7 Crypto Myths Busted
The cryptocurrency world is a confusing place. The proliferation of bad information have led to the existence of many misleading myths about what this new technology is and what it can do.
Despite current market turbulence and the suggestion of some doomsayers, there is little to suggest that cryptocurrency or blockchain are going away or slowing down anytime soon. To help clarify the air, we have come up with this list of commonly-held crypto myths. By understanding the truth about these myths, you can approach crypto with confidence.
Myth # 1: “Crypto is a bubble” or “crypto is a scam”
When most skeptics talk about how crypto is a bubble, they put to the Netherlands and “tulip mania.” Many economists argue that what is going on currently mirrors what happened in Holland in the 1600s.
Holland today is known for tulips, but tulips are not native to the country. Tulips were first imported to the country from Turkey by means of Ogier de Busbecq, ambassador of Holy Roman Emperor Ferdinand I to the Sultan of Turkey, in 1554. Once local botanists found a strain that could sustain the climate of the Low Countries, the flower’s popularity took off – in part due to the fact that its color is the most saturated naturally existing in the time in Western Europe and in part because the Netherlands recently won its independence from Spain and was a newly-formed commercial power.
Continued cross-breeding flooded the market with a litany of varieties and the tulip became a coveted luxury item. As it takes a tulip years to produce a bulb that can be planted, demand quickly outstripped supply and the rarest varieties start to demand high prices. Florists would sign futures contracts with growers, guaranteeing delivery of the bulbs upon maturity. Contracts for bulbs that have the Mosaic Virus, which causes the color on the petal to “break” into streaks, went for more.
Speculation of these contracts grew until tulips became Holland’s fourth-largest export. Typically, the futures contract were traded, with many involved never seeing the tulip bulbs they were buying. An outbreak of bubonic plague finally burst the bubble, with many fortunes reported lost.
Cryptocurrency – particularly bitcoin – is argued to be a bubble, as well, as it is innately worthless, being driven solely by speculation, and is prone to fully collapsing if burst. This is a simplistic and flawed analogy for multiple reasons. First, cryptocurrency is self-supported. As bitcoin is the reserve currency for most cryptocurrencies and as bitcoin itself is indirectly backed by fiat currency – in part, due to institutional investments – the cryptocurrency market cannot collapse overnight. The crypto market can be best described as a bridge than a bubble: it will take multiple breaks, bends, and cracks to make such a complex structure finally fall.
Second, the “tulip mania” example is flawed. Modern scholarship argues that “tulip mania” was limited to a small group of investors are was hyped by propaganda and plagiarism. The effect of this “bubble collapse” seemed to have minimal effect of the Dutch economy, with most economic turbulence flags pointing to the bubonic plague outbreak and rapid changes to the legal code and not to disturbances in the flower market. Even though the prices fluctuated, the amount of money changing hand between the buyers – the florists – and the sellers – the growers – did not.
The way to think of this is this: buyer A promises to buy B for seller C for ten dollars. Speculation of B grows, and buyer D wishes to buy B from A for 20 dollars. E offers thirty, F offers 50, and G offers 100. C reports that B is no longer available. As there is nothing for A to buy, all of the other offers evaporate. While it can be said that $100 was lost, that is not what really happened. Therefore, there is no money lost, besides the failed original growers’ contracts – the “bubble collapse” is a collapse of potential, and nothing else.
For something to be a “bubble,” pricing must separate from the intrinsic value of the item. As a currency’s worth is – by definition – determined by the demand placed on it, even a highly-inflated cryptocurrency like bitcoin during its 2017 height does not qualify as a bubble, as its inherent value at the time was its speculative value. There is still a tulip market today. While there have been examples of speculative bubbles, “tulip mania” was not one, and neither is crypto.
Crypto is a frontier of sorts, meaning that there are risks in its use. We are just starting to understand what the roadmap is for this technology; the rulemaking and road signs are being rolled out slowly. If you take the time to understand the risks, thoroughly research what you seek to invest in, and move with caution, you may find that this crypto “bubble” is more sold than what it is being sold to be.
Myth # 2: “Crypto are not safe”
There is some truth to this. Cryptocurrencies are largely unregulated, meaning that there is no agency or organization that will automatically help you recoup any non-investment loss you may have. If someone, for example, was to steal your coins from your wallet, there is not much that can be said or done.
This is not, however, to say that the crypto world is lawless. Most nations and states have laws mandating that minimum reserve coverage from crypto businesses, licensing and/or bonding, and voluntary or compulsory oversight. So, going back to the wallet example, if it was found that the lost was due to a neglect on the wallet provider’s side and the provider is situated in a country that recognizes crypto as money or a commodity, the provider is obligated to offer remedy to you.
However, just as if you left your real wallet unattended in public, if you do not secure your virtual wallet, there is really no one to blame but yourself for your eventual loss.
Myth # 3: “Crypto is Blockchain’s Only Application”
A blockchain is a distributed ledger, or a data storage device that is distributed over a network for ready access by any user without the need to log in to a central server. While using this technology to confer monetary value was the test case for it, it is not the innate or natural use for this technology.
Blockchain’s ability to “tokenize” data makes it easy to make data portable. This is useful for systems that utilizes different protocols or systems where data must leave different chains of custody. An excellent example of this is a produce tracking system, where tracking data must move from the grower’s database to the transporter’s and then to the merchant’s. Before blockchain, this was done by a supply clerk making an endless number of telephone calls and emails with a confusing stack of invoices as the only reference. Tracking a food illness this way took weeks. With blockchain, the time to track a bad shipment has been cut to seconds.
