The Gift of Bitcoin: Chapter 6 – Bitcoin Misconceptions

TL;DR: Common concerns and issues about Bitcoin debunked. You’ll learn why Bitcoin is good for the environment, is for everyone (not just criminals), has real value, and will survive the rise of quantum computing. We’ll also acknowledge the sordid side of many crypto projects and explain why Bitcoin is different.

This is the sixth chapter of “the Gift of Bitcoin” – a world-class Bitcoin education sent to recipients of Bitcoin gifts sent with GiveBitcoin.

Congratulations on receiving your GiveBitcoin gift! Someone who cares about you gifted you some Bitcoin (BTC) and it’s our job to help you learn about it.

Here are the chapters currently available:

Chapter 1: Introduction to Bitcoin
Chapter 2: The Problems with Money
Chapter 3: Bitcoin, the Best Money Ever
Chapter 4: Bitcoin and Time Preference
Chapter 5: The Optimism of Bitcoin

Quick summary:

  • Years of government and media propaganda have left skeptics unable to understand Bitcoin as digital hard money. Plus, with new technology, there’s almost always an adoption S-curve that starts with plenty of doubters.
  • Any form of money eventually winds up used for illegal purposes. Less than 1% of Bitcoin transactions are related to so-called “illicit” activity.
  • Adding Bitcoin to a diversified portfolio (1-5% of the value) will actually lower the risk profile of your portfolio because it is an uncorrelated asset.
  • There have been scams in the cryptocurrency space, but don’t make the mistake of conflating that with Bitcoin, the most secure form of money on the planet.
  • There’s no real way to ban Bitcoin since there’s no middlemen involved. Governments could try to slow the adoption rate, but any ban on Bitcoin would merely turn it into a black market commodity that is still widely available.  
  • From an energy perspective, Bitcoin’s infrastructure has a much smaller footprint than our current financial system. Moreover, Bitcoin mining encourages the growth and development of renewable energy since Bitcoin rewards the most energy efficient miners with the most profit. 

In the previous chapter, you learned how Bitcoin is a source of optimism. In this chapter, we’ll explain how some common misconceptions about Bitcoin.

The lesson only takes ~15 minutes to read. You can also listen to the lesson if you prefer audio content.

 

Seems like there are still a lot of skeptics out there. If Bitcoin is so great, why isn’t everyone convinced?

Skeptics are often woefully misinformed about Bitcoin because years of government and media propaganda have left them unable to understand it as digital hard money. Also, keep in mind most new technologies take a while to catch on. Telephones, cars, planes, and the internet were all greeted with doubts at first. There’s almost always an adoption S-curve that starts with plenty of skeptics. Eventually, though, worthwhile technology spreads far and wide.

 

What doubts do people have about Bitcoin?


Negative notions about Bitcoin you may hear: It’s too volatile, it’s for criminals, it’s a scam or a Ponzi scheme, the government will shut it down, it’s a waste of electricity that’s bad for the environment, it doesn’t have any intrinsic monetary value, etc. 

Phew, what a list. Is any of it true?

There are fair criticisms to make about Bitcoin since it’s still a nascent technology; for example, there’s room for improvement in terms of privacy, speed, accessibility, and usability. But many of the biggest fears are misplaced especially when you consider Bitcoin’s upside: It allows someone to send money to someone else across the globe, within minutes, without paying big fees or worrying if the transaction will go through, and the impact of that is enormous and will outweigh any relatively minor flaws. 

But let’s go ahead and take a deeper look at some of these misconceptions surrounding Bitcoin…

Is Bitcoin really for criminals?

First of all, any form of money eventually winds up used for illegal purposes; criminals and drug dealers use fiat currency all the time. And that’s before we even get to the dubious “legal” activity that’s been done over the years by Wall Street and others who profit from working the angles of the existing system. In any financial system, criminal activity is a risk that can, at best, be mitigated, and Bitcoin has great tools for that. 

This misguided notion of outsized criminal activity can be traced to the common myth that Bitcoin is anonymous rather than pseudonymous, which means that all transactions are recorded on the blockchain forever. As such, Bitcoin is a poor choice of currency for criminals. In fact, less than 1% of Bitcoin transactions are related to so-called “illicit” activity. Human nature inevitably leads to some criminal activity but there’s no reason to expect Bitcoin will be any worse than currencies that preceded it.

Is Bitcoin too hard to use?

There’s still room to improve Bitcoin’s usability and make it more accessible. This is normal for emerging technology; in the early days of the internet, it was hard to get online, send email, or do anything else. We’ll soon reach a point where it’s easy for people to use Bitcoin without having to think; the software will handle everything in an intuitive, easy-to-use way.

Is Bitcoin too risky?

Adding Bitcoin to a diversified portfolio (1-5% of the value) will actually lower the risk profile of your portfolio because it is an uncorrelated asset.

