Popularity for bitcoin has sometimes come at a steep price. While it has gained so many followers it has also seen a fair share of detractors with perceptions of the cryptocurrency that often succeeds in luring potential investors away from the market.
Most of the perception is borne out of little information about how Bitcoin really works. Marcus Reitz, General Manager for Africa at Luno helps us examine some of the misconceptions.
Bitcoin is a massive bubble waiting to burst
This is one of the oldest misconceptions which gained many followers in 2017 and was not helped by the crash of 2018.
However, the market crash has since been corrected by the remarkable bull run seen from 2019 to 2021 and also the influx of institutional investors.
Marcus Reits makes the point that most of the naysayers are now dipping into Bitcoin and cryptocurrencies and the adoption rate continues to grow.
Jamie Dimon, CEO of JP Morgan who still says “I’m not a Bitcoin supporter” is leading his bank towards enabling clients to have access to Bitcoin.
“If we can help them do those things very, very safely with all the proper disclosures then, you know … it’s not my job to decide what they’re going to do with their money,” Dimon said recently.
Back in 2017, Dimon had called Bitcoin a fraud and didn’t think the company he leads would have anything to do with the cryptocurrency.
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JP Morgan, one of the largest investment banks in the UD, now reports that while more than $3 billion had flowed into the Grayscale Bitcoin Trust in the last quarter of 2020, gold ETFs had declined by $7 billion over the same period.
“Bitcoin is a monetary network. When the concept of electricity being used to power appliances in the home was introduced, it wasn’t considered a bubble but an engineering breakthrough. There will always be people who are afraid of progress,” Reitz said.
With wild volatility, you can’t take Bitcoin seriously
Bitcoin price fluctuates wildly – one minute you are in millions of dollars, the next time you look those millions have been reduced to thousands of dollars. So, some people said trading in Bitcoin would “end badly” for traders based on the high volatility.
Reitz disagrees. This is based on what he calls the long-term value of the technology that powers cryptocurrencies like Bitcoin.
Blockchain is the technology that drives Bitcoin and other cryptocurrencies. Even the Central Bank of Nigeria (CBN), which does not support Bitcoin trading, agrees that the blockchain holds immense potential for the financial services industry in Nigeria.
The price of bitcoin has little to do with the long-term value that cryptocurrencies bring, says Reitz.
“If you’re a trader, the volatility can be stressful and potentially profitable, but if you believe in Bitcoin as the future of money, your investment objectives are long-term and therefore short-term volatility matters less to you,” he said.
Volatility has since reduced and the market is starting to stabilise according to weekly data from Coindesk.
Bitcoin has no intrinsic value
This is one misconception that never grows old. Interestingly, it is applicable to any currency, says Reitz.
Value is essentially the regard that something is held to deserve; the importance, worth, or usefulness or something.
In essence, the dollar or naira is important because people believe in it. Should Nigerians stop believing in the naira, the value diminishes. The price of Bitcoin is determined by supply and demand, that is, the buyers who want Bitcoin and the sellers who have Bitcoin.
“The reason Bitcoin has value is that it is a handy form of value or money commonly accepted by people. It is used to transfer value and buy or sell things. Unlike fiat currency like the US dollar of the rand – where its value and legal status are enforced by the government, Bitcoin’s value comes from its code, infrastructure, scarcity (there will only ever be 21 million Bitcoins), and adoption. By upgrading the financial system, bitcoin empowers people,” Reitz said.
Bitcoin cannot be a currency, investment, and a store of value
Bitcoin meets the requirements of the definition of a currency; scarce, durable, transferable, and fungible (can be exchanged for the same value or type), says Reitz.
One Bitcoin divides into units as small as one hundred millionth; it is scarce as the total supply is limited to 21 million Bitcoin; it is durable in that it does not exist in physical form so it cannot wear out; Bitcoin is digital so you can transfer it to anyone, anywhere in moments and finally, any particular Bitcoin is equal in value to any other Bitcoin.
Bitcoin is also used for payment. It can be used as a store of value since it has controlled supply, like gold or other commodities; and it derives more value and utility from developers who improve the code and ways it can be used.
Bitcoin is a Ponzi or pyramid scheme
This particular misconception gained popularity in 2017 when the infamous Ponzi scheme Mavrodi Mundial Moneybox (MMM) was at peak of activities. The operators started advertising Bitcoin as the preferred mode of payment because of its anonymous nature. When the Ponzi scheme eventually unraveled many blamed bitcoin.
However, Bitcoin which operates a decentralised model does not reward people for buying coins neither does it guarantee returns. Blockchain, the technology that drives Bitcoin, is entirely built on transparency; anyone, at any time, can inspect the public ledger.
Criminals use bitcoin
Long before 2009 when the Bitcoin technology was released and the first coin mined, criminals have always found a way to carry out their trade. Like Ponzi or pyramid schemes, Bitcoin became attractive to criminals because of its perceived anonymity.
Notwithstanding, the level of use of bitcoin by people to carry out illegal activities has drastically reduced, according to data from Chainalysis. Cryptocurrency-related crime fell significantly in 2020. In 2019, criminal activity represented 2.1 percent of all cryptocurrency transaction volume whereas, in 2020, the criminal share of all cryptocurrency activity fell to just 0.34 percent.
Bitcoin is pseudo-anonymous because it cannot be immediately linked to one’s identity. But Reitz says using Bitcoin for criminal activities is actually a terrible idea because once your identity is linked to Bitcoin, your entire history is available and movements are far easier to trace than cash as blockchain technology is a public ledger.
“As Bitcoin continues to gain legitimacy and use cases, data and law enforcement is getting better at tracing transactions to search for criminal uses and figuring out to whom an address belongs,” Reitz said.
