Bitcoin’s recent price surge attracted a lot of attention, including the attention of the mainstream media, and as people struggle to understand and explain this strange new digital currency, they formed a number of misconceptions about it. I will try to address seven of the common ones in this piece.
1. “It’s not a currency”
Since a currency, as it is widely understood, is basically anything that can be used as a means of exchange for goods and services, and Bitcoin is used for that purpose, it stands to reason that Bitcoin is a currency. However, that’s not all Bitcoin is, and there actually wasn’t anything quite like this before. This is why pigeonholing it into any of the established categories isn’t very wise.
Bitcoin is both a currency and a payment system, with one being inseparable from the other. Its purposes are in a kind of symbiotic relationship. Its value as a payment system feeds its value as a currency, and vice versa. And the fact that it is something new, perhaps a new category of money, isn’t necessarily a bad thing. You can call it the evolution of money.
2. “It has no backing”
The argument goes that Bitcoin is basically conjured out of thin air, and being a “virtual” currency, actually isn’t even real. This argument essentially equates Bitcoin to World of Warcraft gold, EVE Online ISK, or Linden Dollars – in other words it’s useless play money.
First of all, it is quite shortsighted to think even of these virtual world currencies as worthless since they obviously aren’t without value to the many people using them for the specific purposes for which they are useful. If a person assigns value to a particular virtual good or service, even if it exists merely within the confines of what is essentially a game, then a currency which allows him to acquire those goods has value to such a person. Value in general is a subjective thing, and if bitcoin demonstrates that it has value to a lot of people then it is not worthless.
Furthermore, Bitcoin definitely is not conjured out of thin air. That’s what the whole process of mining is all about! In order to make a bitcoin come into existence it is not enough to just type a random number on a screen and press enter in some sort of a program. Instead, the program joins in the process of solving highly complicated mathematical problems which have the purpose of strengthening the cryptography of the entire Bitcoin system, thereby strengthening the security of all Bitcoin users. This is the utility value of Bitcoin, in addition to all of the other characteristics that make it an attractive payment system.
And in order to be able to do that it expends significant amounts of electricity. Thus if you’re looking for a real world source of Bitcoins it is electricity, or rather, energy. Between matter (physical tangible things) and energy, there really isn’t a fundamental difference. Just ask Einstein!
I personally find it somewhat laughable when people pose this critique against Bitcoin and immediately compare it to the US Dollar, for example, which is “backed” by the might and power of the US Government. It seems there’s a rather widespread cultural blind spot that has developed among the masses which prevents people from seeing the “backing” of the US Government as a liability rather than anything to be happy and secure about.
The problem is trust, and the fact is that this government which so many trusted, is giving the federal reserve the power to print as much money as they please, literally by typing up numbers on a computer screen in accordance to what they, the masters of the economy, believe to be prudent. I don’t get how does this situation make people feel safe and secure. This fact, that the US Government and the fed control our money, has played a crucial role in just about every recession we’ve had in recent decades, including the 2008 financial crisis, and the upcoming inevitable crash which they won’t be able to maneuver out of by simply printing up stimulus packages (it will kill the dollar).
Bitcoin is, when you understand these facts, actually better backed in the long term than the US dollar or other fiat currencies. It has actual energy behind it, utility value, and cannot be inflated at will. When you also understand that value is subjective, and that many people value things like trust, security, privacy, and other things provided by Bitcoin, that also gives bitcoin the backing it needs to be a worthy currency. In comparison US dollar is only numbers on the screen representing someone’s debt to some bank, and requires you to trust a centralized system.
3. “It is valued too high”
If you consider the fact that there will only ever be 21 million bitcoins (built in scarcity), and that the increasing difficulty in mining it resembles the increasing difficulty in mining natural metals such as gold, this misconception should be easily answered. The more people enter the bitcoin economy the more valuable it will be relative to the dollar economy. If the whole world were to join in, the current value of around $100 to $130 is actually fantastically undervalued. Bitcoin wouldn’t even be on the same playing field. USD would look worthless in comparison.
In other words, it’s not valued too high. It is valued too low, albeit at this point this is probably where it should be, during its volatile stage as the word is still spreading, people are still struggling to understand it, and the infrastructure is still being established and polished up. But when it stabilizes at its real value it should be orders of magnitude worth more than it is now relative to USD.
As a side note, you might think this scarcity presents another problem; how would billions of people trade with only 21 million bitcoins. The answer is that bitcoins can be subdivided into fractions of bitcoins such as microbitcoins or nanobitcoins. When one bitcoin becomes too valuable things that cost far less can be traded in these smaller units of bitcoin. This is similar to how we have cents for dollars and euros, or how you can trade in grams of gold instead of just kilograms or ounces. You can’t subdivide dollar cents like this, which presents a necessity for there to be many more dollars than bitcoins, but that opens the doors to inflation and economic manipulation since there is a central authority that prints these new dollars that can easily abuse this power.