Define: Uncorrelated asset


Asset correlation is a measure of how investments move in relation to one another and when those movements happen. When assets move in the same direction at the same time, they are considered to be highly correlated. When one asset tends to move up when the another goes down, the two assets are considered to be negatively correlated.
(source)

 

Bitcoin is also a nascent asset class with a finite supply and more global capital is flowing into it every year, making it an intelligent, low risk investment opportunity for a portfolio. 

Combined with the fact that BTC is proving to be largely uncorrelated with both the S&P 500 and gold, these data about Bitcoin’s high returns and low volatility made BTC a compelling tool for portfolio management in 2019. (Source)

Of course, any investment (stocks, real estate, etc.) comes with risk. Any prospective Bitcoin investor should understand and weigh these risks.

Photo: John Morgan

 

Is Bitcoin a scam?

No, this is another misunderstanding. There have been scams in the cryptocurrency space that are similar in nature to scams in any other industry. But don’t make the mistake of conflating that with Bitcoin itself, the most secure form of money on the planet.

A lot of people have used Bitcoin to conduct scams, but Bitcoin itself is not a scam. So there have been people who have done ransomware crypto lockers where they say, “Hey, I’ve encrypted your hard drive, and unless you pay me Bitcoin, I’m going to not give you the password” kind of thing. So, in that case I would say look, it’s not Bitcoin that’s a scam; people are using Bitcoin as a tool to do their scamming. So there’s a difference there. And people might see that an exchange got hacked. Does that mean Bitcoin is insecure? No, it means that exchange didn’t secure their Bitcoins. That’s why we say, “Not your keys, not your coins.”

Stephan Livera, Bitcoin podcast host

 

Is Bitcoin a Ponzi scheme?

A few critics have even claimed Bitcoin is some sort of Ponzi scheme (i.e. a form of fraud in which belief in the success of a nonexistent enterprise is fostered by the payment of quick returns to the first investors from money invested by later investors). That reveals a superficial understanding of Bitcoin. While early adopters of Bitcoin have reaped the rewards of its increase in value, that does not mean it’s a Ponzi scheme. In fact, it required a lot of fortitude to stick with Bitcoin throughout its early history. Early Bitcoiners have been rewarded for their conviction and risk-taking, not by scamming people out of their money.

A lot of people don’t understand how difficult it was to hold from early days and not sell. So the reality is a lot of Bitcoin early adopters ended up spending a lot of it, or selling a lot of it, or losing it in a hack. It wasn’t easy to profit since it was extremely volatile. This is what the monetization of a new kind of digital good looks like.

Stephan Livera, Bitcoin podcast host

Photo: Brandy Hollins

 

Is Bitcoin just a bubble?

Some fear Bitcoin is just another inflated and overhyped trend and the bubble will burst soon. (A “bubble” is a state where an asset stays stale for a long time, then its price skyrockets, and then its price drops down quickly.) While Bitcoin has experienced ups and downs, Bitcoin has been through the “bubble” cycle multiple times and it has always risen from the ashes because the network and its money has real value. 

Bitcoin, like all market-based monetary goods, displays a monetary premium. The monetary premium is what gives rise to the common criticism that Bitcoin is a “bubble”. However, all monetary goods display a monetary premium. Indeed, it is this premium (the excess over the use-demand price) that is the defining characteristic of all monies. In other words, money is always and everywhere a bubble. Paradoxically, a monetary good is both a bubble and may be undervalued if it’s in the early stages of its adoption for use as money.

-Vijay Boyapati, author and former Google engineer (source)

 

Can the government just shut Bitcoin down?

It’s extremely unlikely (perhaps impossible) that all countries will collude to ban Bitcoin. The international community is increasingly trending towards anarchic relations so it’s tough to imagine, say, North Korea, Iran, the U.S., China, Russia, and Saudi Arabia all aligned in opposing Bitcoin. In any case, even if this happened, there’s no real way to ban Bitcoin since there’s no middlemen involved. The best governments could even hope for is to impair the adoption rate.

Photo: Mark Doliner

And any ban on Bitcoin would merely turn it into a black market commodity that is still widely available.  

Consider for a second another widely banned commodity, reliant on significant energy for creation, produced by a mixture of industrial and informal entities, chiefly circulated on the black market, enjoyed by millions. I’m referring of course to cannabis, and you can probably obtain it from a dealer nearby — legal or not — in under 30 minutes. To believe a ban would abate bitcoin’s popularity is comical. It would only reinforce bitcoin’s literal raison d’être: protection from the whims of the capricious State. A State so obviously threatened by a financial commodity would reveal itself to the world as paranoid and controlling, making its true parasitic nature very clear.

-Nic Carter, Partner with Castle Island Ventures (source)

Since nations compete with each other, there will be jurisdictional competition between them that extends to Bitcoin. Some countries may be anti-Bitcoin and try to curtail its use, but others will want to attract Bitcoiners by offering them tax breaks and other benefits. And financial repression tools used by a government will just make people want a free (i.e. open, permissionless, no restrictive rules, etc.) system like Bitcoin even more.

