It’s easy to understand why a lot of investors ask the question “Is Bitcoin safe?”
Vocal critics of Bitcoin (BTC) range from well-known investors and media talking heads to government officials.
To be sure, Bitcoin and other cryptocurrencies do carry more risk than most other investments. But much of the criticism leveled at Bitcoin is misinformed, misleading, or just plain false.
The problem is that all the public bashing raises doubts in the minds of the average investor who otherwise would put a little money into Bitcoin. And that means forfeiting exposure to the outsized gains Bitcoin and other top cryptocurrencies are likely to have over the next several years.
The tech world has a term for this sort of thing: FUD, which stands for fear, uncertainty, and doubt. Today we’re going to slice through the FUD surrounding Bitcoin.
10 “Is Bitcoin Safe?” Myths Busted
CLAIM NO. 1: “Bitcoin Is a Ponzi Scheme”
This one has dogged Bitcoin for almost its entire existence. In 2012 the European Central bank (ECB) published a report saying that Bitcoin was a Ponzi scheme. In April of this year, “Black Swan” author Nassim Nicholas Taleb said in a CNBC interview that Bitcoin is “an open Ponzi and everybody knows it’s a Ponzi.”
REALITY: Bitcoin can’t be a Ponzi scheme. A real Ponzi scheme is run by a central operator who pays out returns to existing investors with money from new investors. The scheme collapses when no more new investors can be lured in. The best-known example is Bernie Madoff. Bitcoin, on the other hand, is completely decentralized. It has no central operator as required in a Ponzi scheme. And unlike Ponzi schemes, Bitcoin is completely transparent – all transactions can be viewed on the public blockchain. That Bitcoin price goes up as more people buy means it behaves like any other investable asset.
CLAIM NO. 2: “Only Criminals Use Bitcoin”
Most ransomware attacks, in which hackers cripple the computer systems of a company or government entity, ask for some amount of Bitcoin in exchange for a digital key that will unlock the system. Government officials like Treasury Secretary Janet Yellen and ECB President Christine Lagarde both criticized Bitcoin’s use for illegal activity earlier this year. The recent ransomware attacks on Colonial Pipeline and meat supply company JBS further turned up the heat.
REALITY: There’s no denying that criminals use Bitcoin and other cryptocurrencies to hide their tracks. But criminal activity is far from the primary use. This Reuters report estimates that criminal activity makes up less than 2% of all crypto activity. Cash is responsible for far more criminal activity than crypto. Chainalysis says that for every dollar spent in Bitcoin on the dark web, at least $800 was laundered using cash.
CLAIM NO. 3: “Bitcoin Is Bad for the Environment”
This myth has been simmering for several years but burst into the spotlight in May after Tesla CEO Elon Musk tweeted his concern “about rapidly increasing use of fossil fuels for Bitcoin mining and transactions, especially coal, which has the worst emissions of any fuel.” Critics also routinely denounce Bitcoin’s total electricity use, which they compare to the use of nations like Argentina and Norway.
REALITY: Bitcoin mining does use a lot of electricity, but that energy use is what makes the network secure. It’s why Bitcoin is by far the most secure cryptocurrency. But Bitcoin mining is not disproportionately dirty. A study last September by the Cambridge Center for Alternative Finance found that renewable energy powers 39% of crypto mining. Compare that to the United States, where renewables accounted for 20% of the electricity generated in 2020, according to the U.S. Energy Information Administration. For the world, the figure was 29%, according to the International Energy Agency (IEA). So Bitcoin mining is actually more green than the average. In the wake of the backlash, miners are now determined to drive this point home and redouble their efforts to become carbon-neutral.
CLAIM NO. 4: “China Controls Bitcoin”
About two-thirds of Bitcoin mining takes place in China. Critics say this gives the Chinese Communist Party a large degree of control over the cryptocurrency. The idea that China has any power over Bitcoin deters many investors, especially institutional investors.
REALITY: That the majority of Bitcoin mining occurs in China does not mean China has any control over it. The Bitcoin network is decentralized and governed by its code, which only a handful of developers can change (even then, the full network must approve any changes). China can only help or hinder the miners within its borders. And lately it appears to be discouraging Bitcoin mining. As a result, a significant portion of Bitcoin mining is likely to migrate out of China over the next couple of years.
CLAIM NO. 5: “Bitcoin Is a Bubble”
Bitcoin has enjoyed multiple major rallies in which it has risen hundreds of percent or even thousands of percent. It’s also suffered numerous spectacular crashes ranging from 30% to 87%. Critics are quick to label these events as “proof” Bitcoin is a bubble.
