Bitcoin has been in the news a lot lately, but few people - even those talking about it in the media - really have a solid grasp on this groundbreaking digital currency.
What most people do know about Bitcoin is its meteoric rise in value over the past couple of months. The price of Bitcoins trading on the Mt. Gox exchange rose from less than $100 at the end of July to more than $1,200 at the end of November.
And then Bitcoin prices crashed to less than $700. And then they rose back up to $1,000 - all this in a span of a few weeks (as of this writing, Bitcoins are trading on Mt. Gox at about $900).
Such large, rapid gains - as well as the currency's volatility - have made Bitcoin a hot topic on financial news channels, websites, and publications.
But despite all the attention, Bitcoin remains an enigma. With so much confusion and wrong assumptions about the digital currency out there, we at Money Morning felt it was time to set the record straight.
Here's the real scoop on the seven biggest Bitcoin myths:
The Seven Biggest Bitcoin Myths
Bitcoin Myth #1: Bitcoin Is a Bubble
This may be the biggest of all the Bitcoin myths and has grown out of the digital currency's steep and rapid rise in value. But while Bitcoin may well be overvalued at the moment, it's not a bubble. In fact, the Bitcoin "bubble" has burst several times in its five-year history. Each time it has recovered and moved on to new highs. Real bubbles don't do that. What's more, Bitcoin has risen despite a lot of negative coverage (as opposed to hype) - mostly well-known economists warning investors away from Bitcoin because it's a bubble.
Bitcoin Myth #2: Bitcoin Is Worthless Because It's Not Backed By Anything
Remember, the U.S. dollar, like most "fiat" currencies of the world, is also not backed by anything real like gold or some other commodity. A fiat currency is backed only by the government that prints it. And that's not saying much, particularly when central banks the world over are in a race to see who can devalue their currencies the fastest. By contrast, the supply of Bitcoin is controlled by a computer algorithm rather than a central banker with a printing press - only 21 million Bitcoins will ever be created. That prevents inflation (although it will lead to deflation - hence the rapid rise in the value of Bitcoin.) What's more, the market has answered the question of whether Bitcoin has value. People trade Bitcoin every day, and use it to buy things. That utility alone gives Bitcoin value.
Bitcoin Myth #3: Bitcoin Is Hard to Use
OK, this myth is still partly true, but using Bitcoin is getting easier every day. Companies like Coinbase have made it easier to buy and sell Bitcoin in U.S. dollars, and most merchants that accept it now use scannable QR codes. At some point in the near future, an entrepreneur will invent the Bitcoin "killer app" - software that will make using Bitcoin easier than using a credit card. At that point the digital currency will truly go mainstream. Of course, another issue is finding places to spend Bitcoin, but that's changing as well. (See Bitcoin Myth #4.)
Bitcoin Myth #4: You Can't Spend It Anywhere
While the places that accept Bitcoin are scattered for now, the number is growing. Some high-profile examples are a Lamborghini dealership in California that accepted Bitcoin to pay for a Tesla, and Richard Branson's announcement that his Virgin Galactic would accept Bitcoin to purchase a trip into space. At Money Morning we've talked about more mundane places you can spend Bitcoin here and here.
Bitcoin Myth #5: Bitcoins Are Easily Stolen
Let's be clear: Bitcoins can be stolen, but so can credit card numbers and cash. In other words, Bitcoins are no more or less secure than other forms of money. But as with any form of money, taking the proper precautions greatly minimizes the risks. For example, a strong password for your Bitcoin wallet will make it nearly impossible to steal Bitcoins from your PC. Some people go so far as to store their Bitcoins on a removable flash drive. You also need to be careful about the kind of online accounts you use to manage your Bitcoins. If you have some Bitcoins with a fly-by-night outfit that disappears, so do your Bitcoins.
Bitcoin Myth #6: Bitcoin Is Pointless
Many people don't see the need for a new form of electronic payment when we already have credit cards and online services like PayPal. In fact, Bitcoin has several advantages over other forms of payment. For instance, Bitcoin transactions carry either no or extremely low fees. And no personal information is part of the transaction, making it a more secure way to pay. Bitcoin also makes international transactions much easier for ordinary people. A person in the United States can use Bitcoin to buy a product directly from an Internet-based merchant in Japan, or Sweden, or Brazil - no foreign exchange fees or other charges necessary.
Bitcoin Myth #7: It's Only a Matter of Time Before Bitcoin Is Outlawed
It's true that many central banks, regulators, and governments are wary of Bitcoin. But part of that stems from Bitcoin's popularity among users of nefarious websites such as Silk Road to sell illegal drugs and other contraband. But the U.S. government shut down Silk Road in October. And several U.S. government officials, including U.S. Federal Reserve Chairman Ben Bernanke, have recently softened their stance on the digital currency. A few oppressive regimes may ban Bitcoin, but most will choose instead simply to regulate it, which will help legitimize it in the minds of the public and lead to more widespread adoption.
Whatever happens with Bitcoin, investors need to realize that virtual currency is here to stay. In fact, there are already more than 80 other digital currencies in addition to Bitcoin, with more being created all the time. Here's a list of Bitcoin's primary rivals, and which ones will likely come out on top...