Earlier today, U.S. President Joe Biden sent shockwaves through the market when he signed a long-awaited executive order on cryptocurrencies.
The executive order calls on the federal government to develop a regulatory framework for cryptocurrencies, and so far, investors have reacted positively.
Bitcoin has surged nearly 10% in the last 24 hours to $42,244, as of this writing:
The executive order also seeks to establish policies that will protect consumers and investors from crypto scams and identify and eradicate “illicit activity” that, in their view, is rampant throughout the cryptocurrency space.
While that last part is important to address, it also feeds into one of the most common and detrimental misconceptions about cryptocurrency: that it’s used as a way for criminals to launder money.
If you’ve been a crypto investor for a while, you’ve heard this before. As the world’s No. 1 cryptocurrency, Bitcoin has always been a lightning rod for critics.
But much of the criticism leveled at it is misinformed, misleading, or just plain false.
To be sure, Bitcoin is not perfect. It does have significant issues, and cryptocurrencies as an asset class do carry an above-average level of risk. But myths and half-truths just muddy the water – and in the case of Bitcoin, that could cost an investor a chance at life-changing gains.
So we’re going to cut through all the BS and debunk the 10 most common myths and misconceptions about Bitcoin, for anyone who might still be on the fence.
No. 1: “Bitcoin Is a Ponzi Scheme”
This one has dogged Bitcoin for almost its entire existence. In 2012, the European Central Bank (ECB) published a report saying that Bitcoin was a Ponzi scheme. Then, in April 2021, “Black Swan” author Nassim Nicholas Taleb said in a CNBC interview that Bitcoin is “an open Ponzi and everybody knows it’s a Ponzi.”
REALITY: Bitcoin can’t be a Ponzi scheme. A real Ponzi scheme is run by a central operator who pays out returns to existing investors with money from new investors. The scheme collapses when no new investors can be lured in. The best-known example is Bernie Madoff’s scandal back in 2009.
Bitcoin, on the other hand, is completely decentralized. It has no central operator as required in a Ponzi scheme. And unlike Ponzi schemes, Bitcoin is completely transparent – all transactions can be viewed on the public blockchain. The fact that the Bitcoin price goes up as more people buy means it behaves like any other investable asset.
No. 2: “Only Criminals Use Bitcoin”
Most ransomware attacks, in which hackers cripple the computer systems of a company or government entity, ask for some amount of Bitcoin in exchange for a digital key that will unlock the system. Government officials like Treasury Secretary Janet Yellen and ECB President Christine Lagarde have both criticized Bitcoin’s use for illegal activity. The ransomware attacks on Colonial Pipeline and meat supply company JBS further turned up the heat.
REALITY: There’s no denying that criminals use Bitcoin and other cryptocurrencies to hide their tracks. But criminal activity is far from the primary use. Reuters estimates that criminal activity makes up less than 2% of all crypto activity. Cash is responsible for far more criminal activity than crypto. Chainalysis says that for every dollar spent in Bitcoin on the dark web, at least $800 was laundered using cash.
No. 3: “Bitcoin Is Bad for the Environment”
This myth has been simmering for several years but burst into the spotlight after Tesla CEO Elon Musk tweeted his concern “about rapidly increasing use of fossil fuels for Bitcoin mining and transactions, especially coal, which has the worst emissions of any fuel.” Critics also routinely denounce Bitcoin’s total electricity use, which they compare to the use of nations like Argentina and Norway.
REALITY: Bitcoin mining does use a lot of electricity, but that energy use is what makes the network secure. It’s why Bitcoin is by far the most secure cryptocurrency.
That said, Bitcoin mining is not disproportionately dirty. A 2020 study by the Cambridge Center for Alternative Finance found that renewable energy powers 39% of crypto mining. Compare that to the United States, where renewables accounted for 20% of the electricity generated in 2020, according to the U.S. Energy Information Administration. For the world, the figure was 29%, according to the International Energy Agency (IEA). So, Bitcoin mining is actually more green than the average. In the wake of the backlash, miners are now determined to drive this point home and redouble their efforts to become carbon-neutral.
No. 4: “China Controls Bitcoin”
Last year, about two-thirds of Bitcoin mining took place in China. Critics loved to say that gave the Chinese Communist Party a large degree of control over the cryptocurrency. And the idea that China has any power over Bitcoin deters many investors, especially institutional investors.
REALITY: The fact that the majority of Bitcoin mining occurring in China did not mean China has any control over it. The Bitcoin network is decentralized and governed by its code, which only a handful of developers can change (even then, the full network must approve any changes). China can only help or hinder the miners within its borders. And as of October 2021, the United States now claims the leading share of Bitcoin mining networks.
No. 5: “Bitcoin Is a Bubble”
Bitcoin has enjoyed multiple major rallies in which it has risen hundreds of percent or even thousands of percent. It’s also suffered numerous spectacular crashes ranging from 30% to 87%. Critics are quick to label these events as “proof” Bitcoin is a bubble.
