The biggest misconceptions about cryptocurrencies

When we talk about cryptocurrencies, skeptical comments often appear.

A reasonable dose of skepticism is always desirable, but there are definitely many misconceptions about cryptocurrencies, and these misconceptions can deter people from exploring an exciting and innovative space.

In addition to skeptics, enthusiasts are also prone to misconceptions – often overestimating the potential of cryptocurrencies in the short term.

In this text, we look at four common misconceptions that can be heard in discussions:

Myth 1: Cryptocurrencies are used for money laundering and illegal activities

One of the main arguments of skeptics is that cryptocurrencies, due to the anonymity of participants in transactions and the possibility of trading without intermediaries, are used for money laundering. This theory is refuted by the data, but we will return to that later.

The basic mechanism of money laundering should be explained first because sometimes it is not clear whether the critics themselves understand it.

Money laundering means turning money gained through illegal activities into legal money that is difficult to relate to the way it was made.

This creates a mask and illegally acquired money from the outside looks as if it was acquired through legal activities.

This process has three basic steps: putting “dirty” money into legal financial institutions, then using accounting tricks and more transactions to disguise the source of money, and finally integrating that money when it reaches a bank account that doesn’t seem suspicious nor has a questionable history of transactions and from where an authorized person can pick it up or send it on without much explanation.

Given that there is more anonymity of users in cryptocurrencies than in standard financial transactions, and that at the same time it is very easy to convert cryptocurrencies into cash(and vice versa), at first glance, the thesis about using money laundering seems reasonable.

For the purposes of the discussion, let’s say that this thesis is correct and that cryptocurrencies are really widely used for money laundering.

Does that make them different from any official world currency normally used by criminals? Is the blockchain therefore different from the banking system, which is also used for money laundering and which is also used by criminals?

The answer is self-evident – technology is a tool, and there are those who use it for legitimate purposes, but also those who use technology for illegitimate purposes.

But we don’t have to worry so much. Cryptocurrencies are used for money laundering and illegal purposes much less than previously thought.

According to a Chainalysis report, only 0.34% of cryptocurrency-related transactions in 2020 are related to illegal activities.

And this is a decrease compared to 2019 when the share was 2.1%. At the same time, these are total illegal activities, and only a part goes to money laundering.

Speaking of money laundering, let’s talk about the standard, “legitimate” banking system and the so-called Anti-Money Laundering(AML) rules.

In addition to all the calls of the state for cryptocurrencies, supervision of strong institutions over the global banking system, strong rules and forms that each client fills out, and banks then process and store at great expense – states detect less than 1% of money laundering attempts.

That is, criminals use the banking system with 99% success, and keep 99% of their money. And that’s not even the only way to launder money.

Myth 2: Crypto is a pyramid scheme

In public discussions about cryptocurrencies, the argument that crypto is a pyramid scheme is occasionally heard.

It is not disputed that there are real pyramid schemes in the world of cryptocurrencies, but also many other scams.

Even when there is no fraud, greed, hysteria, and lack of experience, speculators and investors can create a financially disastrous mix and lead to the loss of money.

But the vast majority of projects, especially serious ones, do not have the basic elements of a pyramid scheme.

These are new projects, the real value of which may not yet be known, and whose potential is not always easy to predict, but we certainly cannot say that they have the characteristics of a pyramid scheme.

Pyramid schemes are characterized by the promise of high earnings with minimal risk, consistent profit in the short term, lack of transparency in business, and similar dubious characteristics.

Serious projects in the world of cryptocurrencies not only do not promise big profits, but are focused on making products and solutions based on blockchain, and their public communications are not based on any promises of profit at all.

Even profits are not consistent in the short term.

Cryptocurrency prices are rising and falling very fast, and many cryptocurrencies, Bitcoin in the first place, are profitable only on a wider time horizon.

If we talk about transparency, the very fact that we are talking about blockchain indicates that the transparency of any serious project based on blockchain is far greater and more accessible than if we talk about some other types of business.

Pyramid schemes exist, and they should be watched, both on the blockchain and outside it, but that does not mean that the whole industry should be rejected because of that, with thousands of interesting, potentially revolutionary projects.

Myth 3: Cryptocurrencies are bad for the environment

In short, the impact of cryptocurrencies on the environment depends on which energy sources are used for mining, and whether there is mining in a particular currency at all, ie. which consensus mechanism is used.

More and more cryptocurrency mining is based on cleaner energy sources, while a large number of cryptocurrencies use consensus mechanisms that have minimal CO2 emissions.

Let’s not forget that every new technology involves the use of energy. The point is not to hinder innovation, but to innovate in the field of energy production, so that energy production would be cheaper and cleaner.

Myth 4: Cryptocurrencies will replace money

Most cryptocurrencies do not pretend to replace standard money.

Of course, a scenario in which a cryptocurrency, such as Bitcoin, really manages to replace money is not excluded, but for the vast majority of cryptocurrencies, exchanging money is not a point or an idea.

It is true that on the one hand they can be viewed as money – they allow transactions on the blockchain or the exchange of value without intermediaries between two or more parties.

But this criterion is not enough for the thesis that by definition it will replace the money.

Even if they prove to be a better medium of exchange than state money, it is to be expected that the state will want to maintain its monopoly over money.

Money has been used for centuries, even millennia. Central banks in their current form have existed for about 100 years.

The oldest cryptocurrency has existed for 13 years. It remains to be seen how cryptocurrencies will develop, but to claim that state money will be completely replaced for now sounds ambitious.

However, cryptocurrencies are already significantly facilitating the exchange between people, and their potential for further decentralization of the financial system, or the creation of completely new financial products, is certainly great.

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