There is much talk about cryptocurrencies these days, more notably Bitcoin. Bitcoin was the major disrupter, and many have seen the light of day since then. While many still fail to fully understand cryptocurrencies and their purpose, myths and misunderstandings continue to surface as a result. Let’s have a look at a few I often meet whilst conversing with friends and acquaintances.
1. Cryptocurrencies have no real value
To address this myth, we need to look at traditional currencies. According to the US Gold Act standard, which was passed in 1900 and approved on the 14th of March, gold was the only accepted standard for redeeming paper money, which had the primary purpose of preventing bimetallism. The purpose of this was to establish a value for the dollar, which was set to roughly 1900 mg of gold, per dollar. This simply meant that the US dollar was backed by the fundamental value of gold.
What has changed since then?
In 1971 Richard Nixon single-handedly cancelled the convertibility of the dollar to gold (1), which was likely due to the combination of the US government’s extreme expenditure during the Vietnam war and inflation. As a result, the US dollar is now known as fiat currency, which means that it is a currency that is not backed by anything with an established intrinsic value.
Holding an asset over time
The value of a fiat currency is typically established based on the returns gained by holding it over time, which is due to interest rates. Why do you think the value of some currencies has fallen so radically in the past? Poor or negative interest rates. This ultimately means that you will receive no or little interest, or it will cost you money to hold any currency with a negative interest rate in your bank account.
Interest rates are the primary tool central banks have for addressing inflation and deflation, as the health of an economy is based on the rate at which people are spending money, also known as consumerism.
Dealing with inflation and deflation with cryptocurrencies
We don’t, as inflation and deflation don’t affect them. All we have is supply and demand, which is ultimately what establishes the value of cryptocurrencies (as well as other things). The more people want cryptocurrencies – or want to buy the tokens that represent a technology that addresses a technological challenge (e.g. domestic and international payments), the higher the price will go. Like anything bought or sold, it’s all about supply and demand.
Cryptocurrencies do have value, and the value will continue to rise as the demand for them continues to increase.
2. Cryptocurrencies are easily hacked
Bollocks. That was the short answer and here is a slightly longer one. Cryptocurrencies are no more vulnerable than any other piece of software you use or rely on. Does the fact that your bank, car, house, pacemaker or laptop, can theoretically be hacked, stop you from using it? Of course not. We all use them – as well as other technologies, and we will continue to do so. What we can do is try not to act like an idiot and do something that would expose ourselves to any additional, unnecessary risks. The same applies to cryptocurrencies.
Cryptocurrencies are no more vulnerable than any other software.
3. You can’t use cryptocurrencies anywhere
Bitcoins as well as other cryptocurrencies are being embraced and accepted more and more everyday, and this tendency is not about to change. An acquaintance of mine bought a brand-new Audi Quatro with Bitcoins, from a car dealer (2). The more interest there is in cryptocurrencies, the more they will be embraced and used. You can use cryptocurrencies more than you are likely aware of; You can use them with Microsoft and Dell, you can buy food, watches, plane tickets, clothes, coffee and SO much more with cryptocurrencies.
You can use cryptocurrencies to buy anything you can imagine.
4. Cryptocurrencies are used by criminals
In the US, with what do people pay for guns? Bottles of water? No. Weapons, drugs, assassins, malware – as well as other illicit items and activities have traditionally been purchased using fiat currencies. Wars are financed with whatever fiat currency the involved parties have at their disposal. This is a poor and ungrounded argument, and simply an attempt to appeal to someone’s conscience and sense of ethics. I think that we can all agree that fiat currencies have more blood on their bills than any cryptocurrencies will ever have on their bytes.
Cash continues to be the most commonly used form of payment for criminal activities as well as money laundering (3).
5. Blockchains have no business or commercial applications
They have tremendous business and commercial applications. Let’s have a quick look at a few of many:
- Smart Contracts
- Clearing and Settlement
- Digital Identity
The list could go on – and as we move ahead in time, the list will continue to grow.
Cryptocurrencies are here to stay, and I think they are a breath of fresh air for many reasons. They solve some of the biggest technological challenges we are currently facing, and they provide some good old fashioned competition to mainstream economics, as consumerism is a terrible way to measure the health of any economy, as it so obviously represents the opposite.