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.