Cryptocurrency – myths and misconceptions

We sort the truth from the misinformation

Cryptocurrencies were introduced in 2009 with Bitcoin and have been gaining in availability and popularity ever since. The novelty of crypto and its opaque nature have led to the emergence of some cryptocurrency myths and misconceptions. Which beliefs are true and which are driven by ignorance or fear? 

Many economists view the growth of cryptocurrencies as a threat to the well-established bank transfer system. The main purpose of cryptocurrency, as originally envisaged, was to revolutionise the traditional banking systems by allowing “any two parties to transact directly with each other without the need for (and associated costs of) a trusted third party (i.e. the banks).” It’s possible that the disdain shown by the financial establishment has contributed to some of the misinformation surrounding crypto. We debunk the myths.

Myth 1: Cryptocurrency is not real currency and has no value 

This common misconception is far from the truth. While it is true that cryptocurrencies are virtual currencies and are not tangible assets like notes and coins, they can be exchanged electronically for value. But value is subjective. The value of cryptocurrency, like any other asset, is directly linked to supply and demand from investors. The value of Bitcoin when it began trading in July 2010 was US$0.0008, but it had climbed to US$0.08 by the end of that month. In November 2021 the value rose to US$64,000 per Bitcoin, but has since retreated to US$24,615 as at 21 February (2023). 

This track record demonstrates that the fluctuations in the value of cryptocurrency make it a highly risky endeavour, but not that it lacks value. In one day alone, the value of Etherium can fluctuate by 10%, making it impractical as a means of payment for commodities or luxury goods. If the crypto were used to pay for a big-ticket item like a car worth, for example, R500 000, the vendor would need to convert the seller’s crypto payment into a fiat currency immediately or risk losing up to R50 000 on the sale. Equally, they could gain the same amount, but the unpredictability means crypto is unlikely to replace conventional payment vehicles in the near future. Rather than having no value, it does not (yet) have enough value stability for everyday use. But crypto is real and is here to stay.

Myth 2: Cryptocurrency is difficult to use and a bit mystifying

Many people are wary of virtual currencies due to their intangible nature. On one level, cryptocurrency doesn’t “exist”. Cryptocurrencies are purely digital entries to an online database. You cannot hold a Bitcoin in your hand. But, in fact, most of our financial transactions are digital these days. We rarely pay for goods with cash. We tap our bank or credit cards, which is a form of digital payment; we transfer money via our bank’s app on our phone or laptop; and often we don’t even use a physical card but simply swipe an image of our card on our phone (or wristwatch!) or scan a QR code. Digital finance should not frighten us. But there is a reassurance in knowing that we can go to an ATM and draw rand notes. The rand may be a weak currency globally, one which has lost a lot of value in the last decade, but we still know roughly what our monthly salary will buy. We know what the rand is worth and we can touch and feel it if we want to. Crypto feels abstruse.

However, crypto is not that daunting. It’s a different system than what we are used to. As with any other investment decision, it’s sensible to learn the facts and, above all, beware the pitfalls, which unfortunately include scams. Once the process is understood, cryptocurrency trading ceases to be smoke and mirrors. In another decade, possibly less, it will be as familiar to us as our tap-and-go debit cards or mobile payment apps are now.

Myth 3: Cryptocurrency is used for illegal purposes

While the virtual nature of cryptocurrency has a certain appeal for criminals, particularly cybercriminals, money laundering and fraud have always existed. Just because cars are sometimes stolen does not stop law-abiding citizens from owning or driving a car. Similarly, the fact that criminals abuse crypto for illicit purposes does not make the currency itself unlawful. Most crypto transactions are legitimate, but tighter regulation and anti-money laundering controls will be welcomed. Many countries, including South Africa, are stepping up measures to regulate  cryptocurrencies within their jurisdictions.  

Misinformation: the environmental impact of cryptocurrency 

In 2021, Elon Musk announced that he would suspend the purchase of Tesla vehicles using Bitcoin, given the environmental concerns following the rapid growth of crypto. The creation, or “mining”, of cryptocurrency requires significant amounts of fossil fuel energy. Bitcoin mining uses roughly as much energy as Argentina, according to the Bitcoin Energy Consumption Index. If crypto mining were a country, it would be in the top 30 countries based on energy consumption. 

However, this cannot be considered in isolation. What is the energy consumption of the millions of ATMs around the world, or the hundreds of thousands of bank branches, or the manufacture of credit cards and bank notes, and their transport to branches and ATMs in armoured vehicles, or the websites and apps we all rely on? A recent report from Galaxy Digital found that the Bitcoin network consumes less than half the energy consumed by the banking or gold industries. The report calculated the energy consumed by the Bitcoin network and compared it to other industries, including the banking industry. It found that Bitcoin consumes 113.89 terawatt hours (TWh) per year, while the banking industry consumes 263.72 TWh per year. Neither of these industries is likely to win any environmental awards. But on current evidence, cryptocurrency is arguably the lesser of two evils. Industry in general needs to move rapidly towards renewable energy and a massive reduction in carbon footprint. But as a reason for eschewing cryptocurrencies, environmental impact is a red herring. 

For more information

Do you want to know more about cryptocurrency? SD Law is a firm of experienced attorneys based in Cape Town, with offices in Johannesburg and Durban. If you want more information about this new world, or need assistance with other digital concerns, including compliance with POPIA, cyberbullying and cybercrime, call Simon on 086 099 5146 or email sdippenaar@sdlaw.co.za.

Further reading:

• What is cryptocurrency?
• Cryptocurrency – the wild west or a carefully regulated environment?
• Cybercrimes Act 2020

SD Law

View more posts from this author