This tokenization of data can reform any multi-system data network – from registry systems to voting to orders and supplies. While crypto may be blockchain’s primary use now, indications suggest that will not be the case in the future.
Myth # 4: “Crypto Equals Bitcoin”
With the vast majority of mainstream news being about bitcoin, it is easy to be confused about this point. Currently, there are more than 6,000 cryptocurrencies in existence, with bitcoin being only one of them. While bitcoin is the highest valued coin currently being traded, bitcoin is currently less than 45 percent of the cryptocurrency market.
Bitcoin, however, is the reserve currency of the crypto market. Most cryptocurrencies hold bitcoin in significant reserve as ballast toward their own liquidity. Even coins that claim to use Ether as their reserve currency are still tied to bitcoin, as Ethereum uses bitcoin as its reserve currency. Due to this, the crypto market is largely tied to the price of bitcoin.
Bitcoin is the blockchain’s proof-of-concept, or first public application that proves the usability of the concept. As such, most people’s first exposure to blockchain technology is bitcoin. However, as most of the new class of cryptocurrency utilize a consensus mechanism different from bitcoin’s proof-of-work, a growing percentage of the market is moving away from the bitcoin pattern.
Myth # 5: “All Crypto are Anonymous and Decentralized”
When bitcoin was created, a selling point for the coin was that it was anonymous. Per the forensic standards at the time, the early bitcoin transaction were, in fact, anonymous. However, the rise of criminal activity based around bitcoin – including the rise in organized money laundering schemes and the selling and trafficking of illicit goods – led law enforcement to raise their game.
Today, most blockchain transactions can be traced to their respective parties with relative ease. Coin anonymity requires a special effort – basically, a mixture of coin mixing, signature anonymizing, and transaction cloaking. All of this turns the blockchain opaque.
While there are decentralized “privacy coin” consensus protocols, most “privacy coins” work by having specialized nodes that handle the privacy requests. These “semi-decentralized” network channels some of its transactions from the public network to a private one, making such networks, by definition, partly centralized.
Blockchains, particularly in business applications, can be fully privatized or centralized. Ripple, a payment transmission network, is based on a private blockchain. Walmart uses a private blockchain for its meat and fresh produce supply chains, as do other food companies such as Dole and Driscoll’s. IBM and Microsoft offer blockchain-as-a-service solutions to its commercial customers, and blockchain services are part of Amazon’s AWS portfolio.
Crypto is developing on a path similar to that of the Internet. While a large part of the Internet is public and searchable, the vast majority is private and application-driven. This includes your email, social messaging, Netflix and streaming media feeds, and company intranets. With many companies developing crypto solutions, it will not be long that cryptocurrency will be but a small part of the blockchain world.
Myth # 6: “All Crypto Use Blockchains”
The vast majority of cryptos are blockchain-based. They are traded tokens that have a utilitarian use of their native blockchains or coins traded and used simply as a commodity. Despite their purpose, they are created by the blockchain, their transactions are recorded on their blockchain and they are paired to a public key on the blockchain.
This, however, is not always the case. Blockchain-free cryptocurrencies use directed acrylic graphs (DAG), Tangle (a DAG derivative), or some other limited version of the DAG model to get around the blockchain requirement. DAG is a scheme where a transaction confirms a previous transaction, creating a custody chain for the coin.
Tangle, which is the technological backbone for the coin IOTA, takes DAG one step farther by requiring every new transaction to confirm not one previous transaction, but at least two. This creates a stable network where transaction cost and speed are minimized.
Myth # 7: “Blockchains Will Change Everything”
There are a lot of big dreamers out there that imagine that distributed ledger technology will change everything. There are tests currently in place to use the technology to bring transparency to voting, to make registry and title searches simpler, to make it easier to manage gig/sharing economy applications such as car shares, and to reform how office space can be bought and sold.
While these are noble endeavors, these dance around the “elephant in the room.” Blockchain, in general, is a flawed way to store information on an enterprise level. The problems with blockchain include:
- An inability to scale. The larger a decentralized blockchain network gets, the larger the blockchain gets. This will mean that more resources are needed to process this. As larger and more powerful nodes move onto the network to handle the load, these “supernodes” create a de facto plutocracy in the sense that these large nodes will demand more of the network’s hashrate and rewards. This would “centralize” a decentralized network.
- A lack of security. A decentralized network is subject to 51 percent attacks where – if a single miner was to gather a majority of the total hashrate of the network – that miner can control the acceptance and recording of all incoming transactions to the blockchain. This could lead to the double spending of tokens and to the theft of mining rewards rightfully earned by other miners. Additionally, a determined outside party can trace the parties of any unsecured transaction on a blockchain with relative ease.
- A lack of practicality. Due to the multiple confirmation process, one decentralized transaction could possibly be processed hundreds of time. Not only does this take exuberant amounts of electricity, it also draw transaction times to minutes or hours. Almost every crypto solution around the “bottleneck problem” utilizes a certain level of “centralization,” where large nodes are given special benefits and privileges in exchange for taking the lead in secure or expedited transaction processing.
Without some type of evolution in the technology, such as blockchain partitioning or some type of provisional transaction verification – such as bitcoin’s “Lightning Network” – the uses for decentralized blockchains are limited. Hosted blockchains offer more potential, but – even here – there need to be more development before they can replace enterprise-level databases.