If you’ve been following Bitcoin for some time, you’re likely to come across misleading information about what it is and isn’t.
In this article, common misconceptions about Bitcoin for beginners, I aim to clarify these points so you’ll understand what the protocol is capable of, and more importantly, what it’s not capable of.
Have you heard of the term FUD? Fear, Uncertainty, and Doubt. It’s out there and a common tactic used to spread inaccurate information about Bitcoin.
Jamie Dimon, the current CEO of JPMorgan Chase has even said “I call it the pet rock” when referring to Bitcoin, but it turns out that was a case of do what I say, not as I do as his firm is now an authorized participant in the Blackrock ETF. You don’t say!
The point is, don’t believe anything you hear until you’ve had the chance to run your due diligence.
With that said, here are six common misconceptions about Bitcoin that you’ve heard or are bound to here:
Bitcoin is Anonymous
The term pseudonymous means using a different name from your real name, especially on something you have written.
In terms of Bitcoin, the aforementioned term is often conflated with the word anonymous, making many think that you can simply use Bitcoin for something nefarious, and get away completely scot-free.
This couldn’t be further from the actual truth. While transactions aren’t tied to real-world identities, everything is recorded in a public ledger called the blockchain for all eyes to see.
With the right tools and techniques, it is very possible to trace and analyze Bitcoin transactions.
KEY TAKEAWAYS
- There are several misconceptions about Bitcoin that you’ll want to understand before using and investing in the world’s first electronic currency.
- Bitcoin is not a Ponzi or Pyramid scheme, nor is it only used for illegal activities.
- While it’s true that Bitcoin can be volatile at times, Bitcoin has shown tremendous growth since its inception in 2009
- Though Bitcoin seems to have some similarities to fiat currencies, decentralization, and its deflationary nature make it less susceptible to inflationary pressures.
Bitcoin is Only Used for Illegal Activities
While Bitcoin has been used for illicit purposes like the means to facilitate transactions on Silk Road, a majority of transactions on the network are completely legitimate.
The reality is that the vast majority of Bitcoin transactions are for legitimate purposes like online purchases, investing, or keeping it as a store of value similar to gold bars.
It’s disingenuous to think that only Bitcoin can be used for illegal activities when fiat currency is still the top choice for most when orchestrating these types of schemes.
Bitcoin is a Pyramid or Ponzi Scheme
Many love to throw around the terms Pyramid or Ponzi scheme when it relates to investing in and using Bitcoin.
For something to be considered a Pyramid or Ponzi scheme, new investors must be recruited to pay returns to existing investors. Bitcoin runs on a decentralized network, meaning there is no centralized authority, which is required to run a “legitimate” (pun intended) Ponzi or Pyramid scheme.
Bitcoin’s value is determined by supply and demand dynamics, which is simply buying and selling pressure, combined with the scarcity effect of only ever having 21 million coins available.
Bitcoin Wastes Energy
While it’s true that mining and producing Bitcoin does require a lot of energy, proponents believe Bitcoin mining trends towards using only the cheapest electricity in the world, whenever and wherever that is, and will decarbonize the grid.
Additionally, Bitcoin miners are interruptible and attenuable; they can turn off and back on quickly and can fine-tune their consumption of electricity, with minimal loss of profit.
This means they can avoid using power on the grid during peaks of high demand, among many other things to be more energy efficient.
It’s what is done with the wasted energy that ultimately matters, and many miners have been able to find ways to harness the heat byproduct of electricity leaving their ASIC machines and providing it to spas, and distilleries where it makes sense.
Households and businesses in the United States use 6.63 billion kilowatt-hours of electricity each year to power holiday displays, and that isn’t producing any valuable Bitcoin!
Bitcoin is Too Volatile to Be a Reliable Investment
There’s no doubt that Bitcoin when compared to investments like stocks and bonds is a highly volatile asset. However, this volatility can present both risk and opportunity for investors as Bitcoin’s long-term performance has shown overall growth despite short-term price fluctuations.
We all know that hindsight is 20/20, but consider the story of the guy who bought a few pizzas for 10,000 BTC. I’m sure he wouldn’t consider Bitcoin to be an unreliable investment looking back, but always only invest money you can afford to lose, and do your due diligence.
Bitcoin is Just Digital Fiat Money
Bitcoin is often thought to be similar to fiat currencies, but they are fundamentally different. Bitcoin operates on a decentralized network without any central authority, whereas fiat currencies are issued by governments.
Additionally, with a fixed supply and deflationary nature, Bitcoin isn’t subjected to inflationary pressures that can cause reactionary measures like increasing the money supply, among other things.
Bitcoin is Not Backed by Anything
Some may argue that Bitcoin has no intrinsic value because it’s not backed by physical assets like gold or silver.
As discussed earlier, Bitcoin’s value is derived from its utility as a medium of exchange, its scarcity (only 21 million coins), and its growing adoption as a store of value.
Since its inception, Bitcoin’s value has been and will continue to be determined by market participants’ willingness to accept it as a form of payment and store of wealth.
Wrapping it Up
By addressing these common misconceptions about Bitcoin for beginners, you now have a more accurate understanding of Bitcoin and its role in the financial ecosystem.
Do you agree with this list? Sound off in the comments.
Want to learn more about Bitcoin? Take a look at the article What is Bitcoin and How Does it Work and continue your Bitcoin basic education.