Abstract

As Bitcoin continues to gain prominence in the global financial landscape, it has also become a breeding ground for misconceptions and myths. This article aims to address and debunk the most common misunderstandings surrounding Bitcoin, providing readers with accurate, easy-to-understand information. By examining popular myths about Bitcoin's anonymity, environmental impact, legality, and more, we seek to equip both newcomers and skeptics with the facts needed to form a well-informed perspective on this revolutionary digital currency.

Introduction

Over the past 15 years, Bitcoin has evolved from an obscure digital experiment into what I would consider to be one of the most disruptive technologies that we have seen in recent times, if not the most disruptive. While its popularity has grown, this has come with the rise of myths and misconceptions surrounding the technology. These myths -- some of which being valid concerns -- are not just harmless criticisms. The ignorance surrounding this technology has impacts on public perception, regulatory action, and individual financial decisions. In this article I will tackle the most common misconceptions surrounding Bitcoin and separate the fact from fiction.

Myth 1: Bitcoin is Completely Anonymous

Contrary to popular belief, Bitcoin is not an opaque network of transactions. While it's true that Bitcoin doesn't require users to provide personal information to create a wallet or make transactions, it's more accurate to describe Bitcoin as pseudonymous rather than anonymous. Every Bitcoin transaction is recorded on a public ledger called the blockchain. This means that all transactions are traceable, even if they're not immediately linked to real-world identities. Think of it like writing under a pen name – your real identity isn't immediately apparent, but it's not impossible to figure out who you are if someone puts in the effort.

Myth 2: Bitcoin Has No Real Value

Many critics argue that Bitcoin has no 'real' value. This is often the perspective of the average citizen as well. Afterall, it's just 1's and 0's, right? Wrong, this completely overlooks the nature of value itself. Like any property or currency, the value of Bitcoin stems from its utility as well as the agreement of its users. Bitcoin has several unique features that provide enough utility to justify its value. Bitcoin is scarce, only 21 million coins will ever exist, never a single fraction more (if you are skeptical of this, I explain more in myth 6). This scarcity and absolute salability across time means bitcoin is the single best way to combat inflation. Bitcoin's decentralized nature (again, more info in myth 6) allows every user to be their own bank. No more asking the bank for permission to spend your own money, and then paying a fee for it too... Reread that sentence slowly and process how ridiculous our current financial system is.

Myth 3: Bitcoin is Primarily Used for Illegal Activities

The notion that Bitcoin is mainly a tool for criminals is one of the most persistent and damaging myths in the crypto space. While it's true that Bitcoin has been used for illegal activities, the same can be said for any form of money, including traditional cash. In fact, a 2023 report by Chainalysis, a blockchain analysis company, found that only 0.34% of all cryptocurrency transaction volume in 2020 was associated with illicit activity, which is a decrease from 0.42% in 2022. This percentage is significantly lower than estimates of money laundering in the traditional banking system, which the UN Office on Drugs and Crime suggests could be as high as 2-5% of global GDP. To add to this, Bitcoin is a public ledger, and every transaction that has ever been done using bitcoin has been and will be recorded. This can actually aid in the incentivization to avoid illicit activity and can help crack down on those who participate in it.

Myth 4: Bitcoin is Too Volatile to Be a Useful Currency

Bitcoin's price fluctuation is one of the most prominent reasons cited for why Bitcoin would not serve as a good currency. Yes, it's undeniable that Bitcoins price has been erratic and unpredictable at times. However, these price fluctuations must be viewed in context. In the grand scheme of money, Bitcoin is brand new, it is still in its price discovery phase. It's natural for emerging technologies and markets to experience significant price fluctuations as they mature. Historical data shows that Bitcoin's volatility has been decreasing over time. As the market cap grows and more institutional investors enter the space, we can expect further stabilization. Moreover, in countries with high inflation or unstable currencies, Bitcoin's volatility can actually be less problematic than the consistent devaluation of the local fiat currency. And let's be real, in some cases, your grocery prices have doubled and tripled in the past 3 years. That means in this context, your dollar has lost 50-66% of its value, sounds pretty volatile to me.

