Major Misunderstandings About Crypto
Juan Villaverde is an econometrician and mathematician devoted to the analysis of cryptocurrencies since 2012. He leads the Weiss Ratings team of analysts and computer programmers who created Weiss cryptocurrency ratings.
Despite the tremendous amount of expert manpower and money poured into blockchain and Distributed Ledger Technology (DLT), crypto naysayers continue to push their negative narrative.
“It’s all worthless,” they say.
“It will all disappear in a puff of smoke,” they rant.
I’m not surprised. Fake news is common nowadays, and getting stuck in one’s own echo chamber is something we all do to varying degrees.
That includes me. So I often like to peek outside the “blockchain revolution” subculture to see why so-called “experts” have such a distorted view of the space.
What I find: A whole series of misconceptions about blockchain. Here are just four of the most common …
“Cryptocurrencies can’t be used as money because their limited supply makes them deflationary.”
True, Bitcoin is deflationary.
Yes, beyond the 21 million Bitcoin created, there will never be any more.
Plus, it’s also a fact that some 20% of the existing Bitcoin supply (over 3 million) has been lost forever.
The “deflationary money theory” is not new, of course. It goes back to the old idea that “you’ll never buy shoes with gold, because gold is too scarce to be used as money.”
Instead, goes the theory, people will spend money that’s more readily available and hoard the money that’s scarcer.
Why this is a misconception: Bitcoin is just one cryptocurrency, the only widely used crypto that was designed to be scarce.
Other cryptos don’t follow that model. In fact, cryptocurrencies can be engineered to any specification.
They can be deflationary; they can be inflationary.
They can be pegged to population growth, the growth of the economy, or any combination.
Developers could fine-tune the creation of money so that it becomes scarcer in times of economic booms (when the risk of inflation is higher) and more abundant as the economy turns down (when the risk of deflation is higher).
Cryptocurrencies can even be hard-coded to follow the economic cycle without the need for regular intervention or decision-making by policymakers.
So whenever you hear the argument that “crypto doesn’t work because you can’t have a finite supply of currency,” you can know with near certainty that the author is mostly unfamiliar with the technology.
Cryptocurrency can be made to do all the things that traditional fiat can do and much more.
The big difference: It’s borderless, flagless money that can’t be tampered with by corrupt governments. And that’s precisely what makes it so appealing as a solution to the ills that have periodically afflicted the world’s monetary system.
“Cryptocurrencies are a bubble because they let companies print their own money out of thin air.”
Why this is a misconception: To see the fallacy in this one, you don’t need to be a blockchain whiz kid. All you need to realize is two things:
First, they’re talking almost entirely about start-ups issuing their own non-native tokens. These are Initial Coin Offerings (ICOs) by individual start-up companies seeking to raise money. In all these cases, supply for these tokens is limited in some way by the protocols they launch their tokens on.
Second, even in the realm of start-ups and ICOs, what they do is essentially no different from what traditional companies do when they issue shares.
How do traditional companies create shares? One day there are no shares, and the next there are millions, with the founders holding most of them. Created out of thin air? Sure, if you assume the companies have no value.
Is this a problem? If it’s unregulated and helter-skelter, yes. But as with any common stocks on the market, only those start-ups that create value for society will retain their value.
Almost all others will simply fade away.
That’s just how money, assets and markets work. There’s nothing new here.
“Cryptocurrencies are a fad because no one has created any practical use for them.”
No practical use?!
How about the many millions of the secure, private transactions already confirmed?
How about a global, decentralized, borderless, neutral, censorship-resistant monetary system that no one can control?
These aren’t practical uses?!
“Why not just use systems likes PayPal?” comes the typical retort.
Because PayPal is a different animal entirely. It’s a centralized database. It exists on top of the banking system. And it forces users to go right back to the banking system to spend their money.
This means that the folks at PayPal can refuse to accept your account.
Even after you’ve opened an account, they can reject your transaction. Or they can shut down your account entirely.
Plus, they can decide with whom you’re allowed to transact, and who is off-limits.
Most important, they offer no new currency system, using exclusively government-controlled money issued by a central bank.
In fact …
To say that cryptocurrencies and DLTs are useless because we already have companies doing payments is akin to saying the internet is useless because we already have fax machines.
Blockchain and DLT allow for a whole host of new applications that go far beyond payments.
They create a new layer of trust on the internet where two parties create a transaction in a smart contract without trusting or even knowing each other.
They can be certain that their commercial relationship will be executed exactly according to specs.
And they know that there’s zero chance of tampering or manipulation by either side, by a central authority, or by corrupt institutions of any kind.
“Cryptocurrencies will never catch on because the complexity of the financial and legal system is too great to go on the Blockchain.”
This is an age-old anti-tech argument that likely began with the first tools invented by our ancestors.
You can imagine them asking: “How could you possibly do that with a stick or a stone? What you really need is just your own bare hands, knuckles and noggin!”
In the evolution of technology, the technical term I’d refer you to is “infrastructure inversion.” It’s the idea that new technology always struggles to gain acceptance in the current world.
Because, by definition, the existing infrastructure is always built for the older technology.
The first automobiles, for example, were forced to run on dirt (and often muddy) roads built for horses and carriages.
“These machines will never catch on,” was the common refrain. “They can’t run properly on our roads!”
Somewhat true, until, of course, the infrastructure itself — such as asphalt roads and highways — caught up with the new vehicles.
So yes, the financial and legal systems are too complicated today. But that’s largely due to inefficiencies in these systems and issues of trust. These inefficiencies create multi-day lags before settling transactions and far longer delays in resolving disputes.
In contrast, DLT settles accounts in real time. It’s all built into the transaction process itself.
One last word …
There are many more misconceptions, misunderstandings and false claims made by critics who think they understand this technology well enough.
But in virtually every case, if you dig just beneath the surface, you will find evidence of intellectual laziness, bias or both.
This doesn’t mean blockchain and DLT have resolved all their issues. Nor does it mean they will do so very quickly.
But they are here to stay. And they will change the world in ways we can only just begin to imagine.