Bitcoin and the blockchain drive a good deal of weekly news coverage in the mainstream media, but that coverage isn’t always accurate. To help you separate fact from fiction, here are the top 5 bitcoin myths, debunked:
Cash still reigns supreme for transacting anonymously. It can exchange endless hands without any form of systemized tracking or being associated with someone’s bank account which makes it, and high denomination bills in particular, a common preference for tax evaders, drug dealers, and in other illicit activities.
Bitcoin transactions, on the other hand, establish ownership via Transaction IDs (also, transaction hash id or txid for short) that are publicly searchable on the network’s transaction ledger (also called the blockchain), so we’d be seriously mistaken to think it provides anonymity. A txid allows anyone to view the addresses of the parties who transacted, how much was transacted, when it took place, and other technical details. So while each transaction may not be stamped with your legal signature and a photo, there is a clear trail of data when you send or receive bitcoin.
One of the reasons why this myth seems believable to most people is because we’re so used to centralization. For an issue with our bank or ISP, we know what customer support number to call, and we also know who to blame when something isn’t working properly.
Bitcoin actually functions in quite the opposite way. It’s decentralized. There is no CEO or hierarchy of executives with the ability to control it or shut it down, and that’s an intentional aspect of the bitcoin protocol itself. The protocol is open-source, so anyone can view the code. The use of encryption and a public ledger means bitcoin’s peer-to-peer transactions can be verified without the need for a third party. The concept that bitcoin could be shut down by a corporation or governments is akin to the ridiculous concept of shutting down the internet entirely.
With that said, bitcoin isn’t perfect. It’s still susceptible to flaws and human error, but built right into its code are checks and balances designed to reward participants who help the network flourish.
We’re sorry to be the party-poopers here, but there is no magical mystery loophole that allows bitcoins to be created out of thin air.
The only legitimate way for new bitcoins to enter into circulation is through the mining process. Like gold, the total supply can’t be falsely inflated. And because any commodity that has limited availability is much more likely to be considered valuable, when circulation reaches 21 million, no more bitcoins will be created.
To learn more about how to spot scams like this one, check out our tips for spotting phishing emails.
Bitcoin is a protocol (or piece of code) that uses cryptography to allow users to safely transfer units of value, and all transactions can be verified by looking on the blockchain. This protocol, literally the root of what bitcoin is, has never been hacked.
When the news media talks about bitcoin being hacked, what they mean is that a service that uses bitcoin has had a security breach. If you Google Mt. Gox or Bitfinex, you’ll learn they were both prominent online exchanges that allowed their users to buy and sell bitcoin. Unfortunately, both of these exchanges were hacked, and this means the bitcoin they were holding for users was stolen.
If you’re still unclear on this one, think about this happening in the context of dollars and banks. If a bank had a considerable amount of dollars stolen in a bank robbery, we wouldn’t conclude that the dollar was forever kaput, we’d say the bank was robbed (like the online exchanges were hacked).
Ponzi schemes use grandiose promises to entice investors to fund a nonexistent company or concept. The scheme eventually collapses when the sum of returns needed to pay earlier investors outgrows the sum of funds gained from the newer investors.
Bitcoin has a totally different structure and purpose. It’s intentionally decentralized, and there are no outlandish promises or guarantees made on its market value. And while we’ll definitely agree that Ponzi schemes lack intrinsic value, by contrast we see a constant flow of new headlines sharing examples of how Bitcoin (the currency), and the blockchain are providing valuable and practical solutions for everything from remittances to ways to store wealth to financial access for the unbanked.
Enjoyed this blog post or have your own bitcoin myth that you want us to debunk? Leave a comment below and let us know.