Article

Five major misconceptions about cryptocurrencies

People who work with cryptocurrencies on a daily basis help us sort out a few of the most common misunderstandings about it.

March 17, 2015 by Scott Slucher — Account Executive, Networld Alliance

Here's a tip: If your St. Patty's day party has gone flat and you want to liven things up a little, bring up the topic of cryptocurrency and you'll soon fire up a heated debate.

Cryptocurrency is one of those third-rail topics that anyone at all familiar with it seems to have an opinion about, pro or con. While some view it benignly as digital cash for the Internet, others see it as an instrument to bring down government-backed currencies and the banking systems that control them.

Given all the rhetoric around the topic, we thought it would be helpful to reach out to people who work with cryptocurrencies on a daily basis to sort out a few of the most common misconceptions about it.

Because cryptocurrency relies purely on mathematics, humans are unnecessary

This is a common theme among proponents of cryptocurrency, especially those who would like to see it undermine or replace current monetary systems.

In an online conversation, a digital currency supporter calling himself "Norm Chomsky" wrote that cryptocurrency is "a 'trustless' system whose cold mathematical algorithm cannot be governed or manipulated by humans. Its decentralized nature is inherently impervious to the direct forms of manipulation that plague colored rag-paper."

Joseph Wang, chief scientist with Bitquant Research, sees it differently. Wang writes extensively on human issues surrounding cryptocurrency — including politics, user experience and the ABC's of how cryptocurrency works.

"Finance is inherently a human activity," he said. "I think about ways that people can use virtual currencies to be more human rather than to remove the human element."

Wang said one of the problems with bitcoin is that it’s too inconvenient to use. And he's not the only one making this observation; if cryptocurrencies are to be integrated into retail environments, ease of use and the user experience must be addressed. 

Cryptocurrencies provide a quick boost in sales

According to Tuomas Ahola, community manager for the Web-based cryptocurrency community Let's Talk Bitcoin, merchants have been led to believe that cryptocurrency acceptance will generate higher sales revenue.

"While that may be the case short-term due to a newness effect, in the long term, many merchants have found out that it may be too early to rely on bitcoin," he said.

There are no fixed processing fees for cryptocurrency transactions, which is a big deal to retailers who want to hang on to that money. Those who've gotten in early will have to sit and wait for crypto-payments to go mainstream.

Cryptocurrency needs intrinsic value to be useful

This objection, which has to do with the notion that cryptocurrency, unlike a tangible commodity such as gold, has no intrinsic value, thus making it worthless.

Michael Kimani, a financial trader specializing in cryptocurrency, refers to bitcoin (which has become something of a generic catch-all name like Kleenex and Xerox) as "a digital scarce asset that has been compared to gold — digital gold for a digital age."

Kimani went on to say that "bitcoin is comparable to other limited supply assets such as precious metals, and in fact, the U.S. Commodity Futures Trading Commission has regulated and categorized bitcoin as a commodity."

To think about cryptocurrency as a commodity is to think about markets, which assign value to whatever is being traded. As with any market, the value of cryptocurrency is based on supply and demand. So while cryptocurrency might lack intrinsic value, it's wrong to say that cryptocurrency has no value.

Cryptocurrency is only used by the dark Web and criminals

There's no question that bitcoin is used to nefarious purpose by shady players ranging from drug traffickers to hitmen. But increasingly, it is coming into use in entirely above-board transactions. Last July, Dell announced a pilot program with Coinbase, a third-party payment processor, to accept bitcoin for purchases coming from the U.S. Just last month, Dell expanded the program to include Canada and the U.K.

On the same day that Dell announced the expansion of its bitcoin program, Newsweek published "The Rise and Fall of Silk Road, the Dark Web's Amazon," a detailed account of how bitcoin was used to fuel a multimillion dollar drug business. The story trumped more prosaic headlines about Dell's bitcoin expansion, feeding into peoples’ fear of the unknown, which is what seems to drive much of the uncertainty about cryptocurrency.

While it's true that criminals and other unsavory types use cryptocurrency to do their business, so too do the same types use conventional currencies to do the same thing.

Cryptocurrency is a fad doomed to failure

Because cryptowallets can be clunky for newbies to use and markets for cryptocurrency can be volatile, many have dismissed cryptocurrency as an unsustainable enterprise.

"I think that people don't quite realize how revolutionary these technologies can be," Wang said. "They see them as something that is totally separate and independent of the current financial system."

Wang sees cryptocurrency as an agent for innovation in markets. "I think that one of the big things about bitcoin is that it shows that people can create markets that trade something 24/7, and so the natural question is, If you can trade bitcoin 24/7, why can't you trade Apple stock the same way?"

photo courtesy btc keychain | flickr

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