Jasmine Birtles
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Addressing Misconceptions About Crypto
Ruby Layram
20th Dec 2024
Despite being around for over a decade, the term Cryptocurrency still manages to confuse, intrigue, and occasionally worry people all at the same time. With so many headlines about crypto’s rise and fall, it’s no wonder that myths have swirled around this new digital currency.
Is it a scam? Is it only for criminals? Are crypto enthusiasts hiding from taxes?
To give you a little bit of reassurance, this article will debunk 7 common cryptocurrency misconceptions to help you understand what it’s really all about.
If you’ve ever been a bit skeptical about crypto, this article is for you.
1. Not all crypto assets are equal
There are over 15,000 different cryptocurrencies currently in circulation. If you think of crypto assets like websites on the internet, there are some websites that are more popular (and frankly more useful) than others.
The term “cryptocurrency” refers to a wide range of projects, some of which are legitimate, and backed by sound technology and roadmaps (in the same way an Amazon or Google are), while others are noticeably less robust.
Leading cryptocurrencies, including Bitcoin and Ethereum, for instance, have real use cases and are accepted forms of payment. Both have their own blockchains, and Ethereum supports decentralized applications (or DApps) that span everything from finance to gaming.
On the flip side, certain cryptos have been hyped up only to reveal little substance behind their flashy marketing. When new cryptocurrencies are released, they’re often referred to as “altcoins.” While some are developed with legitimate purposes, others have been created purely for speculation or, in unfortunate cases, to trick people out of their money.
This is why doing your own research is essential in the crypto space. With enough digging, it is possible to distinguish legitimate projects with use cases from others.
2. Crypto is a scam
Let’s start by addressing the biggest misconception out there: that all of crypto is a scam.
It’s a sweeping assumption, but understandable if you’ve only seen stories of sudden price crashes, a few fraud cases, and questionable “get-rich-quick” promises from influencers on social media.
That said, scammers do target the crypto industry given how new the technology is. We’ve spoken to crypto trading platforms who told us that the overwhelming number of “crypto scams” you read about are not complex hacks, but are actually common forms of social engineering. This means that victims are persuaded, often with a convincing and lengthy back story, to voluntarily send their crypto over to the scammer.
It’s important to remember that, much like gift cards are not themselves scams, neither is crypto as an entire asset class.
3. Crypto is only used for criminal activities
This is one of the more persistent myths and has led many to view crypto with a side-eye. Some people believe that cryptocurrency transactions are somehow shadier than traditional transactions.
This is mainly due to crypto’s permissionless nature, which means that no central intermediary is monitoring and processing transactions on behalf of the parties involved.
However, all crypto transactions are publicly visible on the blockchain, which means that every transaction is viewable no matter where you are in the world. There are also professional firms that perform blockchain analytics, which means they map out transactions and work with law enforcement to track criminals using crypto for nefarious purposes. For this reason, it doesn’t make sense for criminals to use crypto anymore.
Most crypto users are regular people
In the same way that not every cash transaction is a drug deal (unless I’m missing something huge here?!), not every crypto transaction is an illicit activity.
In fact, most people use crypto for legitimate purposes such as investing, trading, buying goods, and sending payments. And when you think about it, the blockchain, where all crypto transactions are recorded, is an open ledger that can be viewed by anyone.
So while there is a level of anonymity, it’s not entirely private, as law enforcement agencies have managed to trace illegal transactions quite successfully.
Studies show that the percentage of cryptocurrency transactions involved in criminal activity is actually quite small compared to the overall volume. A report from Chainalysis, found that illicit transactions made up less than 0.5% of the total blockchain activity in 2023.
So, while criminals do use crypto (just as they use traditional currency), it’s certainly not the primary use case.
4. Crypto is bad for the environment
Cryptocurrency and the environment is a hot topic, and it’s true that mining some cryptos, especially Bitcoin can consume a significant amount of energy. However, it’s not as black-and-white as saying that all crypto is bad for the environment.
Firstly, not all cryptocurrency mining is the same. Bitcoin mining, which is energy-intensive due to its proof-of-work (PoW) mechanism, has drawn criticism for its high energy use. But the Bitcoin ESG Forecast has found that around 54.5 % of Bitcoin mining operations are powered by renewable energy, such as wind, solar, and hydropower.
On top of that, there are other types of cryptocurrency mining mechanisms, like proof-of-stake (PoS), which consume far less energy. Ethereum, the second-largest cryptocurrency, shifted from PoW to PoS in 2022, which cut its energy consumption by over 99% (that’s a pretty big change!)
This shift indicates that crypto developers are mindful of environmental concerns and are actively trying to make the space more sustainable.
5. Crypto is not regulated
This one isn’t entirely a ‘misconception’. However, while cryptocurrency isn’t regulated in the same way as traditional banks, there is a considerable amount of oversight in place, depending on the country.
In the UK, the Financial Conduct Authority has strict guidelines that companies handling crypto assets must follow, particularly when it comes to marketing and handling client assets. Other countries, including the EU, Canada, and Japann, and Australia, have introduced similar regulatory frameworks.
On top of this, many crypto exchanges and service providers have implemented their own internal compliance measures, such as Know Your Customer (also called ‘KYC’) requirements and Anti-Money Laundering protocols. These measures ensure that crypto isn’t the unregulated playground it’s sometimes made out to be.
6. Crypto is only for speculation
Speculation refers to buying something with the intention of selling it for a profit within a short time frame. In the same way some people will buy Taylor Swift tickets only to sell them for a profit, others decide to use the tickets for their intended purpose. Crypto trading is no different, and does have a reputation for being highly speculative, but not every investor buys crypto with the intention of selling quickly.
Bitcoin, for example, was created as a digital form of money, and there are other assets known as “stablecoins” that are pegged to the price of fiat currencies, including the US Dollar, Euro and British Pound. These assets can be, are already, being used for payments. For example, in El Salvador Bitcoin is a legal currency that everyone can use to buy and sell goods with.
Some people also hold cryptocurrency in their portfolio as a long-term investment. In this case, investors may hold coins for years before choosing to sell, in a similar way to how someone might invest in a growth stock.
While speculation exists, it’s far from the only reason people use crypto.
7. Crypto is used for tax avoidance
Tax is a key area that comes up a lot when people talk about crypto. A common myth is that crypto investors use their assets to dodge taxes, thinking that since crypto transactions are decentralized, the government can’t track them.
But crypto tax evasion isn’t as easy as it might seem.
In most countries, cryptocurrencies are subject to tax regulations, and users are required to report their gains and losses. For instance, in the UK, investors are asked to report profits from crypto on their self-assessment tax returns. Profits can be taxed under either capital gains tax (for returns on investments) or income tax (for mining or staking rewards).
Additionally, many crypto exchanges now send reports to tax authorities, in the same way that banks and stock exchanges do. So, while it may seem like an easy way to evade tax, doging tax on cryptocurrency is actually pretty tricky!
Conclusion
Cryptocurrency is still a very new industry, and with new technology, there will always be myths and misunderstandings. However, crypto is much more than the fear-mongering headlines suggest. It’s an exciting technology with real-world applications and a good way to diversify your investment portfolio.
As always, remember that when it comes to investing in cryptocurrency, knowledge is power. Although many of the above misconceptions are misconceptions, cryptocurrency comes with inherent risk. Always conduct thorough research before making any investing decisions.
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