REALITY: A classic bubble to which Bitcoin is often compared is the Dutch Tulip Mania of 1636-37. Prices of the bulbs soared about 1,500% in less than three months before collapsing 99%. They never soared like that again – which is what you would expect when a bubble bursts.
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Bitcoin, like the stock market, has seen many crashes. But like the stock market, Bitcoin has always recovered and then moved higher. That’s not what bubbles do. Bitcoin’s price increases are the result of a declining supply – the daily number of new bitcoins created decreases every four years – as demand continues to increase. Not a bubble.
No. 6: “Bitcoin Is Not Backed by Anything”
Bitcoin is not backed by anything tangible in the real world, such as gold or some other commodity. Critics say that means the true value of a Bitcoin is $0.
REALITY: Bitcoin is not backed by any commodity, but the vast amount of electricity that secures the network is part of what gives it value. Bitcoin also has properties conventional currencies do not have.
For one, it’s decentralized – it can’t be devalued or manipulated by a central bank or government (like most countries’ currencies can). It can also be used peer-to-peer – users can send Bitcoin to each other directly without involving a third-party financial institution. All of that has value. Finally, you can just as easily question the legitimacy of fiat currencies like the U.S. dollar. The dollar is backed only by the “full faith and credit” of the U.S. government. And consider this: The buying power of the U.S. dollar has declined 97% since 1913.
No. 7: “Bitcoin Gets Hacked”
Crypto exchanges are routinely hacked and millions of dollars’ worth of cryptocurrency stolen. People also lose money to crypto scams.
REALITY: All of this is true, but it has nothing to do with the Bitcoin protocol. The Bitcoin code itself has never been hacked. Sloppy security is the reason the exchanges get hacked. It’s no different than a bank getting robbed. But no one has ever questioned the wisdom of using dollars because a bank was robbed.
Crypto scams rely on the gullibility of the person targeted – so pretty much the same as any other money-related scam. In the ransomware incidents, the companies’ systems were hacked – not Bitcoin. If you store your Bitcoin in a proper wallet with a strong private key only you know, it can’t be stolen.
No. 8: “Governments Will Shut Down Bitcoin”
Critics say if Bitcoin ever seriously threatens the dominance of fiat currencies, governments will step in to either regulate it into irrelevance or shut it down altogether.
REALITY: Those who say this seem to forget that Bitcoin is decentralized. People can interact with each other on the Bitcoin network, peer to peer, without any third party or the government knowing about it. As far back as 2012, the U.S. Department of Justice looked for a way to shut down Bitcoin. The attempt failed. Strict regulations and bans can hinder Bitcoin use – as we’ve seen in places like China and India – but even then it’s impossible to stop completely. And now, with this executive order from Biden, we can see that the goal is not to shut down Bitcoin – it’s to make the United States the leader in cryptocurrency.
No. 9: “Bitcoin Is Easily Copied”
Anybody can copy the code and make their own version of Bitcoin. Critics say this negates Bitcoin’s top limit of 21 million coins created. When coins can be created out of thin air, they have no value whatsoever.
REALITY: About two dozen “forks” of Bitcoin exist, including some coins with large communities such as Bitcoin Cash (BCH). Some cryptocurrencies also launched as altered copies of Bitcoin’s code, including Litecoin (LTC), Dash (DASH), and Zcash (ZEC). But none of these forked coins is Bitcoin. Each has its own separate, distinct network; the different forked coins are not interchangeable with each other.
That’s why the creation of forked coins (or even other cryptocurrencies not based on Bitcoin’s code) don’t affect the Bitcoin price. That would be like saying the U.S. dollar will lose value if a new fiat currency launched (which happened when the euro was created). That doesn’t happen with fiat currencies, and it doesn’t happen with Bitcoin.
No. 10: “Bitcoin Will Get Left Behind”
Developers of new cryptocurrencies often seek to improve upon Bitcoin in some way. They’ve come up with new ways to create new coins, such as proof of stake, as well as coins that can process more transactions at faster speeds. Ethereum (ETH) and other “platform” coins can run smart contracts. Critics say Bitcoin will eventually lose out to one or more rival cryptocurrencies.
REALITY: While other cryptocurrencies do best Bitcoin in some ways, Bitcoin remains the most secure thanks to the vast amount of energy expended on mining it. However, Bitcoin enjoys unmatched network effects as a result of being the “first mover.” In addition, Bitcoin’s code is not static. The developers are active, periodically tweaking the code. Over time, Bitcoin will be upgraded to address its shortcomings.
In June 2021, Bitcoin miners approved the Taproot upgrade to make it far easier to run smart contracts on the Bitcoin network. Work also continues on the Lightning Network, a layer that runs on top of Bitcoin. Lightning gives Bitcoin higher transaction speeds, lower costs, and scalability compared to other cryptos.
The bottom line is, cryptocurrencies represent one of the greatest investing opportunities investors will ever see, and as the “original” crypto, Bitcoin is a must-have in anyone’s portfolio for its store of value.
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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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