Myths and facts about Bitcoin are abundant and everywhere. But which of them actually reflect the truth? We provide an overview of the five most common myths about the mother of all cryptocurrencies, as well as the facts behind them.
“Bitcoin is used primarily by criminals to launder money”
Bitcoin transactions can be viewed by everyone due to the open bookkeeping via blockchain technology. This makes Bitcoin a bad option for criminals and money launderers. After all, authorities can investigate all transactions on the blockchain directly from their desk and without any problems.
Offshore constructs and the traditional banking system are still the number one mechanism for money laundering. According to UNODC estimates, around 2 trillion US dollars are laundered worldwide every year. The money laundering scandal surrounding Danske Bank alone, which came to light last year, was worth around USD 200 billion. The size of this single case already exceeds a fifth of the total market capitalization of Bitcoin. In a recent report, the International Network of Investigative Journalists (ICIJ) estimates that top banks have engaged in criminal activity worth more than $2 trillion over the past 20 years.
“Bitcoin is a Ponzi / Pyramid scheme”
A Ponzi / Pyramid scheme exists as a result of continuous money-streams being moved into a system via an ever-growing number of people. This money is paid out to intermediaries who need an incentive to bring new “investors” into the system. On the other hand, the money is paid out as a “yield”, which should legitimize the investment. If no new investors are brought in, the system falls apart, as the money is no longer sufficient to pay the promised returns.
Bitcoin does not pay out premiums for intermediaries, nor are there any promises of yields in the form of profit distributions. The total amount and number of newly created Bitcoins is clearly defined. Pricing is based on supply and demand on various exchanges around the globe – every investment and every form of money is subject to these economic laws.
“Bitcoin consumes vast amounts of electricity”
That is true, however, it’s difficult to quantify just how much electricity is used. There is no doubt that there exist high power consumption in the mining process needed to secure the system. According to an estimate by the University of Cambridge, the current electricity demand is 9 gigawatts, which is roughly equivalent to the annual consumption of Switzerland. But according to a report by CoinShares, up to 74% of electricity consumption is powered by renewable energy.
One advantage of mining is the freedom to choose the location. Mining farms are thus created in regions where there is a supply of cheap electricity. The province of Quebec, for example, is actively courting miners, as local hydroelectric power plants expect a surplus of 100 terawatts over the next ten years.
It must be noted that there are hardly any estimates of how much electricity the traditional financial system consumes. A comparison would definitely be interesting.
“Bitcoin has no intrinsic value”
In a free market, value is determined by supply and demand. Bitcoin prices are determined 24/7 on countless exchanges around the globe. According to CoinmarketCap, Bitcoins worth over 65 billion USD are traded daily on these exchanges. In addition, futures contracts worth several billion USD are traded daily on traditional exchanges such as GLOBEX.
There are innumerable things that represent value for some, while for others it seems worthless (for example art). Buyers of Bitcoins are likely to attach some value to the characteristics of absolute ownership, limited supply, censorship-resistant global transferability, and decentralized character.
Conversely, our traditional currencies are now based almost exclusively on the confidence of being able to pay with them. There is no longer a deposited value that covers the printed value number.
You can find out more about fiat money in this article on the monopoly of money creation.
“Bitcoin isn’t safe”
Hacks repeatedly affect exchanges that store Bitcoins for their customers. Bitcoin owners who negligently store or use their private keys are also affected: All things with a single point of failure.
The blockchain technology around Bitcoin has never been “hacked” since it was created about 10 years ago. This is despite the fact that the network operates around the clock, creates a block of transactions every 10 minutes, and has thus certainly faced almost all kinds of possible attacks. Thanks to its decentralized nature, a blockchain does not have a central point of attack – and is therefore far more secure than centralized systems.
For a longer list of more thorough explanations and analyses of Bitcoin myths, see the following article by Lyn Alden.