It's Time to Bury These Six Myths About Investing in Bitcoin

If you believe what you read in some of the mainstream financial media, investing in Bitcoin is a terrible idea that guarantees you will lose most or all of your money.

Instead of offering true insights on the pros and cons of Bitcoin investing, far too many financial columnists continue to recycle inaccurate myths that paint the digital currency as an extraordinarily dangerous investment.

Please.

Investing in BitcoinI've been researching and writing about Bitcoin for six years. Early on (in 2011), I even mined Bitcoin on my home computer. I know from personal experience that these articles are off base.

In fact, the Bitcoin price is likely to rise by a factor of more than 10 over the next few years. One Bitcoin price prediction from Wedbush Securities projects the price of Bitcoin at $17,473 by 2025.

And over the years, I've become acquainted with an assortment of influential members of the cryptocurrency community. I communicate regularly with such folks as Vinny Lingham, founder of Gyft and a Bitcoin Foundation board member, and Spencer Bogart, the managing director and head of research at Blockchain Capital.

The opinions of these knowledgeable Bitcoin insiders often contradict what's being said in the mainstream media. And these insiders are usually proven right.

The problem is that the average investor is far more likely to run across an article in Money or The Hill than the opinions of those who understand Bitcoin best.

Don't get me wrong. I'm sure most of those who write for the mainstream media are well-meaning. But it's obvious they don't quite grasp the revolutionary nature of Bitcoin and why it's such a game-changing development.

I'll give you an example...

Investing in Bitcoin Isn't Like Investing in Anything Else

Take a recent Kiplinger article, "Should I Be Tempted to Invest in Bitcoin?" The author, Taylor Schulte, is the founder and CEO of Define Financial, a San Diego-based financial planning firm.

Schulte argues against investing in Bitcoin for two reasons.

First, he claims that like other commodities, Bitcoin is an investment that produces no return. This much is true, but Schulte goes awry when he says Bitcoin's future gains will depend largely on inflation, like other commodities.

Related: How to Buy Bitcoins - Your Guide to Digital Profits

Then he switches gears and says that because Bitcoin is a currency, it can't increase in value as a result of inflation - "because that's exactly what inflation is - a decrease in the value of currency."

My head is spinning. What Schulte and others like him don't get is that Bitcoin can't be evaluated properly as either a commodity or a currency. It functions as both.

That, and its fully digital nature, makes Bitcoin a completely new animal in the world of finance. It's an odd-shaped peg that doesn't fit into any existing holes.

This kind of thinking is responsible for many of the myths about investing in Bitcoin that have sprung up over the past four years. In other cases, criticisms directed against Bitcoin apply to many, if not all, other types of investments.

Now, investing in Bitcoin isn't necessarily for everyone. But investors deserve better than these misguided arguments...

6 Stubborn Myths About Investing in Bitcoin

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Myth No 1: Nothing Backs Bitcoin, So It Has No Value

This myth is built on the idea that Bitcoin is a currency. In the past, the thinking goes, currencies were backed by precious metals like gold or silver. Today's fiat currencies, like the U.S. dollar, are backed by the "full faith and credit" of the governments that issue them.

The main reason fiat money has value is because most governments require you to pay your taxes in the national currency. People also trust that others will accept fiat currency as payment for any good or service.

Gold and silver have intrinsic value because they have industrial uses, are used to make jewelry, and historically have been used to create coins.

Bitcoin has no central bank, is controlled by no government, and does not exist in physical form. But it has value in that it can be used as a means of exchange like currency, and is built upon an underlying technology - the blockchain - that has uses far beyond that of currency. Bitcoin's utility is why it has value.

And because Bitcoin is deflationary - only 21 million coins will ever be created - the value of a Bitcoin will rise over time.

Compare that to the U.S. dollar, which inflation has decimated over the past 100 years. The buying power of one dollar in 1913 (the year the U.S. Federal Reserve was created) is now $0.04.

Myth No. 2: If the Bitcoin Technology Fails, It Will Become Worthless

It's true that a fatal error in the code that controls Bitcoin would quickly render the digital currency worthless, or nearly so. However, after eight years of running nonstop, this is not a likely scenario.

It's possible, of course. But the risk of becoming worthless is not unique to Bitcoin - it's true of just about every investment. Just ask anyone who held stock in Enron in 2004, General Motors (NYSE: GM) in 2007, or RadioShack in 2015.

Myth No. 3: Only Criminals Use Bitcoin 

This notion got started in 2013, when the FBI took down the Silk Road website. Silk Road was an online marketplace for illegal drugs, among other things, that accepted Bitcoin as payment. More recently, cybercriminals using "ransomware" - malware that locks up the data on a victim's computer with a code known only to the hacker - have asked for Bitcoin in exchange for the digital key.

It's true that cybercriminals prefer Bitcoin. But it's not the exclusive domain of criminals.

Hundreds of legitimate Bitcoin-based startup companies have received $1.5 billion in venture capital over the past five years. And just about all of the world's major financial institutions, from stock exchanges to big banks, are studying ways to apply the technology.

And just because criminals use something doesn't automatically make it bad. Criminals often use autos, but no one considers autos a tool of crime. Criminals also use cash, but so do millions of law-abiding citizens.

Myth No. 4: Bitcoin Isn't Regulated, So It's Dangerous

Bitcoin trading isn't completely unregulated - just ask the folks who run the Chinese Bitcoin exchanges - but it's not nearly as regulated as other forms of investing.

That might make Bitcoin seem more risky until you consider that the regulators don't exactly have the greatest track record for protecting investors from calamity. Who remembers the dot-com bubble of the late 1990s? How about the subprime mortgage crisis of 2008? Credit default swaps? Bernie Madoff?

That's not to diminish the risks associated with investing in Bitcoin. But if you're putting your faith in regulators to protect you, you haven't been paying attention.

Myth No. 5: Bitcoin Is Too Volatile to Be a Currency 

This is a myth that tries to stuff Bitcoin into one category - and in doing so draws some poor conclusions.

The argument is that Bitcoin's price volatility - it can jump up or down as much as 10% to 15% in a matter of hours - makes it unsuitable as a currency.

But just because Bitcoin can function as a currency doesn't mean that's how it should be classified. More important is that it's a frictionless way to move money across the Internet. Bitcoin also provides a way to assign and verify ownership as part of a transaction.

In other words, the volatility doesn't matter for most of the things Bitcoin does.

Myth No. 6: Bitcoin Can Be Hacked

It's true that several Bitcoin exchanges have been hacked and bitcoins stored there have been stolen. But the actual protocol - the code that runs the network -- has never been hacked. If it had, Bitcoin probably would have collapsed.

The lesson for investors is to be careful where you buy and store your bitcoins. If you keep them in a separate Bitcoin wallet on your own computer, or use a paper wallet, your Bitcoins can't be hacked.

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About the Author

David Zeiler, Associate Editor for Money Morning at Money Map Press, has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.

Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.

Dave has a BA in English and Mass Communications from Loyola University Maryland.

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