The most famous cryptocurrency of all is undoubtedly Bitcoin. However, in addition to Bitcoin, there are many other cryptocurrencies. And with many cryptos come many myths or misconceptions. So, we took the 4 most popular claims to see if they were true.
4 Cryptocurrency Myths You Should Know Exist
The popularity of cryptocurrencies has grown in recent years, but many know very little about virtual currencies. It is no wonder that cryptos raise questions, suspicion, or are associated with misconceptions.
Misconception 1: Cryptocurrency Finances Crime
Many people believe that criminals use cryptocurrencies to fund their activity. The image is inevitably caused by the idea that there is something obscure, illegal, or criminal about cryptocurrencies themselves.
It is true that cryptocurrencies are used to fund illegal activities - but so are traditional currencies. Euros, dollars, crowns, and pounds are also used to support criminal activity, whether we like it or not.
Cryptocurrencies are used more because of their encryption technology, which is based on anonymity. In other words, you cannot trace crypto transactions.
However, despite the encryption technique, the role of cryptos in illegal activities is exaggerated. Approximately 2 to 5 percent of global GDP, or about $ 800 trillion to $ 2 trillion, is used to finance criminal activity. According to Forbes, the use of cryptocurrency in criminal activities will cover only 0.34 percent or about $ 10 billion in 2020. Compared to regular currencies, the use of cryptos in criminal activity is almost nonexistent.
Like ordinary banks, cryptocurrency trading venues require their customers to identify themselves. In this way, stores and other actors know their customers by systematically documenting personal information. The reason is to ensure that the customer does not use cryptocurrency to finance criminal activity.
Misconception 2: Cryptocurrency Is Contributing to the Climate Crisis
The electricity consumption of cryptocurrencies has been criticized and widely debated. Cryptocurrencies use a lot of electricity, and there are rumors around the world that Bitcoin mining and network maintenance consume even more electricity than most states.
There are two ways to acquire cryptocurrency:
- by purchasing
- by mining
Mining means using the computing power of a computer to solve a mathematical calculation. The miner gets cryptocurrency in return for the work he does. Mining, that is, reinforcing transactions, consumes electricity.
Up to about 70 percent of all miners will use a renewable energy source at least at some point in the process. Many of the miners have moved to countries where electricity generation is efficient and affordable. For example, some provinces in China produce a lot of extra energy in hydropower plants, which is then used by crypto miners. However, reliable information on this is not yet available.
Cryptocurrency uses electricity, but so does the printing of traditional currency. However, the common currency, i.e., banknotes and coins, also has a life cycle. When old coins and banknotes are destroyed, new physical currency from the printing press is put into circulation.
Making a currency requires many raw materials such as cotton, metals, ink, water, and linen. In addition, putting currency into circulation requires a lot of logistical energy in both transportation and distribution. On the other hand, a cryptocurrency only needs electrical power, and no physical raw materials are used to make it.
Although there has been much controversy over the electricity consumption of cryptocurrencies, it is still an exaggeration to say that cryptocurrencies alone would contribute to the climate crisis.
Misconception 3: Bitcoin Is Worthless and Slow
Bitcoin has become a popular investment product over the past decade. It is important for every investor to remember that Bitcoin and other cryptocurrencies always involve risks. So it may be that you will never get back the money you invested in cryptocurrencies.
The value of Bitcoin, like other cryptocurrencies, is based on supply and demand, but also a few other factors such as availability, quantity, and portability.
There are only 21 million Bitcoins, and the number will not increase by much in the future. Thus, the value of Bitcoins cannot be manipulated by producing more of them.
On the other hand, you can issue as much traditional currency, or fiat money, as you want. The downside is that it will lead to inflation. A good example of this is the decline in the annual purchasing power of the average person.
In terms of usability, there is a slight increase in payments in cryptocurrencies around the world. More and more companies and online stores are accepting cryptocurrencies to buy everyday goods and services.
While it is easy for a customer to pay with a traditional payment card, using a cryptocurrency can be much easier for the seller. This is because the service provider receives the cryptocurrency in his own account immediately instead of having to wait for the traditional transaction to be settled.
Cryptocurrency appears to be a practical, handy and reliable alternative to regular currency. As their popularity grows, and usability becomes more common, more and more people will start using cryptocurrency instead of the regular currency.
Even more, Bitcoin appears to be protected from the effects of inflation and deflation because its quantity is limited. This may not apply to other available cryptocurrencies, such as Litecoin and Ethereum, as their number may still increase significantly.
However, from an investor’s perspective, the Bitcoin exchange rate, the Litecoin exchange rate, and other cryptocurrency exchange rates have been highly volatile.
Misconception 4: There Is No Need to Pay Taxes on Cryptocurrency
Cryptocurrency is difficult or almost impossible to trace. For this reason, tax evasion may be more straightforward compared to regular currency and ordinary banks. However, good encryption technology does not mean that there is no need to pay taxes on your cryptos.
As with all other assets, cryptocurrencies must be taxed. So make sure you also pay the necessary taxes on your cryptocurrencies.
Income from the use and extraction of a virtual currency such as bitcoin is taxable income and must be reported on a tax return. The tax return may also indicate the costs used to extract bitcoin in deductions.
Income from virtual currency is taxable in Finland in the year in which the virtual currency is used.
Report your tax return in 2021 in virtual currency:
- invoices you pay, for example, for goods purchased and services
- euros or other official currencies you have exchanged
- the revenue you earn from mining virtual currencies
Be sure to also report cryptocurrency income received through foreign players.
The taxation of cryptos is not much different from the taxation of other investments, such as equity or fund investments. Income from the use of cryptocurrencies is taxed as capital income, and virtual currencies from mining are taxed as earned income. The value of the virtual currency is the exchange rate of the virtual currency at the time of use or mining.
If the taxation of cryptocurrencies sounds too complicated, we recommend that you contact your taxpayer.
If you want to learn more, read our article about crypto taxes in Europe.
Myths From All Directions
Crypto is still a relatively new form of currency compared to traditional money. Because of this, they are associated with a lot of myths and misconceptions.
However, using Bitcoin and other virtual currencies is relatively easy, and buyers and sellers can treat them like regular currencies. Cryptocurrencies are becoming more common as an investment target, such as equity and mutual fund investments, as well as a trading tool. Even if you don’t own cryptocurrencies yourself, it’s a good idea to be aware of how the Foreign Exchange Market is expanding.
Sources: Forbes, Cointelegraph, Reuters, Coindesk, Ledger and Yle