The popularity of cryptocurrencies has increased in recent years, but many people still do not understand them. A 2021 survey by Crypotliteracy.org found that 96% of Americans cannot pass a basic crypto literacy test.
Here’s what most people get wrong about cryptocurrencies and what you need to know about this growing asset.
Bitcoin is in limited supply
Ninety percent of those surveyed did not understand the limited supply of bitcoin, a fact Coinme co-founder and CEO Neil Bergquist believes is essential to know when it comes to crypto.
“More than 21 million bitcoins will never exist, and what this does is create a fixed supply and trust in a fixed supply,” he said. “As people buy bitcoin, they buy from a limited supply, which is really the underlying principle of why people see it as a secure store of value. As we all know, dollars seem to be in infinite supply as the government chooses to print more dollars, which devalues the dollars in circulation, so we have inflation.”
There are different types of stablecoins
The survey found that 9 out of 10 people do not understand stablecoins: digital assets that peg their value to an underlying asset.
“Many of the respondents did not understand what a stablecoin is, let alone the differences between stablecoins,” said Bergquist.
Investors should be aware of the difference between an algorithmic stablecoin, such as TerraUSD, whose value plummeted after it broke its peg to the US dollar in May, and a cash-backed stablecoin.
“Unfortunately, many people have learned the hard way that an algorithmic stablecoin is very different than a cash-backed or cash-equivalent stablecoin,” Bergquist said. “Understanding that, as we’ve seen in recent weeks, is also very important.”
Do not rely on other people’s advice to choose your cryptocurrency investments
It’s tempting to follow the cryptocurrency advice you see on Reddit or social media, but Bergquist stresses the importance of doing your own research before investing.
“Learn about the different cryptocurrencies, their liquidity, and how big their communities are,” he said. “In general, the larger and more credible the community, the more credible the cryptocurrency. So it’s always important to do your own research and not just follow what an influencer says or does, and be able to make that decision for yourself.”
This is especially true if you want to invest in more volatile currencies.
“Large-cap cryptocurrencies like bitcoin and Ethereum are generally considered the safest stores of value. If you want to speculate on some of the riskiest and most volatile currencies, it’s even more important that you do your own research,” Bergquist said.
In addition to doing your research, Bergquist recommends starting with a small cryptocurrency investment to get your feet wet. Ownership is one of the best ways to learn about cryptocurrency: The survey found that respondents who owned cryptocurrency were twice as likely to answer crypto literacy questions correctly.
“All you need is $1 to buy bitcoin at a Coinme-enabled Coinstar ATM, and then you can go through the experience of setting up a wallet and go through that transaction experience,” Bergquist said. “What we have learned is that people who own cryptocurrencies are more likely to learn about it and become more knowledgeable about cryptocurrency in the long run.”