Myth vs Facts and My Assumptions about Bitcoin
I'm a new user who knows bitcoin since 2020. I don't have much knowledge about bitcoin, but that doesn't stop my interest to read a lot about it. So I dedicate this thread to test my knowledge so far about bitcoin based on a myth that I often hear in the community.
Before you read and comment on this thread, let me say first that this is a learning endeavor which may be very important for all beginners in this forum to know
[including me]. I've read it a few times and it can broaden my knowledge to learn more about bitcoin, but I'm sure many beginners have never heard of it. All content in this thread is available
here. I've just picked up a few key points that I think I still hear a lot to this day, so here are my assumptions about the myths going around.
Index of Content
Bitcoin is just like all other digital currencies; nothing new
Nearly all other digital currencies are centrally controlled. This means that:
- They can be printed at the subjective whims of the controllers
- They can be destroyed by attacking the central point of control
- Arbitrary rules can be imposed upon their users by the controllers
Being decentralized, Bitcoin solves all of these problems.
My assumption: Bitcoin's decentralization has answered all doubts about why this currency is different from other digital currencies. The average digital currency is a centralized currency which has become the basis of the difference between the two.
Bitcoins don't solve any problems that fiat currency and/or gold doesn't solve
Unlike gold, bitcoins are:
- Easy to transfer
- Easy to secure
- Easy to verify
- Easy to granulate
Unlike fiat currencies, bitcoins are:
Unlike electronic fiat currency systems, bitcoins are:
- Potentially anonymous
- Freeze-proof
- Faster to transfer
- Cheaper to transfer
My assumption: All the advantages that exist in bitcoin we can find from how
bitcoin innovation is explained.
The bitcoin innovation differs from the fiat system in that it is not the same as other assets such as gold, fiat currency and electronic fiat currency systems. One of the easiest things to find is transaction fees and they are not controlled by any central authority.
Miners, developers or some other entity could change Bitcoin's properties to benefit themselves
Bitcoin's properties cannot be illegitimately changed as long as most of bitcoin's
economy uses
full node wallets. Transactions are irreversible and uncensorable as long as
no single coalition of miners has more than 50% hash power and the transactions have an
appropriate number of confirmations.Bitcoin requires certain properties to be enforced for it to be a good form of money, for example:
- Nobody ever created money out of nothing (except for miners, and only according to a well-defined schedule).
- Nobody ever spent coins without knowing their private key.
- Nobody spent the same coin twice
- Nobody violated any of the other tricky rules that are needed to make the system work (difficulty, proof of work, DoS protection, ...).
These rules define bitcoin. A
full node is software that verifies the rules of bitcoin. Any transaction which breaks these rules is not a valid bitcoin transaction and would be rejected in the same way that a careful goldsmith rejects fool's gold.
Full node wallets should be used by any intermediate bitcoin user or above and especially
bitcoin businesses. Therefore anybody attempting to create bitcoins with invalid properties will find themselves being rejected by any trading partners. Note that lightweight wallets and web wallets do not have the low-trust benefits of full node wallets. Lightweight (SPV) wallets will blindly trust the miners, meaning if 51% of miners printed infinite coins or spent the same coin twice then lightweight wallet users would happily accept these fake bitcoins as payment. Web wallets blindly trust the web server which could display anything at all.
Miners are required to choose between multiple valid transaction histories. A coalition of more than 50% of miner power is able to (at great expense to themselves)
rewrite transaction history, so miner decentralization is necessary to keep transactions irreversible. Miners burn a lot of electrical power in the mining process so they must constantly be trading their bitcoin income in order to pay bills. This makes miners utterly dependent on the bitcoin economy at large and therefore gives them a strong incentive to mine valid bitcoin blocks that full nodes will accept as payment.
Influential figures in the community (such as developers, politicians or investors) may try to use their influence to convince people to download and run modified full node software which changes bitcoin's properties in illegitimate ways. This is unlikely to succeed as long as counterarguments can freely spread through the media, internet forums and chatrooms. Many bitcoin users do not follow the bitcoin forums on a regular basis or even speak English. All appeals to run alternative software should be looked at critically for whether the individual agrees with the changes being proposed. Full node software should always be open source so any programmer can examine the changes for themselves. Because of the co-ordination problem, there is usually a strong incentive to stick with the status quo.
