Many misconceptions exist around the Crypto-currency, bitcoin. Terms like “pyramid scheme” and “bubble” are often used to describe this coin by people who have little or no knowledge of this new digital currency.
In such cases, it is good to have your facts right, so I have compiled a list to help you refute the most common misconceptions and myths.
I will continue to update this list and if you think I have missed any, you can mention it in the comment section below.
1. Bitcoins are the same as other (earlier) digital currency
Though Bitcoin is not the first digital currency in history, but the first that got set up completely decentralized.
Bitcoin is not centrally managed like PayPal, Neteller, etc, and the benefits it has compared to other digital currencies are:
- Bitcoin is not stored in any central location which can be attacked.
- The Bitcoin network goes offline when the last PC bitcoin software goes out.
- No central administrators exist who can change the rules for the currency.
2. Bitcoins have no added value compared to gold.
Bitcoins can be compared to gold with some added features such as:
- Easy to transfer to someone else – Can you send gold over the Internet?
- Easy to secure – You can keep the same Bitcoin simultaneously in several places.
- Easy to verify.
- Easy to share.
The differences between major currencies and Bitcoin are:
- The behavior of bitcoin is predictable – the exact number of bitcoins are known.
- There is a limit on the number of Bitcoin that will exist. (Maximum of 21 million)
- A central authority does not manage Bitcoins.
The differences between the existing financial services and the bitcoins network are:
- You can make anonymous transactions with bitcoins.
- A bitcoin account cannot be frozen.
- Bitcoins are faster to transfer to another party.
- The bitcoins transaction costs are particularly low.
3. Bitcoins are worthless because they have no insurance.
The trust people have in bitcoin is its insurance. If people know that bitcoins can be exchanged for other currencies or commodities, this gives value to bitcoins.
This is the same with euros or gold. The value of bitcoins is subjective.
4. The value of bitcoins is based on the consumption of electricity and computing power to mine them.
This is incorrect! The value of bitcoins as mentioned above is subjective. It is a matter of supply and demand.
As more people start accepting bitcoins, its popularity and demand increases and invariably, the value.
5. Bitcoins have no real (intrinsic) value.
In contrast to gold and silver, you can use bitcoins to pay for goods and services like cash.
6. Bitcoins are not legal tender.
When two parties agree to do barter even rice can be a legal tender.
7. Bitcoins are a form of terrorism because it brings the stability of existing currencies in danger.
Terrorism involves violence and bitcoins have nothing to do with it.
8. Bitcoins can be edited by anyone and therefore worthless.
Bitcoins cannot be printed. Miners get rewarded for using their computing power and energy to calculate blocks to ensure security in the network.
9. Bitcoins are unreliable because they use an unknown encryption.
Bitcoin uses SHA-256 encryption, which has a particularly good reputation among other banks and government agencies working with it.
10. The early adaptors will be unfairly rewarded.
The people who first invested in bitcoins indeed have made some good money off it, but there was no guarantee to that group of people bitcoins would ever increase in value. So, they were also at risk.
Surprisingly, you will never hear this argument when we talk about people who were smart enough to buy something like Apple stock early.
11. 21 million bitcoins are not enough to sustain an economy.
Unlike paper money, bitcoins are divisible into eight digits after comma leaving yet enough units available.
A “Satoshi” is the smallest unit of a bitcoin. Bitcoins are digital and are stored in a digital way, but you cannot copy them to make more bitcoins.
Each bitcoin is unique just like cash but issued once.
12. Lost coins cannot be replaced and that is a bad thing.
That is right! In the offline world, there are also examples where this is true. Think of a lost wallet or a forgotten password vault combination.
The result will only mean the value of the remaining bitcoins will increase due to the loss of large proportions.
13. Bitcoins will not work because inflation is not regulated.
Unlike your traditional paper money, inflation of bitcoins is highly regulated due to the 21 million limit of bitcoins.
Bitcoins are inherently deflationary, unlike your Dollars and Euro where more can be printed.
14. The bitcoin community consists of anarchists and conspiracy people.
The bitcoin community is a large group of people from different society, languages and with different ideologies.
15. Anyone with large enough power can take over the bitcoin network.
Correct! Someone who holds 51% of the total block chain power can manipulate the system. However, there are hundreds of thousands of people mining bitcoins so the power is very scattered.
The power of Bitcoin is larger than most large data centers put together.
16. Bitcoin violates national regulations on finances.
Partly because bitcoins are a “new” concept, there are no rules about their use.
17. Direct cash transfer is not possible because the transaction needs to be confirmed.
A miner must indeed confirm the transaction. Still, we can assume this is legitimate to be treated as a transaction.
Moreover, a transaction is confirmed in ten minutes. There are payment providers who act as intermediaries and make it possible to conduct direct transactions.
18. New blocks will no longer be created after mining the 21 million bitcoins.
This is incorrect. The transactions are still processed and recorded in blocks.
19. Transactions done with bitcoins cannot be recovered.
Yes, bitcoin transactions are irreversible. This has its advantages and disadvantages for buyers and sellers.
20. Quantum computers can break bitcoin’s network security.
This is theoretically possible, but the bitcoin network security can also upgrade to play in the development of computer technology.
21. Mining of bitcoins is a waste of energy and it pollutes the environment.
The same can be said about the mining of gold or the printing of paper money. If we make a comparison between the amount of power put into the bitcoin network and the amount of energy needed to support thousands of bank branches, fleet private jets, and many armored cars, you will agree bitcoin mining is a lot friendlier to the environment.
22. Entrepreneurs cannot specify prices in bitcoins because of the fluctuating exchange rate.
The price actually does fluctuate much. However, entrepreneurs can see the value of bitcoins in real-time and then they can convert the value to their currency.
Payment providers like Bitpay solve this problem by converting all transactions directly or indirectly into other currencies.
23. Bitcoins are not decentralized and the developers may influence the software in future.
The developers of the bitcoin network have a very limited control over the protocol itself.
24. Bitcoin is a pyramid scheme.
Bitcoin is not a pyramid scheme in the sense that there is no guaranteed payoff. It may happen that as the number of users increases the price may decrease, no one is sure about that.
In a pyramid scheme, monies collected from new members are used to pay the old members to keep the system running. And when members stop joining, the scheme collapses. This is not the case with bitcoin.
Buying and selling of bitcoins are done on an exchange, and supply and demand determine the value of the currency.
So, there is the list. What misconceptions did you have before now or which ones have you heard people talk about? Let me know in the comment below.
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