The crypto market is down, and FUD is going mainstream. With a combined value of nearly $2.48 trillion USD today, cryptocurrencies have piqued the interest of many investors, although many are still on their path towards understanding the technology behind them. While the Internet is full of information to encourage knowledge of crypto, the volume of this data has made it challenging to filter out fake news. Seeds have been planted across different channels, creating feelings of unease about how it works and its potential for the future. Like with any financial decision, it is crucial to separate emotions from the facts and make informed choices. So, to make things simple, we have tackled a list of some common misconceptions about cryptocurrency that should alleviate any concerns.
Compared to other assets like cash and gold, it is true that crypto is an intangible asset. However, cryptocurrencies do hold a real value based on factors of supply and demand, like any other currency. The production of new units is regulated by cryptographic algorithms to create scarcity by making each unit unique and impossible to duplicate. Further, many cryptocurrencies, such as Bitcoin, have a maximum supply of units available on the market. Like any limited resource in high demand, these factors help increase their price. Additionally, many cryptocurrencies serve to support other DeFi technologies, which contributes to increasing their value.
This may come as a shock with tax season just around the corner, but cryptocurrency and NFT transactions are in fact taxable in Canada. According to the CRA, cryptocurrency is generally treated as a commodity and transactions with digital currencies are subject to the Income Tax Act. To learn more about how crypto is taxed in Canada, visit Bitbuy’s Canadian Cryptocurrency Tax Guide 2022.
The rise of cryptocurrency in everyday life has been paralleled with a media frenzy over regulation changes in different countries. This has caused many hodlers to worry that the government could simply ban people from using cryptocurrency at any given time. Although certain countries have already increased their regulation of crypto, it is becoming increasingly challenging for governments to control. People have still been able to access the network using VPNs during periods of harsher governmental control. Not to mention, attitudes around crypto are changing and countries are starting to incorporate it into their economies.
Another variation of this myth is that crypto is not traceable, and that transactions using cryptocurrency are completely anonymous. In actuality, these transactions offer pseudonymity which means that network administrators can trace the transaction back to a user even if they have no visible identifiers. Every transaction is publicly and permanently recorded on a blockchain so that the movement of a coin can be followed. This allows for criminal exchanges of funds to be discovered and traced back to the perpetrators.
The media has become ridden with false information by personal investors trying to move the market in their favour. While this appears to be a popular investment technique, it may not be very effective. In fact, despite the large volume of personal account holders publicizing their opinions in the media, professional traders accounted for 85% of Bitcoin’s USD value sent to exchanges in 2020. Long story short, it is typically the “Bitcoin whales” that have a bigger impact over the liquidity of the market, so it’s best to do your own research and avoid getting swept up in the FUD.
While it is important to recognize that cryptocurrencies can be highly volatile assets, that does not rule them out as stores of value. Most of the Bitcoin that has already been bought is being held by people and businesses for long-term investments. Crypto is volatile, like many investments in new technology, but this does not mean it will not hold value in the future. The scarcity, growth, and belief in a cryptocurrency can be good indicators of its potential in the long run.
As history dictates, even the priciest cryptocurrencies can lose half of their value in a matter of days. While price can play a significant factor in your decision to invest, it is also essential to consider growth; Ethereum’s starting price was $0.31, and now it is valued at over $3,000. A common strategy for investors is to diversify their portfolio by investing in a variety of different crypto, rather than depending on the outcome of one or few. This lessens their risks of loss in the case that a cryptocurrency declines in value. A coin, with a low price per unit, doesn’t necessarily mean it’s in its early stages and has room to grow. Investors shouldn’t be worried about price per unit, but should instead be evaluating a coins “market cap”, which is the number of units outstanding multiplied by the price of a unit, to get a true sense of how much the coin is worth. Each coin has a determined amount of supply. Bitcoin for example has 21,000,000 units as a built-in maximum, where coins like Shiba Inu or Dogecoin have billions and billions available.
When investing in digital assets, there is a significant distinction to be made between digital coins and digital tokens. On the one hand, coins are used as a form of currency to complete transactions. They represent cryptocurrencies, and they lie on their own blockchain. For example, Ethereum uses the Ethereum blockchain. On the other hand, tokens use the technology of existing blockchains to store data. LINK is an example of a crypto token that also makes use of the Ethereum blockchain. Unlike coins, tokens represent digital assets generally secured using smart contracts. Hence, NFT stands for “non-fungible token.”
In the past few months, celebrities of the likes of Neymar, Kevin Hart, and Eminem have added NFTs from the Bored Ape Yacht Club collection to their portfolio. With each piece valuing upwards of 50 ether or roughly $200,000, many have taken their skepticism about NFTs to the Internet. Using their screenshots of the collection as their profile picture across different platforms, they claim to have the same level of ownership over the digital art pieces. This has led people to question if NFTs truly hold any value and how investors benefit from purchasing them. In reality, “NFT” represents the proof of ownership over this digital asset that is unique to the true owner. Like owning a piece from Van Gogh, the real value lies in having the original, not just a picture.
Despite more than 300 million crypto users around the world, a common myth is that crypto is just a scam and that it is not secure. Although there have been cases of fraudulent coins on the market, Internet scams are possible in every industry. Therefore, it is always important to do research prior to an investment to evaluate potential risks and asses the source. Nevertheless, the technology used to secure crypto investments and transactions is very effective. Purchasing crypto through Bitbuy offers users multi-tiered security to keep your assets safe.