Bitcoin has surpassed all-time price highs in 2021, and many other cryptocurrencies have as well. Many people have strong opinions: that Bitcoin is a scam, a crashing bubble, and that it has no intrinsic value. What is all this fuss about? Is it just a fad or the future of money?
Marius Reitz, Luno's General Manager for Africa, unravels the misconceptions and common questions about Bitcoin.
Myth: Bitcoin is a massive bubble waiting to burst
Only time will tell whether or not Bitcoin will continue to rise. However, for now, it can be helpful to take a longer-term view of Bitcoin's performance. What is evident is that the reports of Bitcoin's demise appear to have been greatly exaggerated.
Many former naysayers are now diving into Bitcoin and other cryptocurrencies and adoption rates continue to rise. JP Morgan, one of the largest investment banks in the US, indicated that while more than $ 3 billion had entered the Grayscale Bitcoin Trust in the last quarter of 2020, gold ETFs had bled $ 7 thousand million during the same period.
Bitcoin is a monetary network. When the concept of electricity used to power household appliances was introduced, it was not seen as a bubble but rather an engineering advance. There will always be people who are afraid of progress.
Myth: with wild volatility, you can't take Bitcoin seriously
Many have declared Bitcoin dead (or dying), simply based on the latest price changes. The technology that powers cryptocurrencies like Bitcoin is one of the most important financial innovations of our time and the current price of Bitcoin has nothing to do with the long-term value that cryptocurrencies will bring.
If you are a trader, volatility can be stressful and potentially profitable, but if you believe in Bitcoin as the future of money, your investment goals are long-term and therefore short-term volatility matters less to you.
Volatility has decreased over time and the market is stabilizing. MicroStrategy CEO Michael Saylor, who led the charge when his publicly-traded company chose to keep a significant portion of its cash reserve in Bitcoin, has an interesting view of volatility: “Things that are dead are not volatile. Stability is stagnation. Living things are volatile. "
Myth: Bitcoin has no intrinsic value
This thinking could be applied to any currency. If people stopped believing in the dollar, it would have no value either. The price of Bitcoin is determined by supply and demand: buyers who want Bitcoin and sellers who have Bitcoin.
The reason that Bitcoin has value is that it is a practical form of value or money commonly accepted by people. It is used to transfer value and buy or sell things. Unlike fiat currency, such as the US dollar or the rand, where the government enforces its value and legal status, the value of Bitcoin comes from its code, infrastructure, scarcity (there will only be 21 million), and adoption. By updating the financial system, Bitcoin empowers people.
Bitcoin has grown exponentially and has passed a market capitalization of $ 1 trillion, yet this is still relatively small as an asset class.
In the context of the constant devaluation of fiat currencies, people are looking for ways to protect their wealth, including governments. Bitcoin is set up to disrupt the world of money in the same way that the internet disrupted everything a few years ago. Many believe that it is the future of money.
Myth: Bitcoin cannot be a currency, an investment, and a store of value.
To be called a currency, Bitcoin should be divisible, scarce, durable, transferable, and fungible (it can be exchanged for the same value or type). It meets all these requirements: a Bitcoin is divided into units as small as one-hundredth millionth; it is scarce as the total supply is limited to 21 million Bitcoin; it is durable in the sense that it does not exist in physical form, so it cannot wear out; Bitcoin is digital so you can transfer it to anyone, anywhere in moments and ultimately any particular Bitcoin has the same value as any other Bitcoin.
Bitcoin crosses many lines: it can be used for payments, as a currency; it can be used as a store of value, since it has a controlled supply, such as gold or other commodities; and you get more value and utility from developers improving the code and the ways it can be used.
This multifaceted aspect of Bitcoin makes it difficult to decide whether it should be treated as an asset, as a currency, as a payment mechanism, or as an open global technology. Regulators grapple with this while deciding how it should be treated.
Myth: Bitcoin is a Ponzi or pyramid scheme
A pyramid scheme recruits members by promising pay or rewards for enrolling others. A Ponzi scheme is very similar to a pyramid scheme, with the difference that you are not rewarded for enrolling other people. Instead, he earns a portion of what the recruits pay.
Bitcoin operates on a decentralized model without hierarchy. There is no reward for purchasing coins and there are no guaranteed returns. Furthermore, the blockchain on which Bitcoin is built is completely transparent; anyone, at any time, can inspect the public ledger. If you are considering investing in Bitcoin, increase your knowledge on Luno's free learning portal.
Big companies like PayPal and Tesla entering the crypto space, as well as listings like the Coinbase exchange on the Nasdaq, should help end this myth.
Myth: Bitcoin is only used by criminals
People found a way to carry out illegal activities, long before Bitcoin existed, it always will. But the criminal use of cryptocurrencies has dropped dramatically in recent years. In fact, cryptocurrency-related crime dropped significantly during 2020, according to the latest Chainalysis report. In 2019, criminal activity accounted for 2.1% of all cryptocurrency transaction volume, while in 2020, criminal share of all cryptocurrency activity fell to just 0.34%.
Although Bitcoin is pseudo-anonymous in the sense that it cannot be immediately linked to one's identity, Bitcoin is actually a terrible option to carry out any illegal activity. Once your identity is linked to Bitcoin, your entire history is available and movements are much easier to track than cash, as blockchain technology is a public ledger.
As Bitcoin continues to gain legitimacy and use cases, data and law enforcement are getting better at tracking transactions to look for criminal uses and find out who an address belongs to.
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