REALITY: A classic bubble to which Bitcoin is often compared is the Dutch Tulip Mania of 1636-37. Prices of the bulbs soared about 1,500% in less than three months before collapsing 99%. They never soared like that again – which is what you would expect when a bubble bursts. Bitcoin, like the stock market, has seen many crashes. But like the stock market, Bitcoin has always recovered and then moved higher. That’s not what bubbles do. Bitcoin’s price increases are the result of a pipeline of new bitcoins that decreases every four years as demand continues to increase. Not a bubble.
CLAIM No. 6: “Bitcoin Is Not Backed by Anything”
Bitcoin is not backed by anything tangible in the real world, such as gold or some other commodity. Critics say that means the true value of a Bitcoin is $0.
REALITY: Bitcoin is not backed by any commodity, but the vast amount of electricity that secures the network is part of what gives it value. Bitcoin also has properties conventional currencies do not have. For one, it’s decentralized – it can’t be devalued or manipulated by a central bank or government (like most countries’ currencies can). It can also be used peer-to-peer – users can send Bitcoin to each other directly without involving a third-party financial institution. All of that has value. Finally, you can just as easily question the legitimacy of fiat currencies like the U.S. dollar. The dollar is backed only by the “full faith and credit” of the U.S. government. And consider this: The buying power of the U.S. dollar has declined 97% since 1913.
CLAIM NO. 7: “Bitcoin Gets Hacked”
Crypto exchanges are routinely hacked and millions of dollars’ worth of cryptocurrency stolen. People also lose money to crypto scams.
REALITY: All of this is true, but it has nothing to do with the Bitcoin protocol. The Bitcoin code itself has never been hacked. Sloppy security is the reason the exchanges get hacked. It’s no different than a bank getting robbed. But no one has ever questioned the wisdom of using dollars in the wake of a bank robbery. Crypto scams rely on the gullibility of the person targeted – so pretty much the same as any other money-related scam. In the ransomware incidents, the systems are hacked – not Bitcoin. If you store your Bitcoin in a proper wallet with a strong private key only you know, it can’t be stolen.
CLAIM NO. 8: “Governments Will Shut Down Bitcoin”
Critics say if Bitcoin ever seriously threatens the dominance of fiat currencies, governments will step in to either regulate it into irrelevance or shut it down altogether.
REALITY: Those who say this seem to forget that Bitcoin is decentralized. People can interact with each other on the Bitcoin network, peer to peer, without any third party or the government knowing about it. As far back as 2012, the U.S. Department of Justice looked for a way to shut down Bitcoin. The attempt failed. Strict regulations and bans can hinder Bitcoin use – as we’ve seen in places like China and India – but even then it’s impossible to stop completely.
CLAIM NO. 9: “Bitcoin Is Easily Copied”
Anybody can copy the code and make their own version of Bitcoin. Critics say this negates Bitcoin’s top limit of 21 million coins created. When coins can be created out of thin air, they have no value whatsoever.
REALITY: About two dozen “forks” of Bitcoin exist, including some coins with large communities such as Bitcoin Cash (BCH). Some cryptocurrencies also launched as altered copies of Bitcoin’s code, including Litecoin (LTC), Dash (DASH), and Zcash (ZEC). But none of these forked coins is Bitcoin. Each has its own separate, distinct network; the different forked coins are not interchangeable with each other. That’s why the creation of forked coins (or even other cryptocurrencies not based on Bitcoin’s code) don’t affect the Bitcoin price. That would be like saying the U.S. dollar will lose value if a new fiat currency launched (which happened when the euro was created). That doesn’t happen with fiat currencies, and it doesn’t happen with Bitcoin.
CLAIM NO. 10: “Bitcoin Will Get Left Behind”
Developers of new cryptocurrencies often seek to improve upon Bitcoin in some way. They’ve come up with new ways to create new coins, such as proof of stake, as well as coins that can process more transactions at faster speeds. Ethereum (ETH) and other “platform” coins can run smart contracts. Critics say Bitcoin will eventually lose out to one or more rival cryptocurrencies.
REALITY: While other cryptocurrencies do best Bitcoin in some ways, Bitcoin remains the most secure thanks to the vast amount of energy expended on mining it. However, Bitcoin enjoys unmatched network effects as a result of being the “first mover.” In addition, Bitcoin’s code is not static. Over time, Bitcoin will attain many of the most desirable cryptocurrency features. Just this month, the Bitcoin miners approved the Taproot upgrade, which will make it far easier to run smart contracts on the Bitcoin network. Work also continues on the Lightning Network, a layer that runs on top of Bitcoin. Lightning gives Bitcoin higher transaction speeds, lower costs, and scalability comparable to other cryptos.
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Source: Money Morning