See also:
Full_node#Economic_strength See also this blog post:
Who Controls Bitcoin?
My assumption: In the first paragraph above it seems pretty clear that the idea of developers and miners changing bitcoin properties for their own benefit is never true. I don't have a lot of assumptions and knowledge about this as I don't know much about developers or miners, but a 50% hash power attack would be really tough because of the competition so the fear is very vague.
Bitcoin is backed by processing power
It is not correct to say that Bitcoin is "backed by" processing power. A currency being "backed" means that it is pegged to something else via a central party at a certain exchange rate yet you cannot exchange bitcoins for the computing power that was used to create them. Bitcoin is in this sense not backed by anything. It is a currency in its own right. Just as gold is not backed by anything, the same applies to Bitcoin.
The Bitcoin currency is created via processing power, and the integrity of the block chain is protected by the existence of a network of powerful computing nodes from certain
attacks.
My assumption: Created does not mean
backed. Bitcoin will still be decentralized by itself without being backed by anything. Gold is one of the closest assets if one wants to compare it about backed.
Bitcoin is illegal because it's not legal tender
In March 2013, the U.S.
Financial Crimes Enforcement Network issues a new set of guidelines on "de-centralized virtual currency", clearly targeting Bitcoin. Under the new guidelines, "a user of virtual currency is not a Money Services Businesses (MSB) under FinCEN's regulations and therefore is not subject to MSB registration, reporting, and record keeping regulations."
Miners, when mining bitcoins for their own personal use, aren't required to register as a MSB or Money Transmitter.
In general, there are a
number of currencies in existence that are not official government-backed currencies. A currency is, after all, nothing more than a convenient unit of account. While national laws may vary from country to country, and you should certainly check the laws of your jurisdiction, in general trading in any commodity, including digital currency like Bitcoin,
BerkShares, game currencies like WoW gold, or Linden dollars, is not illegal.
My assumption: Bitcoin is not illegal as a currency but you have to comply with your government regulations if you want to use it as a means of payment. Every country has different regulations regarding bitcoin, but most of them don't make it illegal. El Salvador is one of the countries that have adopted bitcoin as a legal currency.
Bitcoin will only enable tax evaders which will lead to the eventual downfall of civilization
Cash transactions offer an increased level of
anonymity, yet are still taxed successfully. It is up to you to follow the applicable tax laws in your home country, or face the consequences.
While it may be easy to transfer bitcoins pseudonymously, spending them on tangibles is just as hard as spending any other kind of money anonymously. Tax evaders are often caught because their lifestyle and assets are inconsistent with their reported income, and not necessarily because government is able to follow their money.
Finally, the Bitcoin
block chain is a permanent record of all transactions, meaning it can be mined for info at any time in the future making investigation, tracing of funds, etc much easier than with other forms of payment.
My assumption: Doing tax evaders with bitcoin is possible because bitcoin can be spent pseudonymously or with a high degree of anonymity. But in many cases the government may detect tax evaders and investigate possible evasion because the lifestyle does not match the financial statements they receive. I've also created a
thread on this, so maybe you can also find some opinions on how rules and evaders are hard to do.
Early adopters are unfairly rewarded
Early adopters are rewarded for taking the higher risk with their time and money. The capital invested in bitcoin at each stage of its life invigorated the community and helped the currency to reach subsequent milestones. Arguing that early adopters do not deserve to profit from this is akin to saying that early investors in a company, or people who buy stock at a company IPO (Initial Public Offering), are unfairly rewarded.
This argument also depends on bitcoin early adopters using bitcoins to store rather than transfer value. The daily trade on the exchanges (as of Jan 2012) indicates that smaller transactions are becoming the norm, indicating trade rather than investment. In more pragmatic terms, "fairness" is an arbitrary concept that is improbable to be agreed upon by a large population. Establishing "fairness" is no goal of Bitcoin, as this would be impossible.
