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 nothing” 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 than 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.
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 is 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 than 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 the 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 volume in 2019 was related to criminal enterprise.
- And because all Bitcoin transactions 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
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.
- This 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 the 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 is hard. For one thing, all aspects of the digital economy require 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.
The real story:
- Recent research by New York-based fund Ark Investment Management concludes that “Bitcoin is much more efficient than traditional banking and gold mining on a global scale.”
- A significant portion of Bitcoin mining is powered by renewable energy sources (including wind, hydro, and solar). The actual number ranges from 20 percent to more than 70 percent, according to Cambridge Bitcoin Electricity Consumption Index.
- The Cambridge researchers concluded: “Bitcoin’s environmental footprint currently remains marginal at best.”
- An argument can even be made that the economic incentives inherent to Bitcoin mining are helping drive sustainable energy innovation, as miners constantly seek to increase profits by lowering their electricity costs — in a world where renewable energy is fast becoming the cheapest option.