MYTH OR FACT: Crypto Edition
Recently, the Philippine government has been publishing warnings on the infamous “Bitcoin Scams” proliferating the online world. These involve fraudulent use of names of celebrities and government officials and the alleged government advocacy on investing in certain Bitcoin platforms. Because cryptocurrencies are a relatively new investment domain, there have been various speculations, rumors, and myths circulating about it. This may lead people who are interested in cryptocurrencies to stay curious but never actually invest in it. For example, Filipinos are generally aware of the existence of cryptocurrencies but very few invest because they lack the confidence in the credibility of digital assets, especially “cryptoassets”. While the reasons behind the low investment hold may be viable, this article is written to prime you on cryptocurrencies — and tell you the truth about it! — and help you decide for yourself if it’s worth your investment.
STATEMENT 1: Cryptocurrencies are internet-based virtual currencies.
VERDICT: Fact
Cryptocurrencies are defined as virtual currency systems intended to work as a medium of exchange. Like any currency, this can be used the same way cash is used to trade for goods or services. It’s name is derived from the encryption algorithms and techniques used to secure its network — specifically to control its creation as well as verify and record transactions involving cryptocurrency. Cryptocurrencies are enabled by blockchain technology which is essentially a digital record of transactions that occur in a network that makes it impenetrable or resistant to hacking, changing, or duplicating information. It is also decentralized which means that it is not regulated by any central bank or government institution. Note that because cryptocurrencies are decentralized, it is immune to inflation imposed by central banks unlike your national currency which tends to lose value over time due to inflation.
STATEMENT 2: Cryptocurrencies are unsafe.
VERDICT: Myth
As we’ve mentioned earlier, cryptocurrencies are enabled by blockchain technology . All transactions are verified and recorded by a chain of computers. This prevents information from being manipulated and is the reason why cryptocurrencies are generally safe. While it is true that cryptocurrencies are deregulated (the main feature that makes it susceptible to fraud), where you choose to actually invest in (aka the platform) plays a big part in whether or not it’s going to be safe. Some believe that the anonymity offered by cryptocurrencies is what makes it unsafe, but by design and theory, every data on the blockchain is traceable. Anonymity is not absolute and cryptocurrencies and transactions that make use of it are traceable. Bitcoin’s blockchain for example has been studied and scientifically analyzed by authorities making it a poor choice for people to utilize for illicit activities or crimes such as tax evasion or money laundering.
STATEMENT 3: Cryptocurrency and Bitcoin are synonymous.
VERDICT: Myth
As we’ve established earlier, cryptocurrencies are a virtual medium of exchange just like your local currencies such as the Philippine Peso and the US Dollar that can be used for financial transactions. Cryptocurrency is basically the general term used to refer to any virtual “money” that uses encryption techniques. Bitcoin, on the other hand, is a type of cryptocurrency created by an individual or group under the pseudonym “Satoshi Nakamoto” in 2009. Presently, there are many other “altcoins” -referring to cryptocurrencies other than bitcoin — available in the market which include (but is not limited to) Litecoin, Ethereum, Ripple, EOS and Tether. Even Facebook is set to launch its own cryptocurrency called Libra! All of these function as a medium of exchange.
STATEMENT 4: Cryptocurrencies are risky.
VERDICT: Fact
Cryptocurrencies are risky. Non-traditional investments are deemed to be very risky relative to the conventional investments we know such as stocks, bonds, and cash. What makes alternative investments such as cryptocurrencies very risky is their complex nature and lack of regulation. As you’ve read earlier, cryptocurrencies are not regulated by any government institution or even the SEC. It’s deregulation is what contributes to the risk associated with it. Moreover, the prices or value of cryptocurrencies are inherently volatile with supply and demand as its most important influencer. This means that while you can gain so much more than you would for stocks for example, you also face a huge probability of losing as much. Simply said, it’s an easy way to gain and lose money. It all depends on how you educate yourself about it, create a strategy if you are investing in it, and your judgement as an investor.
STATEMENT 5: Cryptocurrency has no value.
VERDICT: Myth
By now, we already know that cryptocurrencies function like your local currency or fiat. It can be used for financial transactions — to exchange for goods and services and for profit. Therefore, it has value. While it is intangible, it can be used to pay for real goods and services such as booking hotels and buying groceries. Moreover, cryptocurrencies will continue to have value as long as its holders, owners, or users place value in it like they do in trading cryptocurrencies.
PROSPECTS OF CRYPTOCURRENCY
Given the infancy and speculations surrounding cryptocurrency, what does the future hold for it? While there is no definite answer for this question, some people believe that cryptocurrency will be the “money” of the future. From businesses and individuals using it for remittances, the existence of cryptocurrency exchange trading (the cryptocurrency take on the current forex trading), wider cryptocurrency investment interest and hold, to cryptocurrency rendering the banking industry useless.
Some believe that because of many failed financial intermediaries, cryptocurrencies would become the next “big thing” allowing for peer-to-peer transactions without having to trust any third party (Interested in learning more about how Cryptocurrency is redefining Finance? Read here). However, with all this comes pessimistic views on cryptocurrency and its future.
Some people would instead reckon that cryptocurrencies are no more than a fad. Because for something to be recognized and accepted as a legal currency, consumers, as well as producers must patronize it. While we are seeing an uptrend on merchants accepting cryptocurrency, it’s still a very small fraction of the global economy. The time it would take for people to finally accept cryptocurrency may be too long and the interest for cryptocurrency might be long gone by then. However, as it was written in one of Stanford University’s online articles: “Cryptocurrency’s future outlook is still very much in question. Proponents see limitless potential, while critics see nothing but risk,” (read their insightful article and watch their webinar on cryptocurrency by Joseph A. Grundfest, a professor in Stanford Law School here).
Just like any investment, it is important that you treat cryptocurrencies with the same caution and interest you would with other investments coupled with proactive education coming from you.