But Bitcoin has no intrinsic value. How can you make a currency out of nothing?

Skeptics often talk about how Bitcoin has no intrinsic value. They argue that, for example, gold can be used in jewelry and electronics so there’s a reason people naturally seek to accumulate it as a way to store value. The theory is that viable money must be used for some other purpose intrinsic to the item.

However, history shows that commodity value isn’t a requirement for money (example: the glass beads historically used for trading in Africa and North America). There’s no reason a new store of value must also be physical. Because of its digital existence, Bitcoin lives as money free from the opportunity costs of physical commodities, and that’s an advantage.

Gold, real estate, or any form of commodity money, is not a store of value because of its utility as a commodity, but despite that utility! When someone decides to hold gold or any other asset for a monetary purpose, they make a clear and conscious choice to use it for its wealth storage properties instead of as a useful commodity…. Bitcoin gives humans the ability to store wealth free from the opportunity cost inherent in storing commodities. This global, permanent, and accessible store of wealth is forming a solid bedrock for future economies around the world. As funds move from other asset classes towards Bitcoin, this newfound supply will create better access for affordable housing, rejuvenated urban environments, higher quality consumer goods, and more. Yes, Bitcoin has no intrinsic value and for that we should be thankful.

-Connor Brown, Bitcoiner at Stanford Law School (source)

 

How do we know a better version won’t show up and turn Bitcoin into the Myspace of crypto?

Bitcoin’s moat is much, much larger than Myspace’s.

In business terms, a moat is the compet­i­tive advan­tage a business builds that prevents new entrants from easily competing. For Myspace that moat was a huge user base with friend relation­ships since people wouldn’t want to use competing services if their friends weren’t already there. But as large a moat as a well connected social graph is, it wasn’t enough to stop Facebook from eating Myspace’s lunch in the span of only a few years.

Bitcoin’s moat is in a another league. In order to under­stand that, let’s examine what it would take for a Bitcoin competitor to displace Bitcoin. It would have to:

  • Be a more salable and liquid money
  • Demonstrate $100B+ worth of security over ten years.
  • Thwart attacks from existing hashpower
  • Be highly decentralized
  • Attract the best developers in the world
  • Grow a worldwide financial network
  • Be a sounder money

The odds of that happening are infinitesimal so there’s little chance of Bitcoin winding up following in Myspace’s footsteps.

Will Bitcoin damage the environment/waste energy/use too much power?

First, let’s get some perspective and look at the amount of energy required to power (and maintain trust in) the current monetary system. Think of the energy required for all those banks, credit cards, armored vehicles, payment providers, authorities, regulators, courts, servers, offices, etc. 

Compared to this bulky operation, Bitcoin is downright lean. In order to make Bitcoin work, you only need electricity, computers, and the internet. That’s it. Bitcoin’s infrastructure has a much smaller footprint than our current financial system. 

Also worth mentioning: The total energy consumption of the current financial system is not transparent and is difficult to measure while the Bitcoin network hash rate is publicly available and can be used to estimate the network’s total electricity costs.


Moreover, Bitcoin mining encourages the growth and development of renewable energy since Bitcoin rewards the most energy efficient miners with the most profit. That’s a big reason why a significant portion of Bitcoin’s energy consumption is already generated from renewable resources. 

Today, more than 75% of Bitcoin’s energy usage is estimated to come from renewable resources, a number projected to only increase into the future. Nearly half of all mining is done in a part of China where power is almost exclusively hydroelectric. So while yes, Bitcoin does use a lot of energy — in the same way, as Saifedean Ammous has pointed out, that the car uses more energy than the horse carriage, and the refrigerator more than an ice bucket, and a washing machine more than arduous hand labor, and a modern hospital more than a medieval field tent — it is already unlocking new sources of hydro, geothermal, solar, and wind power that go otherwise unused or unreachable, hopefully helping us toward the end of the hydrocarbon age.”
-Alex Gladstein, Chief Strategy Officer for the Human Rights Foundation (source)

As Bitcoin continues to grow, the demand for things like solar energy will increase as people rush to find cheaper ways to generate power.

Bitcoin, over time, forces out inefficient miners and forces expensive electricity out of the system. We now have a drive towards the cheapest possible electricity anywhere in the world. Bitcoin, over time, incentivizes us to cheap energy and renewables. We have a lot of governments that subsidize things like coal or gas, but with Bitcoin mining they’ll end up using renewable energy like hydro much more.

Yan Pritzker, author of Inventing Bitcoin

Photo: Minoru Karamatsu

 

Related Links

Let’s wrap up

That concludes Chapter 6: Common misconceptions about Bitcoin.

In Chapter 7 we’ll discuss the technical side of Bitcoin. Don’t worry, we’ll make sure it’s accessible.

Comment below with ONE thing you learned from today’s lesson, or one question you’d like answered. We’d love to hear from you!

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