Top Cryptocurrency Myths

Cryptocurrencies have experienced significant growth in popularity since they were first introduced in 2009. They are somewhat obscure in nature and difficult to understand; this confusion brings about many myths and rumors regarding these digital currencies.

In no particular order, here are some of the most common cryptocurrency myths, accompanied by an examination of facts to help you decide whether there is any truth or falsehood to them.

#1 Digital Currencies Are Only Used for Illicit Activity

One of the oldest and most pervasive myths about digital currencies is that they are most commonly used for illicit activity. While it's true that digital currencies have been used by individuals with nefarious goals in mind, as well as by criminal organizations, the same could be said of any form of money used throughout history.

According to Chainalysis—a company that assists investigators in cryptocurrency crimes with blockchain data analysis—the number of cryptocurrency transactions related to illicit activities fell in 2021 to 0.15% of all cryptocurrency transactions. Out of this small number, 82% consisted of cryptocurrency scams. In 2023, crypto crime increased to 0.34% of all transactions, an increase from 2021 but a decrease from 2022. Even though crypto crime has doubled since 2021, it still remains a very small minority of on-chain transactions.

It's important to note that governments and the international community are cracking down on cryptocurrency use by criminals and organized crime. Many countries have adopted cryptocurrency anti-money laundering and countering the financing of terrorism measures; agencies and teams have been established to combat the use of cryptocurrencies in these illegal activities. For instance, in the U.S., the Computer Crime and Intellectual Property Section's (CCIPS) National Cryptocurrency Enforcement Team (NCET) investigates and prosecutes criminal cryptocurrency uses. The CCIPS is part of the Department of Justice.

#2 Digital Currencies Don't Have Value

Value is a subjective concept—a person, community, or society may place value on an object that another puts in the recycle bin. For example, the first cryptocurrency, Bitcoin, was valued shortly after its launch in 2009 at thousandths of a cent. Its popularity continued to rise, and in 2021, it reached $69,000 per Bitcoin, then reached $77,000 on a cryptocurrency exchange in Poland in 2024. Its rise in value demonstrates that the way an asset is perceived by society is essential in establishing whether it has value.

Ethereum, the blockchain ecosystem that powers the cryptocurrency ether (ETH), is the building block for non-fungible tokens, decentralized finance applications, and other technological advancements in digital asset ownership. ETH may not have the dollar value that Bitcoin does, but its utility and potential give much more value to a company developing financial products and services that use the Ethereum blockchain and smart contracts.

Investors and enterprises have begun holding cryptocurrencies for use in finance, investment, venture capital, and other areas. For example, Galaxy Digital Holdings is a financial service and investment company with more than $2.0 billion in crypto (digital) assets under management as of the first quarter of 2024.

#3 Cryptocurrencies Aren't Secure

The key technology behind cryptocurrency is the blockchain. A blockchain is a distributed database secured with encryption techniques and technology that is very difficult to break. As transactions are entered into the blocks in the blockchain, previous transaction information is recorded in the new blocks and encrypted.

The chain continues to build on each previous block, and a community of automated verifiers has to agree that the information recorded in the transactions is valid. Here's where blockchains can be insecure: on a proof-of-work blockchain like Bitcoin, the network must be large and fast enough to prevent someone from introducing an altered version. So far, this has not been a problem for Bitcoin, but other, smaller blockchains have been taken over.

On Ethereum, which uses proof-of-stake, validators must offer up valuable cryptocurrency as collateral for honest work or risk losing it. This is very expensive, as it takes 32 ether (about $95,000 as of July 5, 2024 prices) to become a node that can propose blocks. Blockchains that do not use expensive collateral might be at risk of attack.

There are other types of consensus mechanisms in use, but their security all depends on the network design and whether they are widely adopted and used.

Another security weakness lies in how cryptocurrency is accessed and stored, such as in cryptocurrency wallets or centralized exchanges that facilitate transactions. It is entirely possible to send cryptocurrency from one user to another without worry, but the platforms and software used to store and access it can be hacked or tampered with.

There are some very safe methods you can use to secure your cryptocurrency. For instance, you can keep your crypto asset keys off the exchanges and in cold storage. When you want to use it, transfer only the amount you want to use to your hot wallet through a secure, wired connection on a non-mobile device like a personal computer.

#4 Digital Currencies Are Bad for the Environment

There is good reason to be concerned about the impact digital currencies have on the environment. Some cryptocurrencies employ a consensus mechanism that uses computational power and large amounts of energy to verify and validate transactions. One token, Bitcoin, has become more popular and valuable as time has passed; large mining operations emerged to take advantage of the rise in popularity and corner the crypto-mining market.

