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If you’ve been following investment news during the last few years, you’ve undoubtedly seen plenty of coverage of cryptocurrency. Every time Bitcoin experiences a dramatic rise or fall in value, news organizations roll out headlines either proclaiming the death of cryptocurrency or a new future in finance.
Needless to say, such dramatic proclamations have helped circulate a wide range of myths about cryptocurrency and how it can be used. Separating fact from fiction is essential for truly understanding cryptocurrency’s implications — both now and for the future.
Myth #1: Cryptocurrency is only used for illegal activities
Cryptocurrency has gained a reputation for being used for illegal activities, in part due to the anonymity associated with cryptocurrency platforms. This anonymity stems from blockchain technology, which is ironically the same technology that makes all transactions on the platform transparent and public.
In reality, criminal activity represents a tiny fraction of the transactions that are performed using cryptocurrency. Research from Chainanalysis estimates that a mere 0.34% of cryptocurrency activity in 2020 was used for illicit activities. A similar analysis from CipherTrace determined that criminal activity accounted for less than 0.5% of cryptocurrency activities.
While these analyses are hardly perfect (critics note that such an analysis is only fully accurate when performed years after the fact), they serve as a clear indicator that the majority of digital-token users are in fact using them for legitimate means.
Myth #2: You need tech expertise to use or invest in cryptocurrency
Many potential cryptocurrency investors are scared off by its inherently technological nature. Because cryptocurrencies generally operate outside traditional stock exchanges, consumers can be led to believe that they need to understand programming or coding to make any kind of transaction.
Leif Ferreira, founder and CEO of Bit2Me, was quick to debunk this myth during a recent conversation, explaining, “Cryptocurrency is like so many other technological products that we use today. You don’t need to know how smartphone programing works to use an app. Similarly, the availability of crypto wallets and exchanges make it so anyone can buy or sell cryptocurrency. In reality, it isn’t that different from how you would manage traditional financial investments. You need financial know-how to make smart investments, but the coding is all managed on the back end.”
The reality is that anyone can invest in cryptocurrency — they simply need to understand the potential risks and benefits so they can make an informed decision regarding which digital tokens they want to invest in.
Myth #3: Blockchain and cryptocurrency are the same thing
Cryptocurrency and blockchain are closely intertwined, but this doesn’t mean they are the same thing. Blockchain is the technology that cryptocurrency is based upon, and is also being used for many other applications, such as sharing medical data, tracking music royalties and monitoring logistics. The transparency and security of blockchain make it highly appealing for these and other functions.
Cryptocurrency uses blockchain’s encryption techniques to verify when funds are transferred. When a transaction occurs, a network of nodes uses algorithms to verify the transaction and create a permanent block that is added to the blockchain. This serves as an unalterable record of the transaction.
In other words, blockchain helps power cryptocurrency — without it, cryptocurrency wouldn’t exist as we know it. Every transaction made using a digital token is permanently recorded on the blockchain as well. This transparency and stability can actually become a major boon for those who may need to audit previous transactions.
The key truth: Cryptocurrency is here to stay
Despite its ups and downs, one thing has become clear over the last several years: More people and businesses are embracing cryptocurrencies than ever before. While it still has plenty of critics (Warren Buffet famously compared it to the Dutch tulip craze of the 17th century), this view seems to be becoming the minority.
Inspired by cryptocurrencies such as Bitcoin, countries including China and the Bahamas are introducing their own digital currencies, which are designed to operate similarly to cryptocurrency but with greater institutional control.
Many major brands are also beginning to accept cryptocurrency payments, even if the way in which they utilize cryptocurrency can vary. For example, Home Depot uses digital scanners that instantaneously convert received Bitcoin payments into dollars. Starbucks uses a similar system to allow cryptocurrency payments through its app. On the other hand, Microsoft has accepted Bitcoin payments for digital products since 2014.
Blockchain’s capabilities for facilitating so-called “smart contracts” is also accelerating the acceptance of cryptocurrency. Analysts expect digital tokens and cryptocurrency platforms to help buyers with major purchases such as homes or cars, with digital contracts associated with the purchase helping to eliminate the need for third parties that would be involved in a traditional transaction.
How will you use cryptocurrency?
While many of the myths I’ve outlined are proving quite persistent, there is no denying that cryptocurrency is becoming more widely used and accepted for a variety of transactions. Both investors and business owners would be wise to take cryptocurrency seriously and consider how it could impact their future financial activities.
As with any other type of investment, there is a fair amount of risk involved due to the volatility of these digital tokens. At the same time, the ever-increasing acceptance of and applications for cryptocurrency indicates that rewards will likely far outweigh the risks.