There’s been a lot of buzz about bitcoin again lately as the value of BTC has shot through the roof over the last six months (at the time of this publishing the price is at $2703 per coin). If you are new to bitcoin, here’s the clearest definition in just one sentence: Bitcoin is both a revolutionary way to send money and it is also a digital currency, leveraging a decentralized network of computer nodes behaving like servers that clear financial transactions. If both fans and haters could agree on one aspect of bitcoin, it would be this: bitcoin is a major “disruptor”. Disrupting multiple billion dollar industries has inevitably made waves and some view this as a negative while enthusiasts view this as a positive, breakthrough technology which levels the playing field, and in part, removes over-reaching government from our lives.
Below are the top 5 myths about bitcoin and why they aren’t true:
Myth #1 – “Bitcoin is shady and unsafe because the transactions cannot be tracked by government”.
Actually, part of the unique benefits about the “blockchain” network which bitcoin runs on is that anyone can view any transaction that has ever taken place. This “public ledger” in the cloud is available for anyone to view at any time. Now granted, there is only limited metadata available (sender key , receiver key, date, time, etc) but there’s definitely a paper trail. If some criminal drug cartel wanted to move a million dollars, they could choose to either move it in cash (which as no paper trail or digital record) or they could use bitcoin (which has a permanent, public digital paper trail). So this notion that the transactions are totally anonymous is just false. A great example of how malicious activity can be traced using bitcoin is illustrated in the current investigation of “Big Vern” the owner of now bankrupt “Cryptsy”. Big Vern had embezzled money and tried hiding it using bitcoin. Investigators have already uncovered millions of dollars and the class action lawsuit is progressing; looks like there will be a significant (or all) money eventually recovered. This is only possible because of the digital paper trail possible with bitcoin’s public ledger, one which cash does not have.
Myth #2 – “It is not safe to keep bitcoin at one of these online exchanges because they could be hacked and all my money could be lost.”
While this may have been partially true back in the early days of bitcoin (2012-2013), some of the big US-based exchanges are actually backed by the Federal Government; are FDIC insured just like your regular bank is. This means that if you were to lose your money in a variety of scenarios (such as the bank getting “robbed”), you wouldn’t actually lose you’re money. One such exchange is Coinbase.com which is based in California. Coinbase has a large percentage of their transactions cleared by Wells Fargo Bank, they are FDIC insured, and they offer two types of bitcoin digital storage: “hot wallet” (for day to day use) and “cold storage” which is disconnected from the internet (think of cold storage like a vault). To wrap up: Having money in your Coinbase account is now essentially no more risky than having money in your [enter your bank name] account.
Myth #3 – “I can’t use bitcoin to buy everyday items at the grocery store or online.”
This is TOTALLY not true, and there’s a number of big reasons why. First, there is an increasing number of big online retailers that accept bitcoin directly (meaning you can pay using bitcoin at checkout just like using a credit card or paypal). These stores that accept bitcoin as payment are: Overstock.com, Expedia.com, TigerDirect.com, NewEgg.com, Dish.com, and more. Next, perhaps even more important is that many of the major bitcoin exchanges have a visa debit card which is tied to your bitcoin wallet and you can therefore us the debit card anywhere visa is accepted. To test this, I requested a visa check card from Coinbase, activated it, and bought a gallon of milk at my local grocery store (essentially using bitcoin to buy it). This will surprise many of you who thought there weren’t any stores where you can use your bitcoin.
Myth #4 – “There isn’t any good reason why the world needs a “decentralized”, limited growth currency.”
For those of you who trust big government unconditionally, we can’t help you. For the rest of humanity, there are countless examples of virtually all big governments “printing money” to either try and stimulate their economy (ie: The US using QE, printing billions over the last 10 years) or even just to pay bills. Regardless of the reason, printing more and more money devalues all of our dollars and reduces our buying power. Part of the genius around the bitcoin model is that there is a finite amount of coins that can ever be created. This feature makes bitcoin more similar to gold than any currency. Though it is possible to find more gold, it is very difficult. We would all arguably be better off if our currency (no matter what type it is) could not be reproduced/printed whenever the government feels like it. This is one of the core features of bitcoin and one of the main reasons why there are many libertarians and other anti-big-government enthusiasts who embrace it. There is even one country (small island nation, albeit) who has adopted bitcoin as their national currency. We will watch how things progress on this front but my prediction is that there will be some sort of major financial crisis in the US markets and a big part of the problem will be rooted in how the federal government had printed billions of dollars over the last 10 years simply to prop up our economy and mask the actual problems we face.
Myth #5 – “There’s no benefits to using a digital currency like bitcoin over our current model.”
There are many benefits to using bitcoin and many reach into areas that you may not realize. One major area: the credit market. Consumer credit card use is a multi-billion dollar per year industry and a strikingly large percentage of that is fraudulent transactions (unauthorized use of credit cards, etc). Who do you think actually suffers when the bank loses money from a criminal using your card? WE ALL DO! Like any business, credit card fraud is a cost of doing business and that (very large, painful) cost is handed down to us consumers who use the credit cards. The rates we pay, the annual fees, the usage fees merchants pay, and other terms would be much cheaper if there was significantly less (or zero) fraud. So where does bitcoin fit in? Well due to the unique, decentralized nature of bitcoin, there isn’t any one centralized database of credit card info that a hacker can steal (think Target having all their customers credit card data stolen a few years ago). When you pay with bitcoin at a store, a unique transaction code is generated by your smartphone using encryption and the entire transaction can be handled with just your smartphone. So how can this save you money and eliminate credit card fraud, essentially making everything you buy cheaper? Well think of how using bitcoin positively impacts store owners who sell you stuff: They typically pay about 4% on every credit card transaction for you to pay them with a credit card. That cost is baked into the price of everything we buy. If the merchant didn’t have to take on that hit, they’d very likely be willing to reduce the cost of their goods they sell you. Example: One major online retailer, TigerDirect had a deal where anything you buy with bitcoin on their site rewards you with a 5% rebate on your next purchase. Why would they offer this incentive? Simple: Because when you pay with bitcoin, they don’t pay any credit card charges. Imagine if everything you bought became 5% cheaper. That would be great.
These are just a few examples of myths peddled by ignorant media outlets who really don’t know much about bitcoin. Full disclosure: I’ve been buying and selling bitcoin for personal use since 2012 and I’ve even got into the (some would say, more complicated) “mining” side of things and have made money on that. I’ve actually done the things I’m writing about which both makes me a little biased but also makes me more of an expert than the typical writer covering this topic. People ask how they can get started in bitcoin. My answer would be: start small. Buy the minimum amount through a reputable exchange like Coinbase.com and get the hand of it before making any big investments or big moves. It will be very interesting to see where this currency revolution takes us.