Bitcoin has reached over 90 percent mining, and almost every day there is a major news about it. And this is a good time to examine the myths and misconceptions that people have about the world's number one cryptocurrency.
If you think Bitcoin's value is "based on nothing" or too volatile to hold true in the real world, then this little guide will be a good read for you. We separate fact from fiction - without shying away from legitimate risks - to learn the truth about the world's most popular cryptocurrency. Let's get into it.
#1: Bitcoin is a “Bubble”
While it is true that some people buy Bitcoin as a speculative investment in search of high returns, this does not mean that Bitcoin itself is a “bubble”. Economic cycles characterized by an unsustainable increase in the market value of an asset, which eventually "pop" when investors realize that prices are much higher than the fundamental value of the given asset, are called bubbles.
Bitcoin is sometimes compared to an infamous early speculative bubble: the 17th century Dutch “tulip mania”. In 1637, due to speculators, the prices of individual types of tulips rose 26 times. The bubble lasted six months, then crashed and never recovered.
Bitcoin has gone through several price cycles in more than 12 years – and recovered each time to reach new highs. As with any new technology, booms and busts are expected. For example, at the end of the dot.com era in the 1990s, Amazon's shares fell from $100 to just $5, only to become one of the most valuable companies in the world in the following decades.
Some larger Bitcoin investors believe that Bitcoin's volatility is a pattern typical of young markets. They say that Bitcoin will bounce and pull back with smaller swings and longer intervals until it reaches relative stability at some point in the future. But only time will tell.
#2: Bitcoin is useless in the real world
Critics like to claim that Bitcoin is not useful in the real world. Or if it is useful, it is mostly useful for prohibited activities. Neither statement is true. Bitcoin has a long history of allowing anyone in the world to use it as a means of payment, all without a bank or payment processor. And large institutional investors are increasingly using it as a gold-like hedge against inflation.
In recent years, Bitcoin has become increasingly popular as an inflation-proof store of value, similar to gold - leading to Bitcoin being nicknamed "digital gold". More and more large funds and listed companies have bought millions or even billions of dollars worth of Bitcoin to better manage their assets.
Like gold, Bitcoin is finite (it will never exceed 21 million). On the other hand, gold is heavy, bulky, and difficult to transport and store. Bitcoin, on the other hand, can be sent digitally as easily as an email.
Bitcoin received almost nothing but negative attention in the early years and was seen as a currency on the dark web. But when the first major dark web market was shut down, the price of Bitcoin went up after a few days – and kept going.
As with all forms of money, some of it is misused here as well. But compared to the US dollar, the illicit use of Bitcoin is just a drop in the bucket. In 2019, only 2.1% of Bitcoin transactions were linked to some sort of criminal enterprise.
And because all Bitcoin transactions take place on an open blockchain, it is often easier for authorities to track illicit activities than in the traditional financial system.
# 3: Bitcoin has no real value
There is no secure physical asset behind Bitcoin like there is behind gold, the US dollar, or virtually any other modern currency. Bitcoin is encrypted indefinitely, which helps it resist inflation.
In fact, there are only 21 million Bitcoins and there will never be more. This breed's rarity gives it its greatest value. And not only is the supply limited, but the amount of new Bitcoin mined predictably decreases over time. Every four years, in an event called a "halving," the block reward paid to miners working in the network is cut in half.
This helps ensure that supply is always in decline, which, according to the basic economic principle of scarcity, has helped Bitcoin's price rise roughly over the long term — from less than a penny initially to more than $50,000.
Bitcoin also gains value from the work done by computers on the network through a process called “mining”. High-powered computers around the world provide massive processing power to validate and secure each transaction, for which they receive new Bitcoins in return.
#4: Bitcoin will be replaced by one of its competitors
Bitcoin was the first truly successful digital currency. And while new cryptocurrencies have long promised to overtake Bitcoin through new features or other advantages, none have come even close to doing so.
Although thousands of rival cryptocurrencies have been created over the past decade, Bitcoin has always been the most valuable cryptocurrency and still accounts for around 60% of the crypto market by market capitalization, by a significant margin.
