7 biggest Bitcoin myths
With Bitcoin hitting new all-time highs and major news breaking almost every day, it seemed like a good time to look at some of the biggest myths and misconceptions people tend to have about the world’s first cryptocurrency, see if they have any merit, and correct the record.
If you think, for instance, that Bitcoin’s value is “based on noting” or that it’s too volatile to have any real-world use, this guide is for you. We’re separating fact from fiction – without shying away from legitimate risks – to get to the truth about the world’s most popular cryptocurrency.
Myth #1: Bitcoin is a bubble
While it’s true that
some people buy Bitcoin as a speculative investment seeking big returns, that
doesn’t mean that Bitcoin itself is a bubble, Bubbles are economic cycles characterized by unsustainable rises in
market value. They eventually pop when investors realize prices are much
higher then an asset’s fundamental value. Bitcoin is occasionally compared to
an infamous early speculative bubble: the 17th century Dutch “tulip
mania.” In 1637, speculators caused prices for some tulip varieties to surge
26-fold. The bubble lasted six months, crashed , and never recovered.
The real story:
Bitcoin has gone
through multiple price cycles over the course of over 12 years – and has
recovered each time to achieve new highs. As with any new technology, boom and
bust cycles are expected. For example, at the end of the dot.com era in the
nineties, Amazon stock nosedived from around $100 to just $5, only to become
one of the most valuable companies in the world in the subsequent decades.
Some major Bitcoin
investors believe that Bitcoin’s oscillations form a pattern typical of young
markets. Bitcoin, they say, will surge and recede with smaller swings and
longer durations between them until at some point in the future it settles into
relative stability. But only time will tell.
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Myth #2: Bitcoin has no real-world uses
Critics like to claim
that Bitcoin isn’t useful in the real world – or if it does have a use, it’s
mostly useful for illicit activity.
Neither of those
statements are true. Bitcoin has a long
history as a means of making payments to anyone in the world, all without a
bank or payment processor in the middle. And it is increasingly being used
as a gold-like hedge against inflation by major institutional investors.
The real story:
In recent years,
Bitcoin has become increasingly popular as an inflation-resistant store of
value much like gold – leading to Bitcoin’s “digital gold” nickname. A growing
number of major funds and publicly traded companies (Tesla, Square, MicroStrategy)
have bought millions or even billions of dollars worth of Bitcoin as a means to
better manage their assets.
Much like gold,
Bitcoin is scarce (there will never be more then 21 million Bitcoin). Gold, of
course, is heavy, bulky, and difficult to transport and store. Bitcoin, on the
other hand, can be sent digitally as easily as sending an email.
Bitcoin received
negative attention in early years as a means of payment on the dark web. But
when the first big dark-web market was shuttered, Bitcoin prices went up after
just a few days – and continued to rise.
Like any form of
money, some of it will be misused. But compared to US dollars, illicit use of
Bitcoin is a drop in the bucket. According to a recent report, 2.1% of Bitcoin
transaction happen on an open blockchain, it’s often easier for authorities to
track illicit activity than it would be in the traditional financial system.
Myth #3: Bitcoin doesn’t have real value
While Bitcoin might
not be backed by a physical asset like gold, neither is the US dollar or
virtually any other modern fiat currency. Bitcoin
is hard-coded to be scarce, which helps make it resistant to inflation. Inflation
with fiat currencies can occur when large quantities are created, thus diluting
the existing supply.
The real story:
There will only ever
be 21 million bitcoin. This scarcity is a major driver of its value.
Not only is the supply
capped, but the amount of new Bitcoin being mined is declining over time in a
predictable way. Every four years, in an event called a “halving,” block
rewards paid to miners in the network are cut in half.
This helps ensure
that the supply is always reducing which, by the basic economic principle of
scarcity, has worked to keep the price of Bitcoin broadly trending upwards over
the long-term – from less than a penny at the start to more than $50,000 as of
mid-February, 2021. (See Bitcoin’s current price.)
Bitcoin also derives
value from the work the computers on the network contribute via a process
called mining. Powerful computers all over the world supply a vast amount of
processing power towards the work of validating and securing every transaction
(in exchange they’re rewarded with new Bitcoin).
Myth #4: Bitcoin will just be replaced by a competitor
Bitcoin was the first
really successful digital money. And while new
cryptocurrencies have long promised to overtake Bitcoin via new features or
other advantages, none have come close.
