Top 10 Bitcoin myths debunked

(@alicetruong) | Published on June 4, 2013 at 08:20 BST

Bitcoins exist solely for illegal activities. You can't use them to buy actual goods from a store. They have no value because anyone can create more.

We've all heard our share of Bitcoin baloney. True, while there are some dark sides to this cryptocurrency — the enormous cost of mining bitcoins, the inability to recover lost coins, wallet vulnerabilities, to name a few — there's plenty of misinformation being spread around.

"People aren't taking the time to do their research, and there is a learning curve," said Alan Silbert, founder and CEO of BitPremier, a luxury marketplace dealing only in bitcoin. "Drug dealers have gotten a lot of focus but it's tainting Bitcoin in general."

In April, Dawid Ciężarkiewicz gave a presentation in Toruń, Poland, that delved into common myths surrounding Bitcoin. One of the most pervasive falsehoods he has encountered is that bitcoins "are given out for free," he said. Furthermore, "many people claim that bitcoins have been hacked while it's not true."

Naysayers be damned. We decided to tackle the issue by exploring (and debunking) 10 myths surrounding bitcoin.

1. Bitcoins have no intrinsic value

It's heavily debated whether bitcoins have intrinsic value outside of their use as a medium of exchange. Sure, if society came to a screeching halt, the decentralized currency not backed by the government or pegged to any commodity likely won't have any value. But there are also arguments to be made about the value of Bitcoin as a global network of exchanges and merchants. At the end of the day, value is determined by supply and demand. If usage grows and this currency becomes a mainstay, then its value will increase as well.

2. Bitcoins are illegal because they're not legal tender

Another big question surrounding Bitcoin is whether it's a form of legal tender. In the US, legal tender comprises coins and bills that have been minted and issued by the US government. But that's not to say that bitcoins are illegal, because the US government classifies it as a virtual currency ... something that the US Financial Crimes Enforcement Network (FinCEN) actually recognizes. For now, Bitcoin might fall into some gray areas, but it's definitely not illegal.

3. Bitcoins are used primarily to launder money

"If you look at the market cap of Bitcoin, that (would be) an awful lot of illicit activities," said bitcoin user Jason Williams. "The Silk Road demonstrates there is a market but, then again, so does the drug dealer on the corner accepting cash."

Silbert of BitPremier weighed in by saying "the Bitcoin community wants to adhere to the rules," and is willing to cooperate with governments to increase the crytocurrency's adoption. "To paint them with this wide brush of money-laundering anarchists is not fair." Besides, the US dollar is the preferred way to launder money, he noted.

4. Bitcoin enables tax evasion

The argument here by Bitcoin backers is that cash transactions are likewise anonymous but still taxed successfully. It's a weak premise to say that tax evaders will be caught because their lifestyles and assets are inconsistent with reported income, but when you think about it, that's how the feds took down Al Capone.

5. Bitcoins are given away for free

Dawid Ciężarkiewicz said not understanding the mining process leads many people to think bitcoins are given away for free. In fact, bitcoins are mined in a computing resource-intensive process that validates transitions by solving a series of cryptographic puzzles.

Bitcoins are validated through blockchains, which are ledgers of past transactions. Miners who process and verify Bitcoin transactions are rewarded with bitcoins, as well as with fees others pay. Like the saying goes, it costs money to make money and, to date, mining bitcoins has cost hundreds of thousands of dollars. This design is intentional: the difficulty of  mining is built in to limit the number of bitcoins found each day. In addition, there's a hard limit on the number of bitcoins that can be mined: 21 million coins, which is expected to be reached by 2140.

6. Point of sale with bitcoins isn't possible

It can take upwards of an hour to confirm transactions and ensure coins aren't spent twice. Silbert's e-commerce venture BitPremier is a luxury marketplace that brokers products such as yachts, sports cars and jewelry. Because the company deals exclusively in high-end items paid for via bitcoins, "people don't mind waiting for an hour," he said.

"I could see for low-ticket items how this could be problematic," he noted. "I think the risk of double-spending is pretty low. For small point of sales, such as a cup of coffee or yogurt, it doesn't behoove the vendor to have people wait around for confirmation. If it's just one out of 100 people committing double-spending, which I think is highly unlikely, have them pay and let them be on their way." Vendors are also able to accept unconfirmed transactions by listening on the network or using a company to avoid double-spend transactions, a process that takes mere seconds.

With new headlines every day about yet another business accepting bitcoins, vendors clearly haven't been scared off.

7. It's a giant Ponzi scheme

This is an easy one. A Ponzi scheme is defined as a form of fraud that pays investors returns with money from later investors instead of with money from profits. Because Bitcoin is a peer-to-peer, open-source currency, there's no central entity to lead such a scheme. While early adopters have enjoyed huge surges, they're not profiting at the expense of those hopping on the bandwagon later.

8. Quantum computers would break Bitcoin's security

The operative word here is would. True, quantum computers pose a risk for the bitcoin network as well as for any institutions -- including banks -- that rely on cryptography. But there's one little caveat: Quantum computers don't exist yet.

9. No one will generate new blocks after 21 million bitcoins have been mined

After 21 million bitcoins have been mined, no more can be generated, but the network will still need to be secured. Incentive for mining might diminish, but the generation of new blocks is important to provide the publicly available, network-distributed ledger of transactions. Miners will still be able to turn a profit from transaction fees.

Still, one notable effect posed by some is that once the mining reward has been reduced (or no longer exists), so will the demand for security.

Over at StackExchange, eldentyrell has pondered about what will happen to the network's security after 21 million coins have been mined.

It isn't perfect, but the important point is that the demand for security increases the incentive to mine …

 

As the mining reward is reduced this "direct coupling" between the network's need for security and the incentive to mine becomes progressively more diluted.

 

I worry a lot about what will happen to Bitcoin once we decouple those two forces. I think the developers ought to at least come up with a story on how this will be solved so people can start testing it.

10. Bitcoin has been hacked

This is one of the most prevalent myths Bitcoiners have to defend against. Is anybody's money secure if the network can be hacked?

So far, Bitcoin vulnerabilities have included inadequate wallet security and attacks on websites that use bitcoins. But to date, there haven't been attacks on blockchains that led to stolen money, heists from exploiting the protocol or thefts due to holes with the original Bitcoin client.

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