Ignore these 5 common myths about bitcoin
From Tama Churchouse, Editor, Crypto Capital:
The world of bitcoin is plagued by silly – and pernicious – rumors and misinformation…
These mistruths can cost you money… in the form of big opportunity cost.
The truth is, a lot of what you read about bitcoin and cryptocurrencies is simply wrong. I have seen articles in the likes of the Wall Street Journal that are factually incorrect. And now that the bitcoin price has soared, the media seems determined to “warn” investors about the dangers of bitcoin.
So today, I’m debunking bitcoin’s biggest myths to set the record straight…
Myth No. 1: Bitcoin is not real money…
The fundamental characteristics an asset must have to be considered money are:
Uniformity: In other words, every “dollar” or bitcoin is the same as the next one. When you’re talking about using seashells or cows as currency, uniformity is hard to achieve.
Divisibility: Dollars and bitcoin need to be divisible, broken up into small increments to cover a wide range of value transactions. Cows? Not so much, unless you’re hosting a barbecue.
Portability: Your currency must be easy to transfer and store.
Durability: Older, agriculturally-based forms of money had a shelf life. Gold is the ultimate when it comes to durability. Paper notes deteriorate.
Limited supply: A currency is worthless if there’s no scarcity to it. In our office here in Hong Kong, we have a $500 million note issued by the Zimbabwean government – it’s a simple reminder of what ultimately happens when governments try to endlessly print their way to prosperity.
Acceptability: To be considered money, the asset has to be widely accepted. People all over the world will take U.S. dollars. They won’t, however, take Turkish lira.
Bitcoin holds all of these characteristics with the exception of acceptability – although that is rapidly changing. Japan passed a law earlier this year that made bitcoin acceptable as legal tender.
And the digital element of bitcoin? Well, more than 90% of all money that exists today around the world is not even physical… It’s purely digital, existing only on computer servers.
Myth No. 2: Bitcoin can be hacked…
In certain circles, bitcoin and cryptocurrencies in general are synonymous with hacking – thanks to some high-profile hacks of cryptocurrency exchanges, like Mt. Gox in 2014 or Bithumb in 2017.
In an area so nascent, of course there are hackers looking to exploit individuals’ inexperience or find technological loopholes. Hackers have always and will always be a risk to ANYTHING where value resides on a computer network.
But bitcoin is one of the most secure assets an individual can own – it’s just that it’s 100% up to the individual to secure it themselves.
Cryptocurrency exchanges have been hacked. They are third-party platforms where you have no visibility as to how customers’ digital assets are being secured. That’s why I’ve said repeatedly that you shouldn’t keep large amounts of bitcoin on an exchange… because when it’s on an exchange, you don’t own it – the exchange does.
And when it comes to hacking, you are far, far more at risk from other cybersecurity vulnerabilities. Just look at U.S. credit reporting agency Equifax, which announced recently that the Social Security numbers along with other personal information of millions of Americans may have been compromised.
That’s a catastrophic breach. And this kind of thing happens all the time. So there’s no use worrying about bitcoin “hacking” when you can take full personal control and accountability for securing it yourself (rather than be at the mercy of an incompetent third party).
Myth No. 3: Bitcoin is used by criminals…
A recent Fortune magazine article published the following quote…
“Bitcoin’s core use remains what’s it’s always been: paying for drugs or extortion fees on the Internet.”
The suggestion that bitcoin’s core use is for buying drugs and extortion is nothing new – and it’s part of the media’s ongoing narrative. It’s understandable in many respects.
After all, there have been recent ransomware hack/virus attacks that demand users pay a small ransom in bitcoin to unlock their computers.
And who can forget the FBI’s 2013 takedown of Silk Road?
Silk Road was an online marketplace used to sell illegal drugs, dirty pictures, and stolen plastic.
These criminals thought that because bitcoin operated independently of the U.S. government, their activity couldn’t be traced.
But they were proved wrong once the government shut Silk Road down, and made an example of this illegal marketplace.
