Fact, Fiction, And 11 Bitcoin Myths

Tyler Durden's picture

Haters gonna hate, but the “Bitcoin bubble” meme has become the financial equivalent of a viral online cat video – wildly popular but pretty vacuous. In an effort to separate fact from fiction, ConvergEx's Nick Colas reviews 11 bitcoin myths (and dispels them). Still, there’s no doubt that the public is entranced: there are now 3x more Google searches for “bitcoin” than “Western Union”, and 33x more than for “Gold coins”.  We started writing about bitcoin back in February because it was – and still is – a fascinating invention (for better or worse). How it plays out, we will just have to wait and see.

Via ConvergEx's Nick Colas,

In the spirit of the old high school essay question about the Holy Roman Empire, consider the following query: bitcoin is often described as an online crypto-currency, even though it is none of these things – discuss.  The Cliff Notes suggested essay outline might go something like this:

Bitcoin doesn’t have to be just “Online.”  There are meetups in parks around the world where you can bring your cash, hand it over to a guy or gal with a smartphone, and watch your Benjamins get deposited to an online bitcoin wallet.


The “crypto” part is also only partially correct.  Yes, at its core the bitcoin system runs as a piece of open-source puzzles which individuals and businesses try to solve.  The winner gets 25 new bitcoins for their trouble, currently worth about $23,000.  Not bad, but the