Reasons include Bitcoin's head start and the clarity of its mission as a decentralized and open currency. Which isn't to say that competitors aren't trying. Bitcoin is decentralized, meaning it is run by a global community of miners and nodes, rather than a central authority.
For example, if the underlying architecture of Bitcoin needs to be changed to add new features or to protect against a newly discovered bug, the community can initiate a network upgrade. For an update to be accepted, a 51% majority of the community must support the change. This allows Bitcoin to adapt and evolve as needed.
Since the software is open source, developers who are unable to reach a community consensus can even create an entirely new cryptocurrency by forking the Bitcoin blockchain. An example of this is Bitcoin Cash. But so far, no Bitcoin clone has come close to replacing the original.
Of course, there is tremendous innovation in the space, so it is conceivable that a bigger rival could emerge. But under the current circumstances, most experts do not think it is likely that Bitcoin will be replaced in the near future.
#5: Investing in Bitcoin is a gamble
While it is true that Bitcoin has experienced significant price volatility over the past decade, this is to be expected from a young and growing market. Since its initial block in 2010, Bitcoin has seen a steady increase in its long-term value. The market cap exceeded $1 trillion in February 2021. And as Bitcoin continued to develop, a robust regulatory structure in countries around the world contributed to a wave of institutional investment.
There is a fundamental reason for a Bitcoin investor to believe that his holdings should increase in value - where as in a casino, he knows that the odds are always in the house's favor. Of course, there are no guarantees of future performance or continued results, but Bitcoin's long-term trend line has been upward over the past decade.
One popular investment strategy to reduce the impact of volatility is dollar cost averaging – where you invest a fixed amount each week or month, regardless of what the market is doing. This strategy typically produces positive returns regardless of volatility in a positive trendline environment.
Bitcoin volatility appears to be decreasing. A recent analysis compared Bitcoin's recent run of the mill to the 2017 boom — and found that volatility is significantly lower this time around. Why? Due to the rise of institutional participants and the stabilizing effect of crypto becoming "mainstream".
Whether Bitcoin or any other cryptocurrency has a place in anyone's investment portfolio depends on that individual's personal circumstances, risk tolerance and investment time horizon. And while Bitcoin has been steadily rising over the past decade, it has also had significant down cycles. For this reason, investors should exercise caution in volatile markets (and consider working with a financial advisor before making larger investments).
#6: Bitcoin is not secure
The Bitcoin network has never been hacked. Its open source code has already been reviewed by countless security experts and IT professionals. Bitcoin was also the first digital currency to solve the problem of double spending, and all Bitcoin transactions are irreversible.
Many of the misconceptions about Bitcoin security stem from attacks on third-party businesses and services that use Bitcoin, rather than the Bitcoin network itself. High-profile hacks of early Bitcoin companies, faulty security procedures and occasional data breaches made Bitcoin's security questionable for some users.
Since its inception in 2009, Bitcoin's core protocol has been working securely, with a 99.9% uptime and massive computing power to keep the network secure. And the miners that run the network are spread across the globe, with nodes in 100 countries – meaning there is no single point of failure.
#7: Bitcoin is bad for the environment
Bitcoin mining is an energy intensive process. But environmental impact is difficult to quantify. On the one hand, all areas of the digital economy require energy. Take for example the entire global banking system and all the energy required to conduct banking transactions and power office buildings, ATMs, local branches and much more, it is still a significant amount.
Recent research concluded that "Bitcoin is far more efficient than traditional banking and gold mining on a global scale."
A significant number of Bitcoin mining operations are powered by renewable energy sources (including wind, water and solar energy). According to the Cambridge Bitcoin Electricity Consumption Index, the actual number ranges from 20 percent to more than 70 percent. The Cambridge researchers further concluded that “Bitcoin's environmental footprint currently remains marginal at best.”
One could even argue that the economic incentives inherent in Bitcoin mining promote sustainable energy innovation. Because miners are constantly striving to increase their profits by reducing their electricity costs. All this in a world where renewable energy is quickly becoming the cheapest solution.
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