Bitcoin, the original cryptocurrency, was launched in 2009. Today, there are thousands of cryptocurrencies with a total value of approximately $2 trillion. its price surge earlier this year made tens of thousands of cryptocurrency millionaires, at least on paper. cryptocurrencies could turn into a massive speculative bubble that ends up hurting many naive investors. in fact, many cryptocurrency fortunes have already evaporated with the recent price crash. But whatever their final destination, the ingenious technological innovations that underpin them will transform the nature of money and finance.
myth no. 1
a cryptocurrency is real money that can be used for payments.
Cryptocurrencies like bitcoin and ethereum were designed as a way to make payments without relying on traditional modes like bills, debit cards, credit cards, or checks. The bitcoin white paper, which sparked the cryptocurrency revolution, envisions an electronic payment system that allows “two willing parties to transact directly with each other without the need for a trusted third party,” excluding governments and banks from the financial circuit. website pymnts states, “blockchain is the future of the payments industry,” a reference to the computational technology that underpins cryptocurrencies.
In fact, it has become very expensive and time consuming to transact cryptocurrencies. it takes about 10 minutes to validate a bitcoin transaction, and the average fee for a single transaction recently was around $20. ethereum, the second largest cryptocurrency, processes transactions a bit faster but also has high fees. /p>
Furthermore, the wild swings in the values of most cryptocurrencies make them unreliable as a means of payment. at the end of April, the price of a dogecoin was 20 cents. it tripled in the next two weeks and then fell to half that peak value ten days later. it’s as if a $10 bill could buy you just a cup of coffee one day and a lavish meal at a fancy restaurant just a few weeks later. Even on a calmer, more typical day, the value of a major cryptocurrency like Ethereum can fluctuate by 10 percent or more, making it too unstable to be practical. Elon Musk recently announced that Tesla would no longer accept Bitcoin as a form of payment, reversing a policy he had implemented earlier in the year. the value of a single currency plummeted almost immediately. then a Chinese crackdown on crypto briefly wiped out another third of the price in just one day.
myth no. 2
cryptocurrencies are a good investment.
Investment funds in bitcoin and other cryptocurrencies have proliferated. Even major banks like Goldman Sachs and Morgan Stanley are getting in on the game. and no doubt I would have made a fantastic return if I had bought any of the major cryptocurrencies last year. A typical article in the Motley Fool doesn’t discuss whether cryptocurrencies are a good investment, but “which one is right for you.” the website’s business topo states: “even with adjustments made, bitcoin and ethereum are very profitable. it’s simple.”
but be careful. part of the appeal seems to be that, like gold, the supply of most cryptocurrencies is tightly controlled (by the computer programs that run them). for example, about 18.5 million bitcoins have been created so far, and eventually there will be a maximum of 21 million bitcoins. this is a limit set by the computer program that manages the supply of the coin.
however, scarcity alone is not enough to create value: there has to be demand. Since cryptocurrencies cannot easily be used to make most payments and have no other intrinsic uses, the only reason they have value is because many people seem to think they are good investments. if that were to change, its value could quickly drop to nothing.
myth no. 3
bitcoin is fading. meme coins are the future.
bitcoin is now considered the grandfather of cryptocurrencies, and investors (or speculators, more precisely) are piling into other cryptocurrencies like dogecoin. In 2019, Investopedia claimed that bitcoin was “losing its power as the driving force of the cryptocurrency world.” “bitcoin and ethereum are being left behind by dogecoin,” reads a recent forbes headline.
dogecoin and other similar cryptocurrencies, which are simply based on memes (dogecoin, with its shiba inu dog mascot, refers to the meme “doge”), do not even pretend to be usable in financial transactions. And there is no clear restriction on the supply of these coins, so their prices rise or crash on random events, like musk’s tweets. meme coin valuations seem to be based entirely on the “big fool” theory: all you need to do to profit from your investment is find an even bigger fool willing to pay a higher price than you paid for the digital coins.
Bitcoin’s technology seems outdated compared to some of the newer cryptocurrencies that allow greater anonymity for users, faster transaction processing, and more sophisticated technical features that facilitate the automatic processing of complex financial transactions. Despite all its flaws, however, bitcoin remains dominant: it accounts for almost half of the total value of all cryptocurrencies.
myth no. 4
cryptocurrencies will displace the dollar.
Morgan Stanley’s chief global strategist, Ruchir Sharma, has argued that bitcoin could end the reign of the dollar, or at least that the “digital currency poses a significant threat to [the] dollar’s supremacy.” An even more ominous Financial Times headline proposes that “Bitcoin’s Rise Mirrors America’s Decline.”
Cryptocurrencies are not backed by anything other than the faith of the people who own them. the dollar, by contrast, is backed by the us. government. investors still trust the dollar, even in tough times. as an example, domestic and foreign investors continue to eagerly grab trillions of dollars in US dollars. Treasury securities even at low interest rates.
The new cryptocurrencies called stablecoins aim to have stable values and therefore facilitate digital payments. facebook plans to issue its own cryptocurrency, called diem, which will be backed one by one with us. dollars, giving it a stable value. but the value of stablecoins comes precisely from their backing by government-issued coins. Therefore, while dollars may become less important for making payments, the primacy of the us. uu. the dollar as a store of value will not be questioned.
myth no. 5
cryptocurrencies are just a fad and will disappear.
warren buffett has compared cryptocurrencies to the 17th century dutch tulip craze, while bank of england governor andrew bailey warned: “only buy them if you are prepared to lose all your money”. Economist Nouriel Roubini called Bitcoin “the mother or father of all scams” and even criticized its underlying technology.
Cryptocurrencies may or may not persevere as speculative investment vehicles, but they are unleashing transformative changes in money and finance. As the technology matures, stablecoins will accelerate the rise of digital payments, giving way to paper money. the prospect of competition from such private currencies has pushed central banks around the world to devise digital versions of their currencies. The Bahamas has already launched a central bank digital currency, while countries such as China, Japan, and Sweden are experimenting with their own official digital currency. the dollar bills in your wallet, if you still have any, could soon become heirlooms.
even transactions like buying a car or a house could soon be managed through computer programs running on cryptocurrency platforms. digital tokens that represent money and other assets could facilitate electronic transactions involving asset transfers and payments, often without trusted third parties such as real estate settlement attorneys. governments will still be needed to enforce contractual obligations and property rights, but software could one day take the place of other intermediaries, including bankers, accountants, and lawyers.