Each of these mining farms requires massive amounts of energy to power the mining rigs, adding up to a total network energy consumption equaling that of some small countries. However, the environmental impact greatly depends upon the source of energy the mining operations are drawing upon and the impact their energy use has on the power grid.

If the mining operations are drawing most of their electricity from fossil-fuel-powered grids, then the impact is excess carbon pollution for an intangible-yet-valuable item whose future and benefits to humanity are uncertain. On the other hand, if mining operations are powered mostly by sustainable energy, the environmental impact is lower. In both cases, the large energy use places a strain on grids.

Bitcoin mining operators have also purchased previously shut-down fossil fuel plants to power their operations. This raises new concerns for environmentalists and countries struggling to reduce their carbon footprints.

#5 Cryptocurrencies Are a Scam

Cryptocurrencies have become an accepted means of exchange at many retailers and merchants. People are accepting them in personal transactions, and governments are working to find ways to regulate them. Most cryptocurrencies have no programming, code, or malicious artificial intent that works to take money from you.

However, people have created scams to try and trick you out of your cryptocurrency or money. For example, there have been many unregistered initial coin offerings—unregulated fundraising for new cryptocurrency ventures—that turned out to be scams. In other cryptocurrency scams, someone might try to get you to accept unverified transactions or call you pretending to be government officials and ask you to pay your debts in cryptocurrency.

While it's impossible to eliminate the chance that you will be the victim of a scam, knowledge and awareness can help you reduce the chances of it happening to you.

#6 Cryptocurrencies Aren't Real Money

The International Monetary Fund defines money as a store of value, unit of account, or medium of exchange that is widely accepted and can be translated into prices. The Financial Industry Regulatory Authority (FINRA) defines cryptocurrency as a digital representation of a stored value through cryptography.

The Internal Revenue Service views cryptocurrency as "convertible" currency—one that has an equal value in "real" currency. Transactions in cryptocurrency are taxed, and capital gains or losses from holding them must be reported on your tax filings.

Many vendors accept Bitcoin, Ether (ETH), and other cryptocurrencies in exchange for products—you can also exchange your crypto for legal tender at many cryptocurrency exchanges.

Cryptocurrencies may not have a physical form, but they are used as money in many areas. You can even find Bitcoin ATMs in many cities.

#7 Cryptocurrencies Will Replace Fiat Currency

Cryptocurrencies are relatively new, while fiat currencies have been around for centuries. China is generally thought to have issued the first fiat currency around the year 1,000 CE. Many developed countries use this type of currency.

For cryptocurrency to replace fiat currency, people would have to adopt it en masse over the money they are used to and can understand. However, once value and purchasing power are established, it is possible that it could happen. If merchants began posting prices in cryptocurrency and more people began using it to purchase goods and services, it might start a trend.

However, governments and officials will not let go of fiat currency lightly because of the established system of controls in place for collecting taxes and funding government-sponsored programs and services. Without the collection of taxes, social programs that people depend upon will disappear, and other government funding could dry up.

Moreover, there would be no way to control inflation through monetary policies due to the decentralized nature of cryptocurrency. The modern tools used by central banks to combat inflation and unemployment while boosting economic growth have taken over 100 years to develop. The complete decentralization of money through cryptocurrency would have unknown effects on a country's economy. Because blockchain technology and cryptocurrency do not have any built-in tools for influencing inflation, employment, or economic growth, new monetary policies and tools would need to be created.

#8 Cryptocurrencies Are a Fad

At one time, computers, the internet, and email were considered interesting only to a small crowd of tech fans—they are now staples of modern personal and work life. It is tough to predict where cryptocurrencies will be in the next few decades; however, the technology they introduced and the products they inspired will likely continue to be developed and refined.

Decentralized finance applications are taking shape, gathering the interest of financial institutions and consumers. Governments are exploring ways to implement legally recognized cryptocurrencies pegged to their fiat currencies, and some businesses are investing heavily in Bitcoin and altcoins.

Tech giants are researching ways to fuse the real and digital worlds, using blockchain technology as a building block for this fusion with non-fungible tokens created for anything imaginable. Tokens can be created for any asset and value assigned to them; the virtual and real worlds are being directed onto a collision course, and cryptocurrency is likely to be involved.

The Bottom Line

There are many myths regarding cryptocurrency because it is such an abstract and new idea. In time, many of these myths will be debunked or verified as more people begin to understand what cryptocurrency is and how the concepts behind it can benefit society.

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