Let's clear up some common Bitcoin misconceptions.
Bitcoin is just like all other digital currencies; nothing new
Nearly all other digital currencies are centrally controlled. This means that:
- They can be printed at the subjective whims of the controllers
- They can be destroyed by attacking the central point of control
- Arbitrary rules can be imposed upon their users by the controllers
Being decentralized, Bitcoin solves all of these problems.
Bitcoins don't solve any problems that fiat currency and/or gold doesn't solve
Unlike gold, bitcoins are:
- Easy to transfer
- Easy to secure
- Easy to verify
- Easy to granulate
Unlike fiat currencies, bitcoins are:
Unlike electronic fiat currency systems, bitcoins are:
- Potentially anonymous
- Freeze-proof
- Faster to transfer
- Cheaper to transfer
Bitcoin is backed by processing power
It is not correct to say that Bitcoin is "backed by" processing power. A currency being "backed" means
that it is pegged to something else via
a central party at a certain exchange rate yet you cannot exchange bitcoins for the computing power that
was used to create them.
Bitcoin is in this sense not backed by anything. It is a currency in its own right. Just as gold is not backed
by anything, the same applies to Bitcoin.
The Bitcoin currency is created via processing power, and the integrity of the block chain is protected by the
existence of a network of powerful
computing nodes from certain attacks.
Bitcoins are worthless because they aren't backed by anything
One could argue that gold isn't backed by anything either. Bitcoins have properties resulting from
the system's design that allows them to be
subjectively valued by individuals. This valuation is demonstrated when individuals freely exchange
for or with bitcoins.
Please refer to the
The value of bitcoins are based on how much electricity and computing
power it takes to mine them
This statement is an attempt to apply to Bitcoin the labor theory of value, which is generally accepted
as false. Just because something
takes X resources to create does not mean that the resulting product will be worth X. It can be worth
more, or less, depending on the utility thereof to its users.
In fact the causality is the reverse of that (this applies to the labor theory of value in general).
The cost to mine bitcoins is based on how muc
h they are worth. If bitcoins go up in value, more people will mine (because mining is profitable),
thus difficulty will go up, thus the cost of mining
will go up. The inverse happens if bitcoins go down in value.
These effects balance out to cause mining to always
cost an amou
to the value of bitcoins it produces.
Bitcoins have no intrinsic value (unlike some other things)
This is simply not true. Each bitcoin gives the holder the ability to embed a large number of
short in-transaction messages in a globally
distributed and timestamped permanent data store, namely the bitcoin blockchain.
There is no other similar datastore which is so widely
distributed. There is a tradeoff between the exact number of messages and how quickly
they can be embedded. But as of December 2013,
it's fair to say that one bitcoin allows around 1000 such messages to be embedded, each within about
10 minutes of being sent, since a fee of 0.001 BTC is enough to get transactions confirmed quickly.
This message embedding certainly has intrinsic value since it can be
used to prove ownership of a document at a certain time, by including a one-way hash of that
document in a transaction.
Considering that electronic notarization services charge something like $10/document,
this would give an intrinsic value of around $10,000 per bitcoin.
While some other tangible commodities do have intrinsic value, that value is generally much less than its trading
price. Consider for example
that gold, if it were not used as an inflation-proof store of value, but rather only for its industrial uses,
would certainly not be worth what it is
today, since the industrial requirements for gold are far smaller than the available supply thereof.
In any event, while historically intrinsic value, as well as other attributes like divisibility, fungibility, scarcity,
durability, helped establish certain
commodities as mediums of exchange, it is certainly not a prerequisite.
While bitcoins are accused of lacking 'intrinsic value' in this sense,
they make up for it in spades by possessing the other qualities necessary to make it a good medium of exchange,
equal to or better than
Another way to think about this is to consider the value of bitcoin the global network, rather than each bitcoin in
isolation.
