There is still al lot of scepticism on cryptocurrencies and blockchain-tech. Bitcoin has gone from something that was seen as a gimmick, made up useless internet money and a fun thing for nerds to something that people use daily for their purchases. Bitcoin has been declared dead more times than we can keep count of.
Myth #1: Ponzi Scheme
I’ve heard many myths on bitcoin. The top one that keeps popping up is that it is a ponzi scheme. Perhaps people are confusing it with Onecoin. Many reputable publishers have also stated that bitcoin is in fact not a currency. Mark O’Brien from the Washington Post even calls it “a little bit of a Ponzi—or is it a pyramid?—scheme that its libertarian early adopters are trying to cash in on”in this article. Financial Times have also attributed a pyramid scheme title to bitcoin. I could go on.There is still al lot of scepticism on cryptocurrencies and blockchain-tech. Bitcoin has gone from something that was seen as a gimmick, made up useless
Let’s take a little look at why bitcoin is not a ponzi scheme. Firstly, transparency. All the ponzi schemes come with one clear “requirement”, you don’t really know what is going on or who is behind it. Normally with a ponzi scheme it is all held or evolves around one person. Bitcoin is decentralized and there is no entity controlling it, like the internet for example. You wouldn’t call that a ponzi would you? Even though it was created by one person (or a group of people), we don’t really know what or who Satoshi Nakamoto is. It is not owned or controlled by a central authority but an open source software. Hence it totally fails the ponzi scheme test.
A Ponzi requires new investors to pay off earlier ones. At the end there’s no value given. Ponzi schemes often promote selling education materials or something that isn’t really there, like selling air basically. When you buy bitcoin, you get bitcoin. Bitcoin can work with any number of users, of course it is stronger with many but there’s no need to do a runner if you are not able to pay the promised rewards because no more people are signing up. Not a ponzi, simple as that.
You’ve probably heard that bitcoin is anonymous. Not quite. It is pseudo anonymous in the sense that your name is not directly linked to it. But every transaction is logged in the public ledger called blockchain. There’s an identifiable address (or many) for every user on the network, but no one necessarily knows who is behind each address. Until you verify your identity with an exchange for example, your name will not become publicly linked to an address but if needed it can be traced back to you. So, if you created WannaCry, firstly, shame on you! And good luck cashing out without anyone finding you.
Myth #3: Bitcoin is Too Volatile to Invest In
Yes, volatility can be risky, but people make a lot of money on volatility. No investment is 100% safe. You can deposit your money in a bank with an interest rate of 2% a year. Safe you think. Yes, that may make a difference if that deposit is a million dollars. Depositing $1000 will make you $20 per year. Also, even with a bank you have no guarantees. Pension funds may collapse any moment, a currency may devalue. Banks may go bankrupt. Every investment is risky and you should never trade with money you cannot afford to lose. But the bottom line is the volatility doesn’t make one asset impossible or a bad investment.
Let’s just simply look at the numbers:
In May 2010 bitcoin was worth $0.01
In July 2011 it was worth $31.
If you got in at the start and sold here your profit would’ve been 309900%
If you had sold at the first huge bubble the profit would’ve been 9999900%
If you got some coins at the beginning and are still holding on to them, your profit at the time of writing would be 24999900%.
Of course the price has done some incredible pullbacks too. After crossing the initial $1000 the price dropped to as low as $200 in 2015. You would not be too happy if you bought at the peak and sold at $200 for sure, that doesn’t make the whole currency a bad investment. Riskier than others? Probably yes, however very few things in life give you huge returns with minimal risk.
Myth #4: Bitcoin is Used for Drug Trafficking and Terrorism
After the Silk Road bitcoin has been widely talked about as a currency for criminals and terrorists. Mainly due to its anonymity. If you read #2 you already know that bitcoin is in fact not anonymous. There’s actually no proof that terrorists are using it to a large scale. Europol has even admitted the following: “Despite third-party reporting suggesting the use of anonymous currencies like Bitcoin by terrorists to finance their activities, this has not been confirmed by law enforcement.” The single most preferred way to pay for criminals and terrorists is still cash.
The European Central Bank has even decided to remove the 500€ bill from circulation as it is used by terrorists and people to fund other criminal activities. This idea sounds backwards, it will not solve the problem with financing crime and terrorism. They can also use banknotes with a lower denomination…
Myth #5: Bitcoin is not Backed by Anything, therefore has no Value.
In the old days currencies were backed by something, be it stock, commodities or something else. Money is essentially an IOU and the value is, basically what we say it is. It all comes down to confidence. Even the price of gold, which is an actual commodity that you can hold in your hand, fluctuates because of how much confidence people have in it. The US dollar and most other currencies have not been backed by gold for some time now. According to this argument the US dollar should also be worthless.
Bitcoin is valued because of different reasons. Some believe in the tech it has brought us, some acknowledge the way it’s been built in terms of economics – the price is expected to keep increasing as the supply is limited. Either way, bitcoin is real. I can go and buy a cup of coffee and pay in bitcoins. You can even buy bitcoins with gift cards. Just as good as a dollar nowadays, if not better.