Bitcoin Misperceptions
Shaking the dark side
While surging in popularity and trading volume, Bitcoin still suffers from negative perceptions about its involvement in criminal activities. Meanwhile, fiat currencies and credit cards are used everyday for illicit purposes, without any negative press. Are non-crypto investors suffering from the Mandela effect?
The Mandela effect occurs when a group of people have a collective false memory. In the case of Bitcoin, many people believe that a large percentage of the digital currency’s usage involves criminal activities. While the history of Bitcoin is somewhat intertwined with the darknet, it is more than just a currency for criminals.
What is the darknet?
The darknet (also referred to as the dark web) exists within the deep web. Sometimes used interchangeably, the terms dark web and deep web are not the same. The deep web consists of any site that is not accessible by standard search engines and is vastly larger than the common internet, with some estimates putting it at a fraction of the surface web. The deep web includes databases, web forums, and unindexed websites.
Originally an idea to protect the communication of U.S. spies, the darknet has since evolved into a combination of illegal activity and reputable media sites. The main way to access information on the darknet is through the Tor browser, which enables encrypted communication.
The privacy of the darknet is also beneficial for dissidents and those in countries where freedom is not guaranteed. To facilitate these individuals, several mainstream organizations have also established a presence, including Facebook, the BBC, and the New York Times.
The activist sign up site, RiseUp, and SecureDrop, which allows you to leak information anonymously, can also be found. Interestingly enough, the CIA also has a presence on the darknet.
But mainly, the dark web conjures thoughts of nefarious activities, and mysterious alleys located off the mainstream browsers. It doesn’t seem like a place for law-abiding citizens. When many people think of the darknet, they also think of Bitcoin. When you think of Bitcoin, do you think of criminal activities? Or do you view it as an investment opportunity?
Who is the real Satoshi?
In 2008, a whitepaper outlining a peer-to-peer electronic cash system was penned by an individual named Satoshi Nakamoto, describing Bitcoin and how it works. While the true identity (or identities) of Satoshi has never been confirmed, the popularity of Bitcoin has grown. At the time of this analysis, Bitcoin has a total market capitalization of $217 billion.
Bitcoins are created by “mining,” a process that involves confirming transactions and placing them into blocks in a blockchain. Since it is decentralized, Bitcoin is not controlled by any government or institution. And as only 21 million units of Bitcoin can be created, the capped supply helps keep inflation under control.
Around the same time that Bitcoin rose in prominence, so did the Silk Road, the infamous darknet site. The Silk Road was a haven for people looking to purchase illegal drugs and weapons.
When the website and its owners were busted in 2013 by federal agents, reports revealed that Bitcoin was used for purchases, contributing to the currency’s ill-deserved reputation.
Mainstream adoption of Bitcoin
Today, Bitcoin is the world’s top digital currency by market capitalization, as well as the most well-known. But is it really advantageous for criminals? There is a public perception that due to its anonymous nature, Bitcoin is beneficial to criminals. However, Bitcoin is only pseudonymous.
It turns out that catching criminals who use Bitcoin is simpler than trying to find a criminal using fiat currency. While the identity of a buyer who uses Bitcoin is unknown, the blockchain provides an immutable record of every transaction. The inherent transparency of crypto makes it easier to investigate.
The fraction of crypto transactions used for illegal activities is minor at less than 2%, according to a recent analysis.
Illicit use of the U.S. dollar
Contrary to popular opinion, fiat currencies are used far more for illegal transactions than cryptocurrencies. While it is difficult to calculate the amount spent on illegal drugs, according to the DEA, it’s in the range of tens of billions of dollars. A recent report by the Rand Corporation estimated that $150 billion went toward illegal drugs in 2016.
Take the recent Twitter scandal, where the handles of several prominent figures were hacked to promote a Bitcoin scam. By using blockchain analysis, authorities caught the criminals in only two weeks.
According to Jennifer Fowler, deputy assistant secretary for terrorist financing and financial crimes at the U.S. Department of the Treasury:
“Although virtual currencies are used for illicit transactions, the volume is small compared to the volume of illicit activity through traditional financial services.”
In addition to the transparency of blockchain, governments and regulators are establishing new regulations concerning money and digital assets. The Financial Action Task Force is an intergovernmental organization founded to combat money laundering.
FinCen, a bureau of the U.S. Treasury, has urged banks to report suspicious activity related to digital currencies. Singapore, Japan, and South Korea will also be launching a cryptocurrency regulatory framework later this year.
So is Bitcoin finally going mainstream?
The latest statistics show that 8 in 10 Americans are familiar with cryptocurrencies. And of those adults who are familiar with at least one type of cryptocurrency, 18 percent have purchased cryptocurrency in the past year.
More and more companies are accepting bitcoin as a form of payment, including Amazon, Starbucks, PayPal, Microsoft, and Expedia. And while there are currently no ETFs or mutual funds dedicated to Bitcoin, the Grayscale Bitcoin Trust (GBTC) tracks the underlying value of BTC, and now has nearly $5 billion in assets under management.
So if Bitcoin is actually preferred by law enforcement since it makes it easier to catch criminals, are investors outside the crypto community suffering from the Mandela effect? Yes, crypto is used for criminal activities, but so are fiat currencies.
Collaboration between regulators and law enforcement has helped advance tactics used to catch cybercriminals. In fact, the U.S. government recently awarded a contract to Elliptic, a global leader in crypto-asset risk management, to support law enforcement investigating cryptocurrency transactions.
The perception that Bitcoin is only useful as a tool for criminals shows just a part of the story. Are the investors who believe this missing out? History would show that they are, since the digital currency has generated some astronomical returns in past years.
Recently, the world’s most prominent digital currency has been trading close to $12,000 on CoinDesk, compared to being worth only pennies back in 2009 and 2010.
Past that, market research has shown that bitcoin doesn’t correlate with other asset classes, making it helpful for providing diversification.
Markets are in constant flux, and the only thing certain is continued uncertainty. To learn more, visit quantumeconomics.io. This information is for educational purposes only and should not be construed as trading advice. Past performance is not an indication of future results.