The value of an individual telephone is derived from the network it is connected to. If there was no phone network,
a telephone would be
useless. Similarly the value of an individual bitcoin derives from the global network of bitcoin-enabled merchants,
exchanges, wallets, etc..
Just like a phone is necessary to transmit vocal information through the network, a bitcoin is necessary to
transmit economic information
through the network.
Value is ultimately determined by what people are willing to trade for - by supply and demand.
Bitcoins are illegal because they're not legal tender
clearly targeting Bitcoin. Under the new guidelines, "a user of virtual currency is not a Money Services Businesses
(MSB) under
FinCEN's regulations and therefore is not subject to MSB registration, reporting, and record keeping regulations.
" Miners on the other hand,
might need to register, if they sell bitcoins for "real currency or its equivalent".[1]
In general, there are a number of currencies in existence that are not official government-backed currencies.
A currency is, after all,
nothing more than a convenient unit of account. While national laws may vary from country to country,
and you should certainly check
the laws of your jurisdiction, in general trading in any commodity, including digital currency like Bitcoin,
BerkShares, game currencies
like WoW gold, or Linden dollars, is not illegal.
Bitcoin is a form of domestic terrorism because it only harms the economic
stability of the USA and its currency
Recent off-the-cuff remarks by politicians have no basis in law or fact.
Also, Bitcoin isn't domestic to the US or any other country. It's a worldwide community, as can be seen in this
map of Bitcoin nodes.
Bitcoin will only enable tax evaders which will lead to the eventual downfall of civilization
Cash transactions hold the same level of anonymity but are still taxed successfully. It is up to you to follow
the applicable state laws in your home country, or face the consequences.
While it may be easy to transfer bitcoins anonymously, spending them anonymously on tangibles is just as
hard as spending any other kind of money anonymously. Tax evaders are often caught because their lifestyle
and assets are inconsistent with their reported income, and not necessarily because government is able to follow
their money.
Bitcoins can be printed/minted by anyone and are therefore worthless
Bitcoins are not printed/minted. Instead, Blocks are computed by miners and for their efforts they are awarded
a specific amount of bitcoins and transaction fees paid by others. See Mining for more information on how this
process works.
Bitcoins are worthless because they're based on unproven cryptography
SHA256 and ECDSA which are used in Bitcoin are well-known industry standard algorithms. SHA256 is endorsed
and used by the US Government and is standardized (FIPS180-3 Secure Hash Standard). If you believe that
these algorithms are untrustworthy then you should not trust Bitcoin, credit card transactions or any type of
electronic bank transfer. Bitcoin has a sound basis in well understood cryptography.
Early adopters are unfairly rewarded
Early adopters are rewarded for taking the higher risk with their time and money.
The capital invested in bitcoin at each stage of its life invigorated the community and helped the currency to
reach subsequent milestones. Arguing that early adopters do not deserve to profit from this is akin to saying
that early investors in a company, or people who buy stock at a company IPO (Initial Public Offering), are unfairly
rewarded.
This argument also depends on bitcoin early adopters using bitcoins to store rather than transfer value.
The daily trade on the exchanges (as of Jan 2012) indicates that smaller transactions are becoming the norm,
indicating trade rather than investment. In more pragmatic terms, "fairness" is an arbitrary concept that is
improbable to be agreed upon by a large population. Establishing "fairness" is no goal of Bitcoin, as this would
be impossible.
Looking forwards, considering the amount of publicity bitcoin received as of April 2013, there can be no reasonable
grounds for complaint for people who did not invest at that time, and then see the value (possibly) rising drastically higher.
By starting to mine or acquire bitcoins today, you too can become an early adopter.
21 million coins isn't enough; doesn't scale
One Bitcoin is divisible down to eight decimal places.
There are really 2,099,999,997,690,000 (just over 2 quadrillion) maximum possible atomic units in the bitcoin
system.
The value of "1 BTC" represents 100,000,000 of these. In other words, each is divisible by up to 10^8.