The real story:
Though thousands of
rival cryptocurrencies have been created over the past decade, Bitcoin has
always been and remains the most valuable cryptocurrency by market cap by a
significant margin.
It’s also the most
popular, making up around 60% of the crypto market.
Reasons include
Bitcoin’s “first-mover” advantage, along with the purity of its mission as a
decentralized and open currency. Which isn’t to say that competitors aren’t welcome
to try. Bitcoin is decentralized, meaning it’s operated by a global community
of miners and nodes, instead of a central authority. For example, if Bitcoin’s
“first-mover” advantage, along with the purity of its mission as a
decentralized and open currency. Which isn’t to say that competitors aren’t
welcome to try. Bitcoin is decentralized, meaning it’s operated by a global
community of miners and nodes, instead of a central authority. For example, if
Bitcoin’s underlying architecture has to change in order to add new
functionality, features, or to protect against a newly-discovered bug, the
community can initiate a fork to upgrade the network.
In order for the
upgrade to be accepted, a 51% majority of the community must support the
change. This allows Bitcoin to adapt and evolve as required, as seen with
Bitcoin’s Segregated Witness (“SegWit”) upgrade in 2017.
Because the software
is open-source, developers who aren’t
able to gain community consensus can even create a hard-fork of the Bitcoin blockchain
and make an entirely new cryptocurrency. For instance, Bitcoin Cash was created
this way – but so far no Bitcoin clones have come anywhere close to replacing
the original.
Of course, a huge
amount of innovation is happening in the space, so it’s conceivable that a
bigger rival could emerge. But given current circumstances most experts don’t
think Bitcoin being replaced anytime soon is a likely outcome.
Myth #5 Investing in Bitcoin is gambling
While it’s true that
Bitcoin has experienced significant price volatility over the last decade,
that’s to be expected of a young and growing market. Since Bitcoin’s genesis
block in 2010, it has steadily gained long-term value – with a market cap
exceeding $1 trillion (as of February 2021; see the current market cap). And as Bitcoin has continued to mature, a
robust regulatory structure in countries around the world has helped to attract
a wave of institutional investment (Tesla, hedge funds).
The whole story:
There is a
fundamental rationale for a Bitcoin investor to believe that the value of their
holdings should rise – whereas in a casino you know the odds are tilted in
favor of the house. Of course there is no guarantee about future performance or
continued results, but Bitcoin’s long term trendline over the last decade has
been upward.
One popular investing strategy for reducing the impact of volatility is dollar-cost averaging – in which you invest a fixed amount every week or month no matter what the market is doing. This strategy typically results in positive returns regardless of volatility in a positive trendline environment. Bitcoin volatility appears to be on the decline. A recent Bloomberg analysis compared Bitcoin’s recent bull run to the 2017 boom – and found that volatility is considerably lower this time around. Why? The rise of institutional participants and the general stabilizing effect of crypto “going mainstream.”
Whether Bitcoin or any other cryptocurrency has a place in your investment portfolio depends on your personal circumstances, risk tolerance, and investment time horizon. And even though Bitcoin has trended steadily upwards in over the past decade, it also has had substantial down cycles. Investors should be careful navigating volatile markets (and consider working with a financial advisor before making major investments).
Myth #6: Bitcoin isn’t secure
The Bitcoin network has never been hacked. Its open-source code has been scrutinized by countless
security experts and computer scientists. Bitcoin was also the first digital
currency to solve the double-spend problem, making “trustless” peer-to-peer
currencies a reality. Further, All Bitcoin transactions are irreversible.
The real story:
Many misconceptions
around the security of Bitcoin stem from attacks on third-party businesses and
services that make use of Bitcoin,
and not the Bitcoin network itself. High-profile hacks of early Bitcoin
companies with flawed security procedures (like the one that hit the early
Japan-based exchange Mt. Gox) and occasional data breaches (like the one that
impacted users of the wallet provider Ledger) have made some users question the
security of Bitcoin.
Bitcoin’s core
protocol has functioned securely with 99.9% uptime since its creation in 2009.
A vast amount of computing
power secures the network. And the miners that power the network are
distributed throughout the world, with nodes in 100 countries – which means
there are no single points of failure.
Myth #7: Bitcoin is bad for the environment
Bitcoin mining is an energy-intensive process. But determining the environmental impact energy. Consider the entire global banking system, and all of the energy required to process bank transactions and power office buildings, ATMs, local branches, and much more.