Busting Bitcoin: 3 Things You Need to Know
Over the last year, there have been a lot of questions about Bitcoin.
- What is it?
- How does it function?
- Does it even have any value?
Despite the digital currency's surge in price, many people still fail to understand the underlying technology that makes Bitcoin tick. They get sucked into the technical rabbit hole and often return so flustered that they've given up on the investment entirely.
If you don't believe me, I'll tell you the number one reason I hear people don't invest in Bitcoin: "I just don't understand the technology."
And that is fair. With new information constantly being doled out through forums, magazines, and public chat channels, Bitcoin is one of the most confusing topics on the market.
But it doesn't have to be.
Bitcoin, while an incredibly complex and powerful technology, is actually one of the simpler digital currencies on the market. In fact, if you take the time to understand the basics of Bitcoin, then you will have an easier time understanding other digital currencies.
Today, on this holiday weekend, I thought it might be fun to sit down and bust some of Bitcoin's biggest myths.
Let's get rolling.
Bitcoin is Anonymous
The myth that Bitcoin is anonymous is one of the most widely circulated and confusing Bitcoin myths.
It's tied to the fact that many people believe Bitcoin's "anonymous nature" makes it perfect for money laundering and other illegal activities. In reality, there are other digital currencies that are far more anonymous than Bitcoin.
And, while Bitcoin does facilitate illegal activity, so do other currencies.
That considered, Bitcoin may not be the best token for illegal activity. Bitcoin is what you would call "pseudo-anonymous."
Bitcoin operates using a technology called blockchain. Every transaction that takes place on the Bitcoin network is recorded on the blockchain.
This recording takes the form of an electronic signature. Just think of this electronic signature as an author's pseudonym.
If you write under a fake name, you may be able to keep your identity behind that name secret. However, the second someone links that fake name to your real identity, the rest of the world can always link it, too.
That's what happens with Bitcoin. If someone figures out your electronic signature, they can figure out your transaction history.
And though this alarms many individuals, it may not be a bad thing. Very few individuals or organizations actually need complete privacy.
Digital currencies that offer complete privacy and identity protection through specific cryptographic tactics do have utility to companies and individuals that need every transaction to be a secret.
You can learn more about those kinds of currencies in our 44-page digital currency guide.
Bitcoin Has No Intrinsic Value
True... and False
Okay, so this one is a bit confusing. It's a digital currency question I see a lot, mainly because it is the statement people use most frequently to shoot Bitcoin down.
Though it is true that no government entity or bank backs Bitcoin, that doesn't mean it doesn't have value. In fact, the lack of centralized support actually is one of Bitcoin's intended strengths.
When Bitcoin was introduced to the internet in 2008, its anonymous creator Satoshi Nakamoto established that the token would provide a decentralized form of currency that wasn't connected to any government entity or bank. The direct quote from the white paper states Bitcoin is "a purely peer-to-peer version of electronic cash [that] would allow online payments to be sent directly from one party to another without going through a financial institution."
Bitcoin's lack of established backing has caused a lot of buzz as Bitcoin gains momentum, with many banks and Wall Street investors crying that Bitcoin is nothing more than an internet dream.
But reality proves that the opposite is true. Today countries and individuals are actively using Bitcoin as both a currency and a store of value.
As Bitcoin matures, it will likely become clearer whether the token is actually "digital gold" or a form of money.
There are many other digital tokens with traits that allow them to operate like a currency. Bitcoin, as the oldest digital currency on the market, actually has a technical shortcoming that other tokens have been able to overcome.
This is why many believe that Bitcoin will end up functioning as a store of value.
Peter Thiel, Donald Trump's tech advisor and the founder of PayPal, says we are currently "underestimating" Bitcoin. In fact, in a recent interview, Thiel stated:
It’s like a reserve form of money. It’s like gold and it’s just a store of value. You don’t actually need to use it to make payment.
In the end, Bitcoin has two paths of value. It will end up operating either as a currency or as a store of value.
What currently gives the token value is the network of people that assign it value. That value may be assigned for many reasons, including using Bitcoin as the reserve digital currency to invest in other digital tokens. As Bitcoin matures, it will become more evident what its long-term utility is.
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Bitcoin Isn't Safe
True (and False)
This is a myth and a truth. It honestly depends on what you mean by "safe." Over the course of Bitcoin's life, over 25% of the bitcoins in circulation have been lost or destroyed. This happened because many people store bitcoins in hardware wallets or on hard drives that meet unfortunate ends.
Heck, one guy spent hours rifling through miles of garbage, all in the hopes of finding a tossed hard drive. This hard drive had over $9 million in Bitcoin. Talk about being down in the dumps...
So it's true that you could accidentally lose or destroy your Bitcoin investment. Luckily, there are a lot of resources that help investors avoid that fate.
Another safety issue is hacking and digital security. Bitcoin has had some rough moments, the most memorable of which is the Mt. Gox hack.
In 2011, the Mt. Gox breach took place. In this event, a clever thief stole over 850,000 bitcoins.
Since then, many other hacks have taken place. Investors have been swindled by cyber thieves. That said, a lot of new security measures have come out that allow investors to protect their investments.
You can store your digital currency investments, including Bitcoin, in a wide range of software and hardware wallets.
Each of those wallets is equipped with its own security measures. Take Coinbase for example. With Coinbase, investors have the opportunity to set up two-factor authentication, which can help secure accounts.
No one can sit here and say investing in digital currency is 100% safe. To do so would be to ignore the tremendous amount of volatility and the infancy of the space. That said, with Bitcoin and other digital currencies raking in triple-digit gains in under 10 months this year, many people are willing to take that risk.
It's also worth noting that over $24.71 billion in credit card fraud was reported in 2016, and 46% of Americans have become the subject of credit card fraud. Money is hardly safe, either.
On a positive note, Bitcoin and other digital currencies are becoming safer. The Securities and Exchange Commission (SEC) recently stepped into the space, promising investors better regulation in the future. Outside of government entities, exchanges have also stepped up to bat, improving security for users.
Well, those are three of the top Bitcoin myths out there.
I hope they answered some questions you may still have about Bitcoin and other digital currencies. If you're interested in learning more, you can check out our digital currency training service.
I wish you the best of luck with your investments,
@AlexandraPerryC on Twitter
Alexandra Perry is a contributing analyst for Wealth Daily and Energy and Capital. She has multiple years of experience working with startup companies, primarily focusing on artificial intelligence, cybersecurity, alternative energy, and biotech. Her take on investing is simple: a new age of investor can make monumental returns by investing in emerging industries and foundational startup ventures.
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