4. “You can mainly buy drugs and other illegal goods with it”
I’ve seen certain talking heads shamelessly repeat this lie in the media multiple times in a way that suggests embarrassing ignorance at best and downright dishonesty at worst; that Bitcoins are mainly used to buy illegal drugs and for other types of shady business. You only need to look at the sizeable list of places that accept bitcoins, the fact that major brands like Reddit, WordPress, Namecheap, and others accept it, to see how far from truth this claim is.
You can buy just about anything with bitcoins, and many are. Drugs are just a small subset of it. The same actually holds true for cash in other currencies. You can buy drugs with dollars and euros as well, yet that doesn’t make people think of these currencies as “shady”, since you can obviously buy many other things with them that don’t have any connotations with shady business. If you think something still can’t be bought with bitcoins that you can buy with dollars, perhaps it’s an opportunity to provide it yourself and make some of your own bitcoins.
5. “It appeals mainly to libertarian anarchists”
While there is some truth to this claim, it isn’t true that Bitcoin appeals only to libertarian leaning people. There are socialist anarchists across Europe who are heeding its arrival for their own reasons, not so much tied to libertarian free market ideals.
Beyond political affiliations people across Europe find it appealing due to its decentralized nature, in the face of the crisis that is hitting the eurozone as governments bail out banks and entire countries on its back. It’s no coincidence, for example, that the cypriot collapse has been widely reported as one of the fuels of the recent Bitcoin price spike. People are losing trust in currencies which are tied to a system that looks increasingly unstable.
Then there’s the purely practical appeal. A good example are merchants which see Bitcoin as a quick and convenient payment method that they can offer to their customers without fear of chargebacks, and high processing fees. Customers find it appealing for the privacy, borderlessness, and ease of use.
In other words, Bitcoin appeals to people of various politicial affiliations, but also for reasons that go beyond politics in general.
6. “It will be heavily regulated and/or shut down”
There may be some sense in the expectation that governments will try to regulate or shut down Bitcoin. From the perspective of those with vested interests in the current system it is a threat. It is easy for them to trump up associations between bitcoin and money laundering, tax evasion, and drug dealing to make it seem as if Bitcoin is mainly enabling criminal enterprises, and use this as an excuse to regulate or shut it down.
The trouble is, it can’t really be shut down, and it doesn’t lend itself easily to regulation. This again has to do with its decentralized nature. It isn’t based in any single country, and doesn’t have a single governing body. In that sense it is much like the internet itself. Even if one country regulated it, people can still extremely easily bypass it through other countries. Furthermore, the encryption and the ability to conduct untraceable transactions make it very difficult to enforce any would be regulations. How can you control what you cannot see?
Finally, even if they somehow banned bitcoin, it is open source software, and the whole system can easily be forked to create an alternative that the government hasn’t even begun to tackle yet.
So it looks extremely unlikely that successful regulation or even banning of Bitcoin is even possible.
7. “It is completely anonymous”
Bitcoin actually doesn’t insure complete anonymity as bitcoin transactions technically aren’t anonymous. Rather they are pseudonymous, with addresses acting as pseudonyms, and transactions between these addresses being public. What it does is allow you to be as anonymous as you wish, that is, it enables you to take control over your privacy. How private your transactions will be, and how easily traceable to you, will depend on how you use it.
For example, if you put up an address on a web page related to you, accepting payments or donations to it, then it will be rather obvious that the bitcoins coming into that address are being paid to you. Generally, if you want to ensure the complete anonymity and untraceability of your transactions you should use a new address for each new transaction, and the bitcoin system makes that pretty easy to do. If each transaction is tied to a new address it will be next to impossible to tell that this new address, or all the other addresses you used, actually belong to you.
8. “It is too difficult to use”
Setting up an offline wallet may be a bit bothersome, I will grant that, but there are some options which make it more straightforward. Namely, the Electrum bitcoin wallet doesn’t require you to download gigabytes of the constantly growing blockchain before you can actually use it to transact. Instead it uses blockchain copies already available online elsewhere. It also backs up your wallet to one of a number of secure servers. Only thing you absolutely have to remember is your passphrase.
But there is a number of online wallets, such as blockchain.info, which make it as easy to use as PayPal, and even easier since it won’t require you to send in copies of your government IDs and whatnot in order to become a verified account holder and be able to take full advantage of it. It also features one click backups of your wallet to specified destinations, including email, and can automatically backup your wallet after every change made to it (that is, after every transaction). Creating new addresses for new transactions is also super easy.
Even buying bitcoins generally isn’t much harder than exchanging into any other currencies, with deposit options including everything from direct deposits and wire transfers to paypal via special channels. Check out our introductory guide to bitcoin for more information.