Crypto Basics

Cryptocurrencies are digital currencies implementing blockchain technology.

Cryptocurrencies differ from conventional national currencies in three important respects. First, normally they are not issued by a central bank (e.g. the Federal Reserve Bank in the U.S.). Therefore, cryptos are not regulated by a central bank.

Second, when you own a cryptocurrency you don’t own any tangible thing or certificate of ownership of a tangible thing (e.g. a coin or dollar bill). You own a digital blockchain account which consists of a ledger of digital activities.

Third, the issuing central banks control the supply and demand for their currencies through their monetary policies. They do not control the decentralized supply and demand of cryptos.

Cryptocurrencies are either purchased with another currency or created through a process of “mining”. Mining of a blockchain is the costly process employed by blockchain miners who create and verify blocks of transaction records and add them to an existing blockchain. The newly created blockchains are then sold to investors. Some are retained by the blockchain miner as compensation.

Common Myths

Crypto started with the mining and issuance of Bitcoin in 2009. The initial price in 2011 was 30 cents per Bitcoin. There followed periods of volatility before a stabilized sustained appreciation. For the last 13 months ending February 2022, Bitcoin prices rose from $11,000 to $66,000 and then settled in at $37,000 per Bitcoin.

The cryptocurrency volatility inspired several myths about Bitcoin. Among them are:

Bitcoin will replace paper currency. Whether you are hopeful or concerned, cryptocurrency will not replace centralized paper or coin currencies. Governments won’t let that happen because it threatens their central management of monetary policy.
Bitcoin mining is anti-environmental. Mining of blockchains does indeed consume much electrical energy. One answer to that is to use non-fossil fuels. For example, El Salvador has adopted Bitcoin as a legal tender and is starting to mine Bitcoin with geothermal energy.

Another answer is that mining is a consumer of energy but like other energy consumption has an overriding social or commercial purpose.

Bitcoin has no purpose other than short-term, short-sighted speculation. This myth is debunked by the 13-year history of Bitcoin value appreciation. That history proves that Bitcoin purchases or mining should be a long-term investment. In a volatile but generally bull market, long-term investment is wiser than seeking a fast buck.
The growth of alternative cryptos is diluting the value of Bitcoin. Since its inception in 2009, Bitcoin has been imitated by 10,000 new “altcoins”. Digital currencies operate in a free market so Bitcoin and others will inevitably face competition. Most altcoins are insignificant competitors. So far, Bitcoin has met the challenge.
Central bank digital currencies (CBDC) will destroy the market for Bitcoin and other private cryptos. Central banks are increasingly concerned about losing control of their monetary policies. Some are issuing their own centralized cryptocurrency. The U.S. Federal Reserve is studying the matter. Others are seeking more regulatory control of private cryptocurrency.

It seems more likely that countries will address the decentralization problem with more regulation. While more regulation might have some depressing effect on Bitcoin and other cryptos they are not likely to be replaced in free-market systems.

Summary

Despite a recent bear market, crypto will continue to be a force in currency commodity markets. It’s not surprising that a short but extraordinary Bitcoin history is the focus of myth and criticism. But most are belied by empirical evidence.