“Bitcoin is a fraud” and Other Crypto Myths

Everyone is talking crypto and everyone seems to have an opinion about it. Working for a company that provides crypto-related services myself, I receive a host of questions from friends and family–oftentimes with questionable information being passed around. I have therefore decided to unravel some of the biggest myths I’ve heard surrounding cryptocurrencies to set the record straight!

1. “Bitcoin is a fraud”- Jamie Dimon

Although Jamie Dimon, CEO of JP Morgan Chase, has since apologised for making this statement, his quote reflects a common misconception people have towards cryptocurrencies.

To clear things up, Bitcoin is by no means a fraud. People like Dimon, who have spent their whole lives working at a bank, think cryptocurrencies are dodgy due to their unconventional nature. Unlike cash, cryptocurrencies are not backed by a government or a treasury. Instead, they are governed by software and mathematics and are decentralised over a massive network of computers. Moreover, as Bitcoin operates on a distributed ledger, all transactions are recorded and can be traced back to their origins. This means that Bitcoin records cannot be falsified and new Bitcoins cannot be randomly created or destroyed. Blockchain’s immutable nature also allows Bitcoin transactions to be completely transparent, unlike the opaque nature of some of the securities sold by today’s largest institutions…(I’m sure Dimon has not forgotten the $13 billion fine JP Morgan Chase had to pay based on their elaborate asset-back securities that contributed to the Financial Crisis).

Yet, the fact of the matter remains, that a large proportion of Bitcoin is used for the black market. In fact, reports suggest that over 44% of Bitcoin transactions are used for illegal activities. However, the same can be said about cash. At least with Bitcoin you can trace the person who transacted with it, which is not the case with cash transactions. So in reality, cash is a much more common means for illicit trading than Bitcoin.

2. Bitcoin transactions are anonymous

This is another common misunderstanding that gets passed around a lot.

Simply go to the FAQ section of the Bitcoin website and it’ll almost instantly tell you that Bitcoin is not anonymous. As Bitcoin transactions are made through Blockchain, they are recorded permanently and publicly on a ledger which is linked to the user’s electronic address. Although the transaction may not actually be traced back to a specific person, they are still linked to an electronic address, which could (through careful analysis) be traced back to said person. Bitcoin and other crypto transactions are therefore better described as pseudo-anonymous–meaning that they show that an address is related to a person but not which person. So to those who had been hoping to use cryptocurrency as a gateway to illegal handlings, I’m afraid you’re better off just using hard cash!

3. Blockchain eliminates the need for trust

Blockchain is often hailed as being a “trustless system”. However, Blockchain does not actually remove the need for trust. Instead, what Blockchain does is it decreases the amount of trust required from one particular party or entity.When you are making a transaction through Blockchain, such as digitally transfering a Bitcoin from one account to another, you are still trusting the technology itself. You have faith that the Blockchain system will enable the transfer and ensure sender authentication. You also put trust in the miners that will validate the transaction and the complex mathematics of the algorithms that govern the system.

Therefore, a more correct way of describing Blockchain would be that it is based on distributed trust. We are not putting our trust in one single party when we engage with Blockchain, but rather distributing trust among a network, which includes developers, miners and the technology of the Blockchain itself. Indeed, Consensys (a group of technologists and entrepreneurs building the infrastructure to enable a decentralised world) call it the ‘Internet of Trust’.

4. Blockchain lacks interoperability

When most people think of Blockchain, they think of it as a standalone technology that operates outside of the current systems we have. Although public chains such as Ethereum and Bitcoin lack interoperability, some private chains are able to work alongside multiple networks, legacy systems and softwares through APIs (Application Programme Interface) and communicate with them. For example, consider our proprietary distributed vault technology, Keybox, that is powered by Activeledger, can integrate with other technologies and will develop enterprise solutions. Anyway, blockchain and other technologies should be invisible right? As an infrastructure layer, what is important is that the technology is able to work with other incumbent systems. How many of you even care what technology your bank uses? Not me!

5. Bitcoin has no inherent value

To some, cryptocurrencies are just another fad. They see the recent surges and will compare it to previous bubbles such as Tulip Mania, a time during the Dutch Golden Age when the price of tulips climbed to exceptionally high levels and then dramatically fell. However, applying the same principles to Bitcoin would be completely useless. Tulip Mania took place at a time when speculation drove the price of values to exorbitant levels with the flowers barely having any intrinsic value. At one point tulips cost more than houses! Bitcoin, on the other hand, does have inherent value. Not only is it an electronic store and exchange of value, it is also durable and divisible, unlike tulips!

Bitcoin and other cryptocurrencies demonstrate the true strength of distributed ledger technology, whereby transactions are immutable, transparent and require no intermediaries. This is the actual value that the technology adds. Bubbles may come and go but the Blockchain is here to stay!