Part of our special report: A Bitcoin for Your Thoughts
This article is an attempt to clarify some of the information out there…much of which is anywhere from misleading to flat-out wrong. It is difficult to have a meaningful conversation about the value (or lack of value) something has if misinformation is muddying the waters.
Bitcoin is anonymous:
False BUT… Every transaction made by every Bitcoin is logged and kept in a public ledger maintained on thousands of computers and anyone with a Bitcoin wallet has a copy. This ledger is central to Bitcoin’s operation and protects it from counterfeiting and other shenanigans.
That said, it is possible to trade bitcoins anonymously but to do so requires other methods, none of which is a part of Bitcoin itself (e.g. use an anonymity network such as Tor among other measures). There are many examples of people using Bitcoin for illegal purposes getting caught. This Forbes article details how easy getting caught is.
Anyone can mint their own Bitcoins. Free money!
True BUT… Bitcoins are generated by bitcoin miners. A bitcoin miner is any computer running the open source software used to generate bitcoins. Essentially it is a brute force math problem solving for very, very large numbers, literally a cryptographic problem (hence Bitcoin being labeled a “cryptocurrency”).
In the early days these bitcoin miners were individuals with a computer and some free time to let the program run. As time passed people used faster computers, even computer centers, to mine bitcoins and invested in specialized hardware. As computers run faster the mathematical, or cryptographic, problem becomes more difficult and the rate is maintained. Bitcoins are produced, on average, once every 10 minutes.
Today, considering the competition is in the range of supercomputers, a person at home mining on their PC has almost no chance.
Only criminals use Bitcoin.
Mostly true…so far: Depending who you read or listen to there are claims that many Bitcoin transactions are for illegal purposes. Bitcoin offers a means of electronic transactions that can, in theory, be anonymous (see the first point again).
That said, over time other legitimate businesses will accept bitcoins. Bank of America Merrill Lynch recently said in a report that Bitcoin will be a major player in e-commerce.
Bitcoin is unregulated and not backed by any entity.
True BUT… Bitcoin was explicitly designed to be free of government intervention. It is meant to be run purely on market forces. This is either a bonus or a drawback depending on your perspective.
Bitcoin is in a bubble. It’s tulips all over again!
Maybe: As with any market, Bitcoin is susceptible to bubbles and perhaps even more susceptible. Bitcoin lacks many of the mature systems surrounding it and sheer size to be free (or mostly free) of market manipulation.
I can lose or have all of my bitcoins stolen.
Maybe: Your bitcoins are a computer file when it comes down to it. If that computer file is lost, for whatever reason, you have lost all the money that is in there. No different from losing your real wallet with cash in it. As with any valuable data on a computer there are a variety of means a person can take to protect that data.
We can counterfeit bitcoins.
False: Every Bitcoin wallet has a copy of the complete Bitcoin ledger of transactions. They all agree what is and what is not valid.
There are ways people can game the system such as double spending (spend a bitcoin one place then spend the same bitcoin somewhere else before the network updates the transaction ledger). Merchants often wait 10 minutes to an hour before honoring the transaction as over time the network agrees on what is a valid transaction and it becomes permanent.
It is called a “cryptocurrency” for a reason and that is because it IS a cryptographically locked system that would require stupendous computing power to upend.