The Most Popular Myths About Bitcoin
By Andrey Costello on ALTCOIN MAGAZINE
Bitcoin is a complicated conception that born many myths around itself. Сan they be explained in simple words?
Even as digital currencies popularity grows, some myths have proven difficult to shake. Let’s review some of the most popular misconceptions about Bitcoin.
Bitcoin was designed by its author, Satoshi Nakamoto, as a way to remotely transfer value from one entity to another without the involvement of a third party trustee, a bank or other financial institution. For this purpose, the innovative cryptographic design of mechanisms was used — public blockchain, a combination of cryptography and economic incentives.
Initially, this epochal invention was met with skepticism even in the narrow environment of cryptographers and cryptoanarchists. But there were enthusiasts who saw the technology as a huge breakthrough for humanity. It was their faith and conviction that moved Bitcoin in the first months and years of its existence — the network was developing and growing, the software code was improving, the first exchange platforms and cryptocurrency exchanges appeared, as well as other cryptocurrencies.
For the first time, Bitcoin was widely recognized almost 5 years after its appearance — at the end of 2013. The price of the first cryptocurrency suddenly took off and surpassed the $1000 mark. At the same time, it was a time of misunderstanding, distrust, and skepticism. People couldn’t understand how “something that came out of nowhere” could have such a high value and even function as money?
Little has changed since then — the Bitcoin price has grown rapidly and even touched the $10,000 mark, but the number of its skeptics is not decreasing. Let’s review some of the most popular myths around Bitcoin.
Bitcoin is the currency of the criminals
Behind this statement is the fact that all transactions in Bitcoin are anonymous. In fact, they are pseudonymous, but it doesn’t really matter. The thesis that if a person hides the source of his income and his financial transactions, he is a criminal.
“[Bitcoin] won’t end well, it’s a fraud…worse than tulip bulbs…[but] if you were a drug dealer, a murderer, stuff like that, you are better off doing it in bitcoin than U.S. dollars”
These words belong to Jamie Dimon, an American millionaire, chairman of the board of directors and CEO of JPMorgan Chase, the largest financial holding company.
Of course, the criminal world uses Bitcoin to conduct its financial transactions. But criminals also use U.S. dollars, euros, Japanese yen and many other currencies of the world. By the way, the financial corporation JPMorgan Chase was recently convicted of laundering money itself.
The misunderstanding stems from the history of mankind — all financial institutions were always managed by someone — central banks, reserve funds, etc. These structures produce (issue) money and control its circulation. And if the state is not behind Bitcoin in the form of its institutions, it is probably ruled by the criminal world. What logic!
All of this is based on ignorance — it is difficult for people to understand and, moreover, to accept that a financial structure may not have a single control centre, but may be based on a distributed peer-to-peer network in which all nodes are equal, and may be controlled by a network protocol, i.e. a computer program, in which all the rules are laid down. And no one, including developers, can interfere and influence these rules without the approval of most networks. This is a new paradigm! It takes time to understand and accept.
Bitcoin is not backed by anything
The opponents of the cryptocurrency believe that the money they use in everyday life is backed with something. Some kind of mythical commodity or gold. But the truth is that fiat money, such as the U.S. dollar or euro and others, is also have nothing behind them. They are used as a means of settlement and payment solely because the government has established its laws obliging all organizations and institutions to accept the currency as a legal mean of payment.
Try to go to a local store and pay at the cash desk with foreign currency. They will not accept it from you! Even the one that is clearly stronger and more stable than the national one.
The U.S. dollar itself lost its gold collateral in 1972 and is based solely on the strength of the U.S. economy. But, any economic crisis pushes people to invest their fiat money in something more significant and stable — gold, land, art objects, etc. Fiat money has no intrinsic value. The word “fiat” itself comes from Latin fiat — a decree, an instruction, and “fiduciary” — from Latin fiducia — trust.
The process of backing money is actually trust on the part of sellers and buyers. This trust in fiat money is ensured by the power of law and stability of economies, as well as trust in the state that it will fulfil its obligations, and will moderately print new money.
But the government often uses money issuance for its own causes:
- to solve budget problems;
- to pay ever-growing debts with a devalued, cheaper currency;
- to give its exporters a competitive edge.
This triggers inflation and even hyperinflation, and the purchasing power of the population drops.
The Bitcoin issuance is limited. And trust in the cryptocurrency is based on network control and cryptographic protocol. Bitcoin has its own value in the eyes of people and a very high utility — the ability to transfer the equivalent value over long distances quickly, reliably and cheaply.
According to Metcalfe’s law, the utility of a network grows in proportion to the square of its users, so does the utility, and thus the value of Bitcoin. The more nodes and users in the Bitcoin network, the stronger and more expensive the Bitcoin unit of account (BTC) will be.
Bitcoin, as a system, is not even money, but a method, tool, or protocol used to reliably transfer value. It can be used for purchases, payments, and other financial transactions. It is a new means of exchanging value in the coming digital age.
Bitcoin is a Ponzi scheme
Ponzi scheme” is a financial scam in which the income of the first participants (depositors) is provided by the inflow of money of the next depositors. Of course, there should be a constant and exponentially growing emission of pyramid assets (shares, bonds, coupons, etc.), which would be bought by new participants in exchange for promises of income (dividends). This money is exactly what is used to pay out “dividends” to those who have become depositors before.
This pyramid exists as long as there is an inflow of new depositors who provide income to previous depositors. As a rule, the money attracted by financial pyramids is not directed as investments in business projects but only distributed among the participants. Thus, the major share received by organizers of the scam. The classical pyramid does not create a useful product or service.
Profitability in financial pyramids provided only by the money of new investors. In Bitcoin, early owners do not receive bitcoins from new members. In fact, the opposite is happening — those who come later should buy Bitcoin from the early participants.
Bitcoin does not have a concept of depositors and dividends at all, but rather users who make transactions (money transfers) between each other’s addresses (accounts) and miners, who ensure that the system is working.
The rise or fall in the value of Bitcoin (the unit of account in the network) depends solely on the market mechanism — the supply and demand on the cryptocurrency exchanges. Since the latter is limited (up to a maximum of 21 million units, in reality much less) and demand is constantly growing, this ensures that the market value of Bitcoin increases. This is similar to an increase in the share price of successful companies, and Bitcoin is a kind of digital asset that is growing in value.
Bitcoin is a bubble
One of the most popular analogues for the rising price of Bitcoin is Tulip Mania: a speculative financial bubble that occurred in the Netherlands in the 1630s.
Bitcoin is very often compared to Tulip Mania, but how fair is this comparison?
The demand for beautiful tulips in the Netherlands in the 1630s led to an increase in the price of bulbs from which they were grown. In turn, the rise in prices for bulbs has led to the fact that a lot of people rushed to this market, trying to buy them to grow tulips, then sell them even more expensively than their bulbs. Thus, at first, the number of buyers of bulbs who wanted to get rich quickly grew in the market, and the demand exceeded the supply, and as a result, prices rose rapidly. The bubble was swelling. But then came the saturation, the number of sellers increased and supply started to exceed demand — the bubble collapsed.
With Bitcoin, the situation is similar — the rise in Bitcoin prices is attracting new users, who should buy them from earlier users. And to do so, they need to connect to the Bitcoin network. The size of the network is growing and, as we noted earlier, according to Metcalfe’s law, its usefulness is increasing, which pushes the price of Bitcoin up even more. At the same time, the issue of new Bitcoin coins is not only limited, but it is also decreasing with time. There is no saturation of the market. The demand for Bitcoin is not satisfied but is growing even more. It also pushes the price up.
A paradoxical situation is created — the bubble is inflated, but it cannot burst, because the demand does not fall due to the lack of saturation of the market. As a result, short-term periods of Bitcoin price fall (due to negative news, etc. secondary factors) are replaced by its even greater growth.
Throughout Bitcoin’s history, there have been several spikes in its market value that resemble a typical “market bubble”. But they are all different from the classic “exchange bubble” chart in that once the maximum is reached in the manic phase, Bitcoin never falls below its level in the hidden phase and even in the awareness phase.
In this situation, the market will be saturated and balanced when it will receive a very large amount of fiat money. If Bitcoin takes the place of gold as a reserve asset, the total value of the Bitcoin network (capitalization) may reach several trillion U.S. dollars. This means that the current price of Bitcoin may rise even more in the near future.
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