As the value of the unit of 1 BTC grows too large to be useful for day to day transactions, people can start
dealing in smaller units, such as milli-bitcoins (mBTC) or micro-bitcoins (μBTC).
Bitcoins are stored in wallet files, just copy the wallet file to get more coins!
No, your wallet contains your secret keys, giving you the rights to spend your bitcoins.
Think of it like having bank details stored in a file. If you give your bank details (or bitcoin wallet) to someone else,
that doesn't double the amount of money in your account. You can spend your money or they can spend your
money, but not both.
Lost coins can't be replaced and this is bad
Bitcoins are divisible to 0.00000001, so there being fewer bitcoins remaining is not a problem for the currency
itself. If you lose your coins, all other coins will go up in value a little. Consider it a donation to all other bitcoin
users.
A related question is: Why don't we have a mechanism to replace lost coins? The answer is that it is impossible
to distinguish between a 'lost' coin and one that is simply sitting unused in someone's wallet.
It's a giant ponzi scheme
In a Ponzi Scheme, the founders persuade investors that they’ll profit. Bitcoin does not make such a guarantee.
There is no central entity, just individuals building an economy.
A ponzi scheme is a zero sum game. In a ponzi scheme, early adopters can only profit at the expense of
late adopters, and the late adopters always lose. Bitcoin has an expected win-win outcome.
Early and present adopters profit from the rise in value as Bitcoins become better understood and in turn
demanded by the public at large. All adopters benefit from the usefulness of a reliable and widely-accepted
decentralized peer-to-peer currency.
Finite coins plus lost coins means deflationary spiral
As deflationary forces may apply, economic factors such as hoarding are offset by human factors that may
lessen the chances that a Deflationary spiral will occur.
Bitcoin can't work because there is no way to control inflation
Inflation is simply a rise of prices over time, which is generally the result of the devaluing of a currency.
This is a function of supply and demand. Given the fact that the supply of bitcoins is fixed at a certain amount,
unlike fiat money, the only way for inflation to get out of control is for demand to disappear.
Temporary inflation is possible with a rapid adoption of Fractional Reserve Banking but will stabilize once a
substantial number of the 21 million "hard" bitcoins are stored as reserves by banks.
Given the fact that Bitcoin is a distributed system of currency, if demand were to decrease to almost nothing,
the currency would be doomed anyway.
The key point here is that Bitcoin as a currency can't be inflated by any single person or entity, like a government,
as there's no way to increase supply past a certain amount.
Indeed, the most likely scenario, as Bitcoin becomes more popular and demand increases, is for the currency to
increase in value, or deflate, until demand stabilizes.
Alternative Currencies are useless, Bitcoin is the only important cryptocurrency
Bitcoin is the biggest and most popular crypto currency, but other currencies like Litecoins shouldn't be neglected.
Obviously, minor currencies with prices of $0.06 per coin aren't very interesting, but maybe worth an investment.
Alternative cryptocurrencies will be especially important when the capacicty of all BTC has been reached.
The Bitcoin community consists of anarchist/conspiracy theorist/gold standard 'weenies'
The members of the community vary in their ideological stances. While it may have been started by ideological
enthusiasts, Bitcoin now speaks to a large number of regular pragmatic folk, who simply see its potential for
reducing the costs and friction of global e-commerce.
Anyone with enough computing power can take over the network
That said, as the network grows, it becomes harder and harder for a single entity to do so.
Already the Bitcoin network's computing power is quite ahead of the world's fastest supercomputers, together.
What an attacker can do once the network is taken over is quite limited. Under no circumstances could an
attacker create counterfeit coins, fake transactions, or take anybody else's money.
An attacker's capabilities are limited to taking back their own money that they very recently spent, and preventing
other people's transactions from receiving confirmations. Such an attack would be very costly in resources,
and for such meager benefits there is little rational economic incentive to do such a thing.
Furthermore, this attack scenario would only be feasible for as long as it was actively underway.
