Crypto assets form a new asset class. The crypto space is developing rapidly. The anecdotes being passed around between the news and laymen are often incorrect. We try to clear up the critiques and misconceptions and present what you need to know.
Many media opinions about crypto create perceptions that miss the truth. We highlight the 3 biggest misconceptions.
1. Chinese Control
Many a report call Bitcoin’s decentralization a failed experiment. All control is in Chinese hands.
China controls around 70% of global mining. Chinese operators and the Chinese government control the system, it is not decentralized.
Most of the world’s modern semiconductor manufacturing happens in China. Since transport costs time and money, miners who set up shop nearby have a competitive advantage. For this reason, most mining today is done in China.
Contrary to popular narrative, miners have almost no influence on the blockchain system. They are best thought of as replaceable maintainers, but they wield no power.
If mining is banned in China and stops, this would send a short term shock through the network. But the network would adjust within a few days and continue as normal.
The risk from Chinese companies of the Chinese government to interfere with public blockchains is very limited
Read more in this blog post: Mining Threat Equilibrium
2. Bitcoin is Insecure
Millions of Dollar disappeared! And it’s the Blockchain’s fault! These types of outcries are common.
Bitcoin gets hacked all the time. Hundreds of millions of Dollars have been lost and stolen. The technology is too insecure.
This narrative is incorrect. The Bitcoin blockchain has been operating continuously without hacks or theft for more than 10 years. It is unhackable.
The challenge facing many people and companies interacting with the blockchain is the private key management. Private keys allow the transfer of funds. Keeping the keys safe but also accessible is difficult.
Many times hackers have successfully found private keys on insecure devices which allowed them to transfer (and steal) crypto assets.
Private key management is already offered by several companies who are insured against hacks, making this a problem of the past. Learn how to store and custody crypto assets securely in one of our seminars.
3. Blockchains are limited and too slow
The Media state: Bitcoin can’t reach the levels of Paypal or Visa. It’s purely a toy.
The block size of blockchains is limited. The number of transactions that can be processed is way too low.
It is true that Bitcoin can process only 7 transactions per second; for Ethereum it’s only 20. This is vastly insufficient for a global transaction network.
But the numbers don’t tell the full story. A single transaction can process several payments. There are also payments, for example in the lightning network, that do not require any transactions. The true network capacity is already much higher.
Currently all teams work to make their blockchains faster and more efficient. Currently, we are still in the time of dial up blockchains, but ISDN, DSL and fiber blockchains will be there if enough demand mounts.
We reviewed the 3 biggest crypto misconceptions and could hopefully put things in the right perspective. As bonus we present a fourth, simply keep on reading.
4. Value derives from energy consumption.
Many articles, some from renowned professors, projected Bitcoin’s death once the price falls beneath the threshold where mining becomes unprofitable.
Mining consumes a certain amount of energy. To pay for this mining, the mined coins must be worth a certain minimum price. If they are worth less the system collapses, as miners stop mining.
This is incorrect. Miners follow the price.
While mining is profitable, meaning if the expenditure for hardware and electricity is lower than the value of the coins mined, more people will start mining. This makes mining more competitive and reduces profits for everyone.
If mining becomes unprofitable, some people will stop mining. This increases profits for the remaining miners.
An equilibrium, where the least efficient miners are barely breaking even, is always reached.
Contact author: Paul@f5crypto.com
Paul Otto is a managing director at F5 Crypto Capital GmbH. The views and opinions expressed by Paul are solely his own and do not necessarily reflect those of F5 Crypto Capital GmbH. This post is for informational purposes only and should not be relied upon for investment decisions.
The author may hold long or short positions in the assets discussed.