology and cryptocurrency do not have any integrated tools to impact inflation, employment, or economic growth, so new monetary policies and tools will need to be created. The complete decentralization of money through cryptocurrency, therefore, will have unprecedented impacts on a nation’s economy.
Bitcoin and Crypcurrence
What I think: All transactions are only done with Bitcoin
Most new cryptocurrency users think that Bitcoin is the only asset they need to focus on trading. Whenever someone talks about cryptocurrency, they immediately think of Bitcoin because very few newcomers have knowledge and awareness of the entire cryptocurrency market, which contains thousands of different currencies.
In mainstream media, Bitcoin is also the most popular cryptocurrency mentioned.
The reality is: The market has a lot of different assets
It cannot be denied that many people are only interested in investing in Bitcoin. However, other available assets can yield comparable or higher profits but carry significantly more risk.
Most modern exchanges offer hundreds of different cryptocurrencies, so before investing, research carefully, read reliable sources, and always listen to diverse opinions, especially contrary ones.
What I think: Cryptocurrencies are only used for illegal activities
One of the oldest and most common misconceptions about cryptocurrencies is that they are most commonly used for illegal activities.
While it’s true that cryptocurrencies have been used by individuals with dishonest intentions, as well as criminal organizations, the same has happened throughout history with any form of currency in use. The difference is that the decentralization of cryptocurrency makes it a more attractive “target” for these illicit activities.
According to a report by Chainalysis, a company that aids cryptocurrency crime investigators by analyzing blockchain data, in 2020, the amount of cryptocurrency transactions related to illegal activities dropped to just 0.34% of total cryptocurrency transactions. Of this small number of illicit transactions, 54% were cryptocurrency scams.
The reality is: Most cryptocurrency transactions are conducted for legitimate purposes
Currently, governments and the international community are making great efforts to suppress the criminal and organized crime use of cryptocurrencies. Many countries have implemented anti-money laundering and terrorist financing measures. Agencies have been established to combat the use of cryptocurrencies in these illegal activities.