Most of us have heard of cryptocurrency and currencies such as Bitcoin and Ethereum, but to many people, the ins and outs of crypto remain a mystery. To make it more difficult, there are many myths surrounding cryptocurrency which make people hesitant to invest.
In this blog, we look at what cryptocurrency is, how it works and debunk some of the myths surrounding it.
The basics of cryptocurrency
Okay, so you’ve heard of cryptocurrency or crypto but what is it? Crypto is a digital or virtual payment form created by code that can be exchanged for goods or services. It is an alternative form of payment created using encryption algorithms. Oswego says, “the use of encryption technologies means that cryptocurrencies function both as a currency and as a virtual accounting system.”
As with conventional money, there is a range of different currencies when it comes to crypto. According to Inovayt Financial Planner, Luke Mase, there are “over 10,000 different types of cryptocurrencies publicly being traded, all with different levels of risk and volatility.”
What is Blockchain?
Cryptocurrencies use secure technology – Blockchain – to store information. Blockchain is a specific type of database that stores data in blocks that are then chained together. It is a system of recording information in a way that makes it difficult or impossible to change, hack or cheat the system.
What are the myths associated with crypto?
If you’ve considered investing in cryptocurrency and started some research, you’ve probably seen your fair share of horror stories and have a list of questions. Below we’ll look at some of the most common myths around cryptocurrency and, hopefully, put your mind at ease.
Myth #1: Cryptocurrency is illegal
One of the most common misconceptions around cryptocurrency is that it is illegal or used for illicit activity. Before investing in crypto, it is important to check your country’s stance as it is illegal in countries like China and Russia, although legal in countries like Australia and the United States. Regarding illicit activity, research shows that less than 1 per cent of transactions are used for illicit activity. Of this 1 per cent, crypto scams make up the vast majority of cryptocurrency-related crime, rather than money laundering or trafficking which is the common perception.
Myth #2: There’s no value behind digital currency
This myth stems from the fact that many of us aren’t fully educated on what crypto is and this lack of information means it is often discounted as not having any ‘gold or silver’ value behind it. Aithority says:
“The value of any currency comes from the backing of the state and the trust that people have over the government. Hence, for any money to be established as an exchange of value within a network, it is important for the network to trust it regardless of who (or what) is backing it.”
Myth #3: Cryptocurrency isn’t secure
As it is stored digitally, some people believe that cryptocurrency isn’t ‘safe’, but rather, susceptible to hacking due to its virtual format. The security behind cryptocurrencies comes from the database we discussed earlier; blockchain.
Myth #4: Cryptocurrency is real money
If you’re defining ‘real’ money as AUD, USD, etc. then no, it isn’t real money in that way, meaning you can’t go to the supermarket and pay for your shopping using Bitcoin. Having said that, there are some places that do accept Bitcoin as a form of payment. As discussed in Myth #2, there is a value behind cryptocurrency, you just need to find the right places to spend it.
Should I invest in crypto?
Now that we’ve looked at the myths surrounding cryptocurrency, let’s tackle the big question – should you invest in cryptocurrency? Some people may be unsure if they should invest in crypto over other general stocks, which is completely fair. For those who believe in the future of digital currency, this may be a good investment for you, as it is a way to earn potentially high returns while simultaneously supporting the future of technology. There are risks involved in investing in cryptocurrency, though. Because cryptocurrency is not regulated by any banks and is still a relatively new concept, it’s not usually insured and can be quite difficult to exchange for regular currency.
Luke says that when considering investing in cryptocurrency, it’s important to keep in mind that from a tax point of view, they are treated like any other investment. He also mentions, “As an investment, it can be extremely volatile. If anyone is looking to invest, they need to view it as money they don’t need and are prepared to lose.” He uses the example of Dogecoin when he says, “It’s my belief that a lot of crypto is based on hype.” Dogecoin started off as a joke, however, was recently ranked as high as the fourth most valuable cryptocurrency, perhaps owing to public figure Elon Musk tweeting about it. This resulted in people pumping it up on Reddit and creating hype around it. “That’s one of the reasons it’s so volatile,” Luke says. “It can easily be manipulated by bigger players and public figures.”
Cryptocurrencies, such as Bitcoin, provide us with an alternative way to invest, other than in property and the share markets. The use of blockchain databases makes it secure, as well as legal in Australia. Although it is a secure and growing market, it is important to thoroughly research before investing to ensure that it’s right for you and your situation.
As we have mentioned in previous blogs, this advice is general only and should be discussed with a finance professional specific to your needs and situation. If you are considering investing in cryptocurrency, book an appointment with one of our financial planners today.