As soon as the attack stopped, the network would resume normal operation.
Bitcoin violates governmental regulations
There is no known governmental regulation which disallows the use of Bitcoin.
Fractional reserve banking is not possible
Point of sale with bitcoins isn't possible because of the 10 minute wait for confirmation
It is true that transactions can sometimes take tens of minutes to become confirmed.
Despite this, retailers can accept unconfirmed transactions with very little risk by simply 'listening' on the network
for a double-spend transaction, or partnering with a company that provides this service.
After a head start of merely several seconds, the original transaction would reach so much of the Bitcoin network that a fraudulent double-spend transaction would almost certainly be fruitless. An attacker would have to commit easily-detectable fraud, in person, several hundred or several thousand times,
before one of these low-value double-spend attempts would likely succeed.
An attacker could work around the necessity of sending out a second fraudulent transaction to the Bitcoin network
by attempting to solo-mine an attack block containing the attack transaction himself - temporarily withholding
the block with the rest of the network - and then execute the fraudulent purchase within seconds, or minutes
at most, of mining the attack block, before broadcasting the attack block.
However, the cost of such an activity would dramatically outweigh the value of anything typically offered without a
confirmation wait for several reasons.
First, mining a block (attack or otherwise) entitles the miner to a valuable block reward, and because the attack
involves temporarily withholding the block from the network, the attacker would put himself in the likely position
of his block becoming stale, which would result in forfeiture of the entire reward.
Most solo miners solve less than one block per month, so this would represent the loss of proceeds of potentially
several weeks of mining.
Second, it is not possible for a solo miner to know exactly when his mining activity will yield a block,
and because the attack must be carried out within seconds or minutes of successfully mining a block,
the attacker will not be able to know or plan in advance the brief window when the attack would be likely
to succeed. While it may be easy for a determined attacker to get low-value items that are sold and delivered
online instantly without waiting for confirmations (such as downloads), this unpredictability and the briefness of
the opportunity would make it extremely difficult to commit any kind of fraud where real-life interaction is required,
such as visiting a merchant or taking possession of goods. Petty shoplifting would be far simpler.
Even if an attacker went forward with this attack, the retailer would be notified of the fraud the moment the attack
block is released seconds later.
In short, the 10-minute wait for confirmation is only practically necessary when delivering goods of value that
significantly exceed the block reward an attacker would have to risk to perform an attack and where recourse after
delivery is practically nonexistent, such as money transfers.
After 21 million coins are mined, no one will generate new blocks
When operating costs can't be covered by the block creation bounty, which will happen some time before
the total amount of BTC is reached, miners will earn some profit from transaction fees.
However unlike the block reward, there is no coupling between transaction fees and the need for security,
so there is less of a guarantee that the amount of mining being performed will be sufficient to maintain the
network's security.
Bitcoin has no built-in chargeback mechanism, and this isn't good
Why some people think this is bad: Chargebacks are useful for limiting fraud.
The person handling your money has a responsibility to prevent fraud.
If you buy something on eBay and the seller never ships it, PayPal takes funds from the seller's account and
gives you back the money. This strengthens the eBay economy, because people recognize that their risk is
limited and are more willing to purchase items from risky sellers.
Why it's actually a good thing: Bitcoin is designed such that your money is yours and yours alone.
Allowing chargebacks implies that it is possible for another entity to take your money from you.
You can have either total ownership rights of your money, or fraud protection, but not both. T
hat said, nothing inherent in the dollar or euro or any other currency is necessary for chargebacks to be possible, and likewise, nothing prevents the creation of PayPal-like services denominated in Bitcoin that provide chargebacks or fraud protection.
The statement "The person handling your money has a responsibility to prevent fraud" is still true; the power
has been shifted into your own hands. Fraud will always exist. It's up to you to only send bitcoins to trusted
entities. It is possible to trust an online identity without ever knowing their physical identity;
see the OTC Web of Trust.