Looking forwards, considering the amount of publicity bitcoin received as of April 2013, there can be no reasonable grounds for complaint for people who did not invest at that time, and then see the value (possibly) rising drastically higher.
By starting to mine or acquire bitcoins today, you too can become an early adopter.
My assumption: It is clear that anyone who dares to take the risk of investing early will be rewarded for what they have invested. But not all early adopters could get the huge profits they are today if they spent their bitcoins instead of keeping them. Remember how much bitcoin for 2 pizzas price? But of course it's never too late to adopt bitcoin even though it's currently $40K or more. Bitcoin is a risky investment but well worth the return. There are no guarantees, this is just a habit that has happened in the history of bitcoin.
It's a giant Ponzi scheme
In a
Ponzi Scheme, the founders persuade investors that they’ll profit. Bitcoin does not make such a guarantee. There is no central entity, just individuals building an economy.
A
Ponzi scheme is a zero sum game. In a Ponzi scheme, early adopters can only profit at the expense of late adopters, and the late adopters always lose. Bitcoin can have a win-win outcome. Earlier adopters profit from the rise in value as Bitcoin becomes better understood and in turn demanded by the public at large. All adopters benefit from the usefulness of a reliable and widely-accepted decentralized peer-to-peer currency.
It is also important to note that
Satoshi Nakamoto, creator of bitcoin, has never spent a bitcoin (other than giving them away when they were worthless) which we can verify by checking the blockchain.
My assumption: Since I know about bitcoin in 2020 then I never got any guarantee that bitcoin will guarantee a bigger return. However, price fluctuations as well as the influence of supply and demand have made holders benefit. This is not a ponzi scheme and one needs to take a closer look at what bitcoin really is before they determine that this is a ponzi scheme.
Bitcoin is a pyramid scheme
Bitcoin is nearly opposite of a
pyramid scheme in a mathematical sense. Because Bitcoins are algorithmically made scarce, no exponential benefit is derived from introducing new users to use of it. There is a quantitative benefit in having additional interest or demand, but this is in no way exponential.
My assumption: Bitcoin doesn't need this way to get a lot of users. Each user can get their own profit according to the amount of investment they want to make. You may be recruited by people who have business interests in the name of bitcoin like many investment platforms today where you become a referral member of people who take advantage of your member status. Bitcoin doesn't require this as you are free to make any purchases based on your current financial capabilities, P2P or centralized exchanges are a great place for you to buy and invest in bitcoin.
Bitcoin was hacked
In the history of Bitcoin, there has never been an attack on the
block chain that resulted in stolen money from a confirmed output. Neither has there ever been a reported theft resulting directly from a vulnerability in the
original Bitcoin client, or a vulnerability in the protocol. Bitcoin is secured by standard cryptographic functions. These functions have been peer reviewed by cryptography experts and are considered unlikely to be breakable in the foreseeable future.
It is safe to say that the currency itself has never been 'hacked'. However, several major websites using the currency have been hacked, often resulting in high profile Bitcoin heists. These heists are misreported in some media as hacks on Bitcoin itself. An analogy: just because someone stole US dollars from a supermarket till, doesn’t mean that the US dollar as a currency has been 'hacked'.
Most bitcoin thefts are the result of inadequate
wallet security. In response to the wave of thefts in 2011 and 2012, the community has developed risk-mitigating measures such as
wallet encryption, support for
multiple signatures,
offline wallets,
paper wallets, and
hardware wallets. As these measures gain adoption by merchants and users, the number of thefts drop.
My assumption: Bitcoin are not hacked, but hackers manage to hack users or trading platforms due to weak security systems or security practices by users. Usually hackers take advantage of this weakness to steal bitcoins either from users or trading platforms, so this is another risk that users need to be aware of so that they can practice good security for their bitcoin. The best ever recommended standard for storing bitcoin is a hardware wallet.
References
1.
https://en.bitcoin.it/wiki/Main_Page2.
https://en.bitcoin.it/wiki/Myths3.
https://bitcoin.org/en/
