Is Crypto a Scam?

Are the critics right? Is all crypto a scam? Check out the most common claims against crypto and the level of authenticity they hold.

The bear market of 2022 has brought up some familiar questions about the future of cryptocurrency, especially among new investors and crypto critics.

However, this is definitely not the first bear market that the crypto industry has seen. As far back as 2018 (the last big bear downturn), Bitcoin experienced its third bear market plunge of 80 percent or more in 10 years as the crypto winter took over everything in sight.

This theme seems to run true in 2022, three years later — regardless of what the numbers say, we seem to be in a bear market simply because investors are feeling the pinch of disappointment as Bitcoin plunged below $20,000 for the first time since December 2020. The total market cap of all cryptocurrencies is also down about $2 trillion since its 2021 peak.

Some of these disappointed investors have taken one look at these numbers and started crying out "scam," "crypto is dead," and "FUD" — we’ll take a look at some of the key discussions around cryptocurrencies, and whether there is any truth to these claims.

Claim 1: Cryptocurrencies Are a Scam Because They’re Not Backed by Anything

This “lack of backing” argument is one of the most popular claims made by crypto critics. One reason it is so popular is that it is mostly true — cryptocurrencies, for the most part, are not backed 1:1 by any fiat currency or physical scarce item like gold or silver. Instead, cryptos are backed by the trust that people have in them.

Many believe that Bitcoin doesn’t need to be backed by anything due to its unique monetary qualities: namely, its scarcity and immutability. These are key aspects of the cryptocurrency that allow it to “work” without anything like a 1:1 gold backing.

So does it matter if Bitcoin is supported by anything physical? The U.S. dollar has long gone off of the gold standard, so why do people still use this argument for cryptocurrencies?

It often comes down to what people define as the value of a cryptocurrency.

The term "value" has two meanings. It could refer to a desirable thing or service that someone would pay money for, or it could be used in the financial sense, the value of something evaluated in terms of monetary units. This second meaning can be used to explain why Bitcoin supporters might consider it a better option when compared to fiat currency.

The decentralized way that Bitcoin works, as opposed to the fiat currency system, is one of the reasons that crypto proponents believe it has better monetary properties.

Now, let’s take a look at how fiat currencies hold up under scrutiny.

This is why it should not come as a surprise why the price of cryptocurrencies is so volatile. When there's good news, like more adoption or institutional investment, the prices go up. But when there's bad news, like hacks or scams, the prices go down.

So, while it's true that cryptocurrencies are not backed by anything physical or any governments, that doesn't mean they're not valuable.

Claim 2: Cryptocurrencies Are a Scam Because They're Used for Illegal Activities

This claim is also popular, but it's not entirely true. While it's correct that cryptocurrencies can be used for illegal activities, like money laundering or drug trafficking, isn’t that true for all forms of currencies in the world?

Moreover, that's not the only thing cryptocurrencies are used for. They are also used for legal activities, like buying coffee or investing in projects.

The reason this statement is popular is that it is easy to sensationalize and make headlines like "Cryptocurrency Used in Drug Trafficking!"

Similarweb comparative web metrics show that in May 2022, the "scam" SERPs garnered 353% more search traffic than they did six months ago. Meanwhile, volume for the "how do I invest on crypto?" topics decreased by 28.9%.

Source: Similarweb

Claim 3: Cryptocurrencies Are a Scam Because They're Too Volatile

This claim is partially true. Cryptocurrencies are volatile, and that can be both a good or a bad thing, depending on how you look at the situation.

Some people see volatility as a good thing because it means there's potential for big gains. Others see volatility as a bad thing because it means there's potential for big losses.

But either way, volatility doesn't make cryptocurrencies a scam.

Investors in stocks and bonds also have to deal with volatility. And like cryptocurrencies, the volatility of stocks and bonds can be a good or a bad thing.

So, if we're going to say that cryptocurrencies are a scam because they're too volatile, then we should also say that stocks and bonds are a scam too.

Claim 4: Cryptocurrencies Are a Scam Because They're Not Regulated

Again, this claim partially makes sense. Cryptocurrencies are not regulated by governments on a wide scale like fiat currencies are. But that does not mean they are not regulated at all.

For the most part, cryptocurrencies are regulated by the code that controls them. And this code is open for anyone to see.

Claim 5: Cryptocurrencies Are a Scam Because They're a Bubble

There is, you guessed it, some sense to this claim as well. As with many trends in the tech world, cryptocurrencies have shown signs of being a bubble that one day it will eventually pop.

But again, that does not mean they are a scam. Bubbles happen all the time in the financial markets. For example, there was the dotcom bubble in the late 1990s and the housing bubble in the early 2000s. But when they popped, not all of the websites became worthless. Nor did the properties.

Same with cryptocurrencies. Some of them will survive and thrive. And well, here’s something to silence the bubble callers. Even the Bitcoin’s all-time low this time is much higher than it was during the last crypto winter.

It's Not a Scam Just Because Your Favorite Analyst Says So

Last but not least, even if someone experienced says that all cryptos are a scam, it does not make it true. While many finance gurus, like Warren Buffet or Bill Gates, are not optimistic about Bitcoin, some entrepreneurs, like Elon Musk or Sam Bankman-Fried, are pretty vocal in their support for cryptocurrency and the technology backing it.

However, it is worth remembering that cryptos are a speculative investment and you should only invest what you can afford to lose. Which is, again, pretty much the same with shares and all other investments.

Cryptocurrencies definitely are volatile: prices can crash at any time. And, as they are not regulated in the same way as the stock market by governments, if you do lose money, you may not be able to get it back. That said, your risk appetite has to be really high if you decide to create a crypto portfolio. However, just because there are risks involved, it does not make all of crypto a scam.