The adoption of cryptocurrency and blockchain technology has significantly advanced since Bitcoin was created in 2009.
Nonetheless, there are persistent myths about cryptocurrencies and blockchain that hinder its adoption.
To be sure, Bitcoin can be polarizing. Bitcoin diehards claim the cryptocurrency will soon replace gold, all government-backed money, and credit cards, as well as turn the banking system on its head. Rational exuberance aside, that is unlikely to happen, at least in the short term. On the flip side, media critics often badly mischaracterize Bitcoin as nothing more than a speculative tool, an environmental disaster, a bubble, or worse.
This makes an honest, sober analysis of the facts by an investor almost impossible, which is a shame. As a new asset class, investors must do their homework on Bitcoin and carefully consider the risks before jumping in.
So in that spirit, it’s high time to fact-check a few common Bitcoin misconceptions:
Myth #1 Cryptocurrency Is Not Taxed
Yes, there is no central authority involved and there are no banks involved. But this does not rule out that the digital currency evades being taxed. It is just any other transaction and you are taxed whenever you sell it or whenever someone pays you in cryptocurrency.
In India, when you trade in cryptocurrencies and make a profit, and if that profit exceeds 10 lakh rupees, you have to pay 30 percent on the profit. This is for short-term gains where there is no minimum time period for holding the investment.
For a long-term gain, where your investment needs to hold for at least two years, you will be taxed 20 percent on the profit.
Myth#2 Bitcoin is used only for speculation
This is not accurate. Every day, the Bitcoin network settles approximately $10 billion worth of transactions. Bitcoin’s average of 305,000 daily transactions is not far behind Fedwire, the Federal Reserve’s settlement system for wire transfers between financial institutions, at 550,000 transactions.
Some of these transactions represent investment purchases, and some of those may be for speculation, but many others are for regular use like remittances, especially in the global South. For example, according to the World Economic Forum, 32% of Nigerians own Bitcoin for peer-to-peer payments. In regimes like Russia and Belarus, Bitcoin is sometimes the only way to fund anti-corruption efforts and protests. That’s pretty useful.
Myth#3 Bitcoin wastes energy
Bitcoin “miners” harness vast computing power to secure the Bitcoin network. Those computers use a lot of energy: by some estimates as much as the country of Chile. This has led to charges of energy waste.
Something “wastes” energy only to those who think it serves no useful function. The Bitcoin network secures $1 trillion in value, and serves millions of people, including many without access to traditional payment networks. Miners often colocate to where power is abundant and free, which often means renewable hydroelectric or geothermal sources. Today at least 39% of Bitcoin mining is powered by renewable energy, and that share is growing rapidly. It also takes a lot of energy to run FedEx, TikTok, and the U.S. Department of Defense. Bitcoin’s carbon footprint is undoubtedly a problem that requires a solution. But it doesn’t mean Bitcoin is a bad idea. Rather, that carbon footprint is an implementation challenge to overcome—just as it is for all kinds of useful entities.
Myth#4 Bitcoin is not backed by anything
This is the critique of Bitcoin I easily hear the most. While Bitcoin was designed as a P2P e-cash, it is true that it does not have the backing of a government, central bank, or FDIC insurance. Frankly, this is the beauty of Bitcoin because no central party can unilaterally print endless money, devaluing its own currency like central banks have done in trillions this year to combat COVID. This point notwithstanding, the only true value of money is the trust its users place in it.
Bitcoin is backed by an equal trust as well, but in a completely different sense. Bitcoin and its value are primarily backed by two sources we can trust: Mathematical code and the billions of capital poured into Bitcoin mining to support and secure the networkAs Bitcoin is the world’s hardest form of money, meaning it is impossible for any party to unilaterally print more of it, unlike fiat, it is a highly trusted form of global money. Backed by the billions spent on operational and capital expenditures to maintain the network by decentralized Bitcoin mining groups, Bitcoin is a more trusted alternative form of money for millions around the world.
Myth#5 Cryptocurrency Doesn’t Have Any Real Money Value To Them
This is perhaps the biggest myth about cryptocurrencies since there is no material asset that is backing them. However, the people who trade in cryptocurrencies believe in the inherent value of it, which has been supporting the system since 2008.
As long as there are people who believe in and understand the value of cryptocurrencies, they are here to stay.
Myth#6 They Are Illegal Forms of Digital Money
Although the currency has been banned in countries like Bolivia, Russia, Algeria, Ecuador and Trinidad; EU nations, G7 nations, and the USA have made cryptocurrency a legal tender.
India’s previous Finance Minister, Mr. Arun Jaitley pointed out in the Budget 2018-19 that the Blockchain technology will be explored to promote digital and safe transactions. The transactions in cryptocurrency are not banned in India and are thriving.
Myth#7 Bitcoin is too volatile to be a store of value
While it’s true that Bitcoin is more volatile than, say, government bonds, that’s not inherently bad. In the 1970s, as gold was severed formally from the monetary system, its price was extremely volatile, increasing 10-fold in a decade, before declining 60% and flatlining for decades. Gold was at its most volatile as it was increasing in value. Sometimes the most volatile assets have the best returns, and sometimes they do not. Bitcoin today is in a “price discovery” phase similar to where gold was in the 1970s, where big swings up and down can be common. Still, because of its volatility, Bitcoin may not be suitable for all investors.
