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Getting Comfortable with Cryptocurrency

#Cryptocurrency

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Cryptocurrencies like Bitcoin have prompted potential investors and analysts to ask lots of Big Qs, because over the past several yrs, digital currencies have seen significant growth in popularity.

Along this way there are untruths, myths, and rumors about the sector in general and about certain coins and tokens in particular.

Here, we take a look at some of the most common myths about cryptocurrencies, and examine whether or not they contain any truth, as follows:

1. Digital Currencies Are Primarily Used for Illicit Activity

One of the oldest and most pervasive myths about digital currencies is that they are effectively used for illicit activity. While it is true that digital currencies have been used by individuals with illicit intent and goals by criminal enterprises, the same could of course be said for fiat (paper) currencies too. The Key reasons behind this myth is the anonymity that is related to most cryptocurrencies.

While it is true that aspects of bitcoin and the anonymity it gives may have been enticing to criminals conducting illegal business in that and other similar markets. But it is worth remembering that it was the transactions themselves that were illegal, not the cryptocurrency. Criminals could and do use paper money for most of their activities. The analysis of the patterns of money flow on the Bitcoin network has revealed that while there was a frame where much of Bitcoin activity was concentrated in black markets and gambling venues, today illegal activity has fallen to a tiny fraction of total flow.

2. Digital Currencies Do Not Have Any Value

Cryptocurrencies are difficult to categorize. In the US, the IRS has spent yrs determining how to classify digital currencies for tax purposes. Investors have not been sure how to treat their digital assets when it comes to taxes or everyday transactions. All of this has contributed to the idea that cryptocurrencies are a fad or that they will just disappear. In actuality not only have cryptocurrencies gained in prominence and popularity, they are generally set up in such a way as to minimize the risk of such things happening. As with other types of currencies, cryptocurrencies can be exchanged for goods and services, and they have value in accordance with the belief of its holder/s.

The research shows that Bitcoins do have some intrinsic value based on the cost of producing new 1’s. Bitcoins, as well as many other digital currencies that use a PoW (proof-of-work) consensus mechanism, are produced through a “mining” process that involves the enormous consumption of electricity, which has a real cost. The market price of bitcoin tends to hang around this cost, which increases as the mining network gets bigger, and as the block reward is reduced over time.

3. Cryptocurrencies Are Not Secure

As digital currencies gained popularity, there have been high-profile scams and thefts. In many cases, digital currency exchanges themselves were the targets of these attacks. In other cases, criminals capitalized on vulnerabilities in wallets and other aspects of the cryptocurrency space. Investors worrying about the security of digital assets should remember that it is possible for hacks, thefts, and fraud to occur. What is important to know and understand is that the cryptography and mining network used in a blockchain network are big and open to attack, single points of failure such as a cryptocurrency exchange’s website or an individual user are susceptible to bad players.

There are ways that investors can change their behavior in order to better protect their holdings. Further, it is also worth noting that many governments and other financial institutions have shown an interest in blockchain technology. The Key reasons for this is that blockchain is widely seen as a secure and effective tool with untapped potential.

4. Digital Currencies Are Bad for the Environment

As cryptocurrencies like Bitcoin and Ether have taken off, so too has the number of mining operations around the world. Each of the individual mining rigs requires massive amounts of computer power, and this, in turn, requires large amounts of electricity.

But, Remember that the value of mining for a cryptocurrency nearly always outweighs the real-world cost that is required in order to complete that mining operation. What is more, many cryptocurrencies, including bitcoin, have set hard caps on the total number of tokens that can be mined. After this point, individuals will no longer be able to mine for new tokens or coins, and the costs of the computational power required for mining that currency will be dramatically reduced. And that the modern financial and banking system also requires a lots of electricity to operate on a daily basis, from office lights to computer servers to electronic payments networks and asset exchanges. And just for a moment think of the power cost to mine an ounce of gold.

5. Cryptocurrencies Are a Scam

Yes, there have been lots of ICOs (initial coin offerings0 that have proven to be fraudulent in various ways. But, savvy investors tend to treat cryptocurrencies in the same way that they would any other potential investment: with a healthy dose of skepticism and a large amount of research and caution.

It is possible for investors to be drawn into fraudulent investment schemes in the traditional financial world, and this situation tends to come about when an investor has not taken the time to thoroughly consider and learn about the details of the opportunity going forward. Just as 1 must sift through good and bad investment opportunities in the traditional financial space, he/she must take the time and effort to sort out investment opportunities in the cryptocurrency space.

It is impossible to fully eliminate the chance that you may be the victim of a scam, Due Diligence helps reduce those chances. Remember it is your money, so it is your responsibility.

Have a healthy day, Keep the Faith!

Paul Ebeling
Paul A. Ebeling, a polymath, excels, in diverse fields of knowledge Including Pattern Recognition Analysis in Equities, Commodities and Foreign Exchange, and he is the author of "The Red Roadmaster's Technical Report on the US Major Market Indices, a highly regarded, weekly financial market commentary. He is a philosopher, issuing insights on a wide range of subjects to over a million cohorts. An international audience of opinion makers, business leaders, and global organizations recognize Ebeling as an expert.   

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