Quantum computers would break Bitcoin's security
While ECDSA is indeed not secure under quantum computing, quantum computers don't yet exist and probably
won't for a while. The DWAVE system often written about in the press is, even if all their claims are true, not a
quantum computer of a kind that could be used for cryptography. Bitcoin's security, when used properly with a
new address on each transaction, depends on more than just ECDSA: Cryptographic hashes are much stronger
than ECDSA under QC. Bitcoin's security was designed to be upgraded in a forward compatible way and could be
upgraded if this were considered an imminent threat.
The risk of quantum computers is also there for financial institutions, like banks, because they heavily rely on
cryptography when doing transactions.
Bitcoin makes self-sufficient artificial intelligence possible, which will in turn become self-aware and decide to
exterminate humanity
An artificial intelligence powerful enough to be threatening to mankind wouldn't depend on mankind to make Bitcoin,
it would just invent something like Bitcoin itself and design it to be so attractive to us that we couldn't resist
using it.
Bitcoin mining is a waste of energy and harmful for ecology
No more so than the wastefulness of mining gold out of the ground, melting it down and shaping it into bars,
and then putting it back underground again. Not to mention the building of big fancy buildings,
the waste of energy printing and minting all the various fiat currencies, the transportation
thereof in armored cars by no less than two security guards for each who could probably be doing something
more productive, etc.
As far as mediums of exchange go, Bitcoin is actually quite economical of resources, compared to others.
Economic Argument 1
Bitcoin mining is a highly competitive, dynamic, almost perfect, market. Mining rigs can be set up and
dismantled almost anywhere in the world with relative ease.
Thus, market forces are constantly pushing mining activity to places and times where the marginal price of
electricity is low or zero. These electricity products are cheap for a reason.
Often it’s because the electricity is difficult (and wasteful) to transport, difficult to store, or because there is low
demand and high supply. Using electricity in this way is a lot less wasteful than simply plugging a mining rig
into the mains indiscriminately.
For example, Iceland produces an excess of cheap electricity from renewable sources, but it has no way of
exporting electricity because of its remote location. It is conceivable that at some point in future Bitcoin mining
will only be profitable in places like Iceland, and unprofitable in places like central Europe, where electricity
comes mostly from nuclear and fossil sources.
Market forces could even push mining into innovative solutions that have an effective electricity consumption of
zero. Mining always produces heat equivalent to the energy consumed - for example, 1000 watts of mining
equipment produces the same amount of heat as a 1000 watt heating element used in an electric space heater,
hot tub, water heater, or similar appliance. Someone already in a willing position to incur the cost of electricity for
its heat value alone could run mining equipment specially designed to mine bitcoins while capturing and utilizing
the heat produced, without incurring any energy costs beyond what they already intended to spend on heating.
Economic Argument 2
When the environmental costs of mining are considered, they need to be weighed up against the benefits.
If you question Bitcoin on the grounds that it consumes electricity, then you should also ask questions like this:
Will Bitcoin promote economic growth by freeing up trade? Will this speed up the rate of technological innovation?
Will this lead to faster development of green technologies? Will Bitcoin enable new, border crossing smart grid
technologies? …
Dismissal of Bitcoin because of its costs, while ignoring its benefits, is a dishonest argument.
In fact, any environmental argument of this type is dishonest, not just pertaining to Bitcoin. Along similar lines,
it could be argued that wind turbines are bad for the environment because making the steel structure consumes
energy.
Ratio of Capital Costs versus Electrical Costs
The BFL Jalapeno hashes at 5.5 Gh/s using 30W. That device consumes about $40 per year in electricity
(using U.S. residential average of about $0.15 per kWh.) But the device costs over $300 including shipping.
Thus just about a quarter of all costs over a two-year useful life goes to electricity.
This compares to GPUs where more than 90% of costs over a two-year life went to electricity.
Even more efficient designs can be expected in the future.
