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Are Cryptocurrencies Scams?

By Zhiyuan Sun – Sep 21, 2021 at 8:45AM

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Over a decade later, a growing number of skeptics are still pessimistic about Bitcoin and other cryptocurrencies' potential.

It's human nature to be fearful of new technologies. Back in the 1830s when the train was first invented in Britain, it was universally panned. Frightened passengers believed that breathing in steam vapors could kill them, or their eyes would be damaged by adjusting to its velocity.

Those fears obviously didn't come true, which brings up one of the key tenets of investment success -- embracing new technologies while others remain skeptical. Not only do one's worst expectations seldom come true, but such innovation could be years or even decades ahead of relevant regulations -- giving investors an ample time period of clemency. Let's look at why it's important to keep this thought in mind for the rising blockchain industry, especially for Bitcoin (BTC 1.50%) and Ethereum

A digital coin entering a piggy bank.

Image source: Getty Images.

Why it's not a scam, explained in two minutes

The best analogy for cryptocurrencies is that of gold and silver. Both have tangible fundamental value due to industrial applications, the purchasing of goods and services, use in making jewelry and accessories, and so on. However, these rare metals also possess intangible fundamental value. Since the time of Ancient Babylon, gold and silver have again and again saved their owners from the devastating effects of hyperinflation. Their ability to cater to investor psychology is part of the reason they are so widely adopted. 

Cryptocurrencies themselves also have tangible fundamental value. For starters, blockchain technology and cryptography solve the double-spending problem with unencrypted digital currencies. That is, anyone can copy and paste a series of codes, claim it as currency, and spend as much as they want without any verification. Similarly, cryptocurrencies' intangible fundamental value lies in their (often) limited supply and decentralization. Most Americans simply don't trust the Fed since it has the privilege of issuing as much currency as it wants, especially after it printed 40% of all U.S. dollars in existence last year to combat the COVID-19 pandemic -- leading to high levels of inflation. So alternatives to fiat currencies like Bitcoin have become an enticing option.

Here's the big kicker: It's a consensus everywhere that gold and silver are not scam commodities. However, a little-known fact is that the supply of gold is 100 times greater than the amount physically used up -- 99% of the commodity is stored for purposes like an inflation hedge. The same can be said for cryptocurrencies. Very little of their float is used as a medium of exchange. But their limited supply and scarcity plays into investor psychology of protection against inflation just like commodities. Hence, we can deduce that there's nothing fraudulent about these cryptocurrencies themselves, but skeptics are merely coming up with an excuse to deny the technology. 

Takeaways for investors 

Cryptocurrencies are rapidly revolutionizing the world of finance as we know it. Last month, UWM Holdings, the second-largest mortgage lending service in the country, announced it would accept Bitcoin as mortgage payments. And to ensure there is a greater buildup of trust in the industry, Coinbase is rolling out blockchain analytics to help law enforcement track down wallet addresses suspected of ransomware transactions and help victims recoup their losses. What's more, the sector is democratizing finance for the masses, with innovations like cryptocurrency asset loans and charitable donations of non-fungible tokens enabling retail investors to access markets only previously available to high-net-worth individuals.

While nearly all major cryptocurrencies are solid buys, keep in mind that the same does not apply to altcoins, which are cryptocurrencies created after the success of Bitcoin. Out of almost 12,000 cryptocurrencies in circulation, just 2.2% of them, or 264, have a market cap above $200 million. It's more likely than not that investors will run into worthless coins or scams in the altcoin market, so stay cautious. 

Zhiyuan Sun owns shares of Bitcoin and Ethereum. The Motley Fool owns shares of and recommends Bitcoin and Ethereum. The Motley Fool has a disclosure policy.

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Bitcoin Stock Quote
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