Myth 5: Bitcoin is Terrible for the Environment

Many critics have taken an environmental approach to the criticism of Bitcoin, specifically Bitcoin-mining. Afterall, it does use a significant amount of energy, more than many countries. But it's important to understand why Bitcoin uses so much energy. Its proof-of-work consensus mechanism, which secures the network, is deliberately energy-intensive to make attacks prohibitively expensive. All this energy expenditure, however, does not equate to environmental impacts. In fact, the proportion of renewable energy to non-renewable energy used to mine Bitcoin is considerably higher than other energy-intensive tasks, with some estimates as high as over 50%. Besides, the implications of a secure network of online transactions do infinitely more good than harm, and even if the network used no renewables, the benefits are undeniable justifiers of the cost. Pro-clean energy advocates should adore Bitcoin, because it incentivizes cheap energy. When a renewable energy grid is built, it must be backed up by non-renewables, this is because the sun doesn't always shine, and the wind doesn't always blow, and people need energy. This means that much of the time, when the renewable sources are in fact producing energy, it is not needed and goes to waste. If this energy instead went into Bitcoin mining, it not only would put that energy to good use, but it would add incentive for clean cheap energy production wirelessly all around the globe.

Myth 6: Bitcoin Can Be Hacked or Shut Down

This misconception stems from the fact that computers can be hacked, and physical money can't be. This would be a valid concern if it wasn't for Bitcoins proof-of-work decentralized nature. Unlike a centralized system with a single point of failure, Bitcoin operates on thousands of nodes spread across the globe. The way Bitcoin transactions are validated is by solving extremely intense math problems, essentially. The algorithm for what constitutes a solved problem is self-audited and adjusted every 2 weeks, this is so that as more computers join the network or leave the network, it still will take roughly 10 minutes for a solution to be found. Think about it this way: Every miner in the Bitcoin ecosystem is given a lock, the same exact lock. Bitcoin mining is a race to find the key that opens the lock, once that key is found, it is distributed to every miner so they can open the lock. The person who finds the key is rewarded in Bitcoin. A 'block' in the blockchain is a ledger that contains all the transactions that occurred during that block as well as all the transactions that have ever happened in any block before it. This means that in order to alter the historical record of a transaction, not only do you need to solve the equation for that block (don't forget this equation took hundreds of thousands of computers 10 minutes to solve), but you also have to solve every single block that came after that. The work isn't done their, because now you have a different version of the Bitcoin blockchain, and you need to convince 51% or more of the miners that your version is in fact the correct one. This makes hacking the network so difficult that it might as well be impossible. The protocol has been running for 15 years by itself without a single successful hack.

Myth 7: Bitcoin is Just a Ponzi Scheme

Ponzi scheme is a term carelessly thrown around essentially by people who don't know what a Ponzi scheme is, and certainly don't know what Bitcoin is. A Ponzi scheme is a fraudulent investment that promises returns, but those returns are paid by new investors to old investors. Bitcoin, on the other hand, is completely transparent and open source. It's also decentralized and completely nondiscriminatory to new or old members. Its value is not based on new entrants paying old members, but from its utility as a self-custody, censorship-resistant, borderless medium of exchange and completely salable store of value. Unlike a Ponzi scheme, Bitcoin's code is entirely transparent, its supply is fixed and predictable, and its network operates based on clear, unchanging rules. The logic used to define Bitcoin as a Ponzi scheme can just as easily be applied to refer to house-flippers as Ponzi scheme artists, or even stock market investors as Ponzi scheme artists considering they are buying an asset with the intention to sell at a higher price. It is completely false.

Myth 8: Governments Will Eventually Ban Bitcoin

Fear of a government ban of Bitcoin has been looming since it's early day, but as time goes, Bitcoin has matured, and this scenario becomes increasingly unlikely. For starters, Bitcoins cryptography and decentralized nature would make it extremely hard to actually ban even if governments tried. And per the Constitution, if the government were not to secure or even to deny the unalienable rights of the citizens, it is not only permissible, but it is citizen Duty to revolt. Financial freedom and freedom to have money sound basic but are becoming increasingly threatened and exploited. Bitcoin fixes this, and for governments to ban Bitcoin would be a slap in the face to the idea of freedom. Bitcoin is also becoming more and more adopted by institutions and individuals. This creates a powerful constituency that would oppose bans, making it politically challenging for governments to take such drastic action.

Conclusion

Hopefully this article has helped you see that many of the criticisms of Bitcoin do not stand their ground. From misconceptions about its anonymity and environmental impact to unfounded fears about its security and legality, these myths often stem from a lack of understanding about how Bitcoin actually works. I hope I have provided a clearer picture of Bitcoin's capabilities, limitations, and potential. As with any new technology, it's important to be educated on the facts, not just he said she said. As Bitcoin becomes increasingly integrated into the world's economy, its true value will be realized, and it will become increasingly stable.

References

Team, Chainalysis. “2024 Crypto Crime Trends from Chainalysis.” Chainalysis, 29 Feb. 2024, www.chainalysis.com/blog/2024-crypto-crime-report-introduction/.