Shopkeepers can't seriously set prices in bitcoins because of the volatile exchange rate
The assumption is that bitcoins must be sold immediately to cover operating expenses.
If the shopkeeper's back-end expenses were transacted in bitcoins as well, then the exchange rate would be
irrelevant. Larger adoption of Bitcoin would make prices sticky.
Future volatility is expected to decrease, as the size and depth of the market grows.
In the meantime, many merchants simply regularly pull the latest market rates from the exchanges and
automatically update the prices on their websites. Also you might be able to buy a put option in order to sell
at a fixed rate for a given amount of time. This would protect you from drops in price and simplify your operations
for that time period.
Like Flooz and e-gold, bitcoins serve as opportunities for criminals and will be shut down
- Visa, MasterCard, PayPal, and cash all serve as opportunities for criminals as well, but society keeps
- them around due to their recognized net benefit.
- Hopefully Bitcoin will grow to the point where no single organization can disrupt the network, or would be
- better served by helping it.
- Terrorists fly aircraft into buildings, but the governments have not yet abolished consumer air travel.
- Obviously the public good outweighs the possible bad in their opinion.
- Criminal law differs between jurisdictions.
Bitcoins will be shut down by the government just like Liberty Dollars were
Liberty Dollars started as a commercial venture to establish an alternative US currency, including physical
banknotes and coins, backed by precious metals. This, in and of itself, is not illegal.
They were prosecuted under counterfeiting laws because the silver coins allegedly resembled US currency.
Bitcoins do not resemble the currency of the US or of any other nation in any way, shape, or form.
The word "dollar" is not attached to them in any way. The "$" symbol is not used in any way.
Bitcoins have no representational similarity whatsoever to US dollars.
Of course, actually 'shutting down' Liberty Dollars was as easy as arresting the head of the company and seizing
the offices and the precious metals used as backing. The decentralized Bitcoin, with no leader, no servers,
no office, and no tangible asset backing, does not have the same vulnerability.
Bitcoin is not decentralized because the developers can dictate the software's behavior
The Bitcoin protocol was originally defined by Bitcoin's inventor, Satoshi Nakamoto, and this protocol has now
been widely accepted as the standard by the community of miners and users.
Though the developers of the original Bitcoin client still exert influence over the Bitcoin community,
their power to arbitrarily modify the protocol is very limited. Since the release of Bitcoin v0.3, changes to the
protocol have been minor and always in agreement with community consensus.
Protocol modifications, such as increasing the block award from 25 to 50 BTC, are not compatible with clients
already running in the network. If the developers were to release a new client that the majority of miners perceives
as corrupt, or in violation of the project’s aims, that client would simply not catch on, and the few users
who do try to use it would find that their transactions get rejected by the network.
There are also other Bitcoin clients made by other developers that adhere to the Bitcoin protocol.
As more developers create alternative clients, less power will lie with the developers of the original Bitcoin client.
Bitcoin is a pyramid scheme
Bitcoin is nearly opposite of a pyramid scheme in a mathematical sense. Because Bitcoins are algorithmically
made scarce, no exponential benefit is derived from introducing new users to use of it.
There is a quantitative benefit in having additional interest or demand, but this is in no way exponential.
Bitcoin was hacked
In the history of Bitcoin, there has never been an attack on the block chain that resulted in stolen money from a
confirmed output. Neither has there ever been a reported theft resulting directly from a vulnerability in
the original Bitcoin client, or a vulnerability in the protocol. Bitcoin is secured by standard cryptographic functions.
These functions have been peer reviewed by cryptography experts and are considered unlikely to be breakable in
the foreseeable future.
It is safe to say that the currency itself has never been 'hacked'. However, several major websites using
the currency have been hacked, often resulting in high profile Bitcoin heists.
These heists are misreported in some media as hacks on Bitcoin itself. An analogy:
Just because someone stole US dollars from a supermarket till, doesn’t mean that the US dollar as a currency
has been 'hacked'.