Myth#8 Governments will kill Bitcoin
It’s true that in Nigeria, Russia, and Belarus, Bitcoin gets the government’s cold shoulder. But in the U.S., Canada, and much of the West, the situation is different. For example, the top U.S. securities regulator taught a course on cryptocurrencies at MIT; the Commodity Futures Trading Commission, which regulates commodity markets, is a global innovator in regulating Bitcoin derivatives; and the U.S. Office of the Comptroller of the Currency recently cleared banks to provide custody services for Bitcoin. Central banks care about financial stability above all else. Nothing would be more destabilizing to the $1 trillion Bitcoin market than some arbitrary and unwarranted crackdown.
Myth#9 Cryptocurrencies Are Easy To Hack
Using a platform to trade in cryptocurrencies is just like any other platform for trading. Upping the security on wallets where trading in cryptocurrency is facilitated is the only way to secure your wallet and enable safe transactions.
Myth#10 There Is Only One Huge Blockchain In Place
There absolutely is not. There are many blockchains. Blockchain is just a technology that caters to different problems- they may be public or private versions of blockchain, the source may be open or closed, etc.
While one type of blockchain might back Bitcoin, others might support other cryptocurrencies like Ethereum, Ripple, etc.
Myth#11 Cryptocurrencies Are Not Accepted As a Form of Payment
Cryptocurrencies came in 2008. Slowly and steadily, their virtue has been realized by people who are investing in it. Big companies like Microsoft, Fiverr, Dell and Expedia have started to accept Bitcoin. However, while buying cryptocurrencies is not illegal, cryptocurrencies are not recognized as legal tender in India.
Myth#12 Bitcoin cannot be spent on anything
You can spend Bitcoin anywhere that accepts VISA or Mastercard. Let me repeat this as it is an unbelievably important point.
YOU CAN SPEND BITCOIN ANYWHERE THAT ACCEPTS VISA AND MASTERCARD.
Dozens of firms have developed crypto debit cards, including Binance, Coinbase and more. These cards can be used to seamlessly spend Bitcoin to buy groceries, make purchases on Amazon or to pick up the bar tab for your friends (or me) if you are feeling generous. If you hold crypto for payments, your purchasing power increases as crypto prices increase relative to USD or fiat. While the fees to use such cards are relatively high compared to standard payment methods today, I expect these will fall precipitously as new players enter the market and crypto payments via VISA or Mastercard become commoditized.
Myth#13 Bitcoin is too expensive and I do not have enough to buy one
I know this sounds silly to those who are familiar with crypto, but I am asked this many times by no-coiners who simply just don’t know better because nobody has explained it to them.
One of the primary benefits of crypto is nearly all the assets are fractionalized or divisible into many parts. 1 Bitcoin, for instance, is divisible up to 8 decimal places, meaning the smallest amount of Bitcoin one can own is 0.00000001 Bitcoin. We call this microscopic unit a “Satoshi” or “Sat” after Bitcoin’s founder, Satoshi Nakamoto. If/when Bitcoin hits a $100,000 price per Bitcoin, each Satoshi will be worth $0.001, or 1/10th of a penny. This unit is easily purchasable and usable on the Bitcoin network.
Myth#14 Blockchain Is A Cloud-like Database
What is important to remember is that blockchain is just like a ledger- it only keeps a record of the transactions. In its entirety, this is the ledger that is backing cryptocurrencies and ensures that transactions are safe, not repetitive and are transparent.
Blockchain cannot store any ‘files’. It only contains a code for the transaction that took place.
Myth#15 Bitcoin is mostly used for illegal activities and money laundering
One of the biggest misnomers about Bitcoin is that it is private and anonymous. Because Bitcoin is 100% transparent, meaning no action that occurs on its blockchain can be hidden, it is anything but private, and in fact the exact opposite of private. Any transaction occurring on the Bitcoin blockchain can be seen by any individual in the world at any time. Further, while public wallet addresses for Bitcoin are not specifically tied to any individual identity at the onset, it is quite easy to track spending patterns and deduce the identity of wallet owners and put a stop to any nefarious transactions occurring in Bitcoin. This is how, at one point in time, the FBI and government of Bulgaria were some of the world’s largest holders of Bitcoin after making arrests for illegal activities.
Chainanalysis, a global on-chain analytics firm that monitors Bitcoin and other leading crypto assets, has conducted thorough examination of all transactions that occur in Bitcoin in crypto.
To sum up, since cryptocurrencies is still an unexplored avenue in the Indian market, a little more information around the topic can go a long way in helping investors take a call whether they would want to venture into the virtual currency space.
If you are someone planning to buy a Bitcoin or other cryptocurrencies, I suggest you weigh the pros and cons of investing very carefully and be very clear about their use and tax treatment in India before you make a decision.