You see, it turns out bitcoin is nowhere near as anonymous and untraceable as cash.
Bitcoin is pseudonymous. That is to say, a bitcoin address can be tied to a particular user. You may not know who that user is, but that user has an identity. Think of it like a username on a website. You may not know who’s behind it, but that username is tied to a particular person – and their actions are tied to that username.
The whole point about bitcoin is that it’s actually transparent. Every transaction is recorded on the blockchain and visible to everyone.
In short, just because bitcoin has been the method of payment used by some criminals, it’s definitely not the currency’s core use.
Myth No. 4: Bitcoin is not regulated…
A lot of people are worried about bitcoin because the government hasn’t come out with an official policy about how it should be run.
In short, there’s no financial system, like the U.S. Federal Reserve, managing its existence and value. And as a recent Forbes article warns, “there is no ‘good faith and credit’ of the government standing behind the currency.”
But think about it: Does a government’s promise that something is “money” protect its value?
The U.S. dollar can be printed at will… and only has value because the government says so.
Plus, more regulation on bitcoin is quickly being established. For example, the U.S. Commodity Futures Trading Commission, which regulates futures and options markets, already approved the creation of options trading around bitcoin.
And the U.S. Securities and Exchange Commission recently came out with a statement hinting that it will soon begin regulating cryptocurrencies.
These moves will only bring additional stability to the bitcoin market, and with it, some new money.
But what about in the rest of the world?
In August and September, China announced a ban on initial coin offerings, where companies create and issue cryptocurrencies to the public in exchange for bitcoin or ethereum (the second-largest cryptocurrency).
But China didn’t “ban” bitcoin. And even if a government did want to ban it, the question is “how”? That cat’s already out of the bag. And bitcoin doesn’t answer to any government.
There is no bitcoin head office, no CEO, no board of directors.
What’s more, there’s no incentive for any major economy to “ban” bitcoin. (Japan, the third-largest economy in the world, made it legal tender.) Any government that does ban it is simply saying “we don’t want innovation, technology jobs, new companies, or enterprise in general.”
Now, don’t get me wrong – there is and will be regulation, and there may even be a temporary shutdown of the exchanges.
But regulation is a different story altogether. For example, don’t think for a second that Uncle Sam is going to let you make 10 times your money on a cryptocurrency trade and not pay your “fair share” of tax to the coffers.
Myth No. 5: Bitcoin is too volatile to invest in…
Most people look at bitcoin’s daily price changes and write bitcoin off simply because it’s more volatile than your typical blue-chip stock. But these swings are growing smaller, as more and more people move money into bitcoin.
According to investment firm ARK Invest, at the beginning of this year, “bitcoin’s daily volatility was about one-fifth that of five years ago, and 28% less than January 1, 2016.”
And this trend should continue as time goes on… and more money flocks into this space.
That said, even with this level of volatility, bitcoin delivered better risk-adjusted returns than stocks, bonds, gold, and real estate over the past five years. In fact, over the past year alone, bitcoin performed twice as well as stocks, on a risk-adjusted basis.
I’m not saying bitcoin won’t be volatile. Like any asset, cryptocurrencies will continue to experience rallies and corrections. Don’t fall into the trap of thinking “this time is different” and that bitcoin will go up forever. The cryptocurrency could absolutely be in for a short-term price bubble. But over the long term, the upside is far from over. You just need to proceed carefully. And “invest” no more than you can absolutely afford to lose.
Don’t believe the media hype…
As I said earlier, the media doesn’t really understand bitcoin. So what you read in the mainstream media on cryptocurrencies should be taken with a liberal dose of salt.
The truth is, bitcoin is just a cryptographically scarce and secure medium of exchanging value. Bitcoin, and the technology behind it – called the blockchain – is quickly changing the world. And it’s here to stay. Being on the outside (and not understanding it) will limit your ability to profit.
So if you’re not familiar with it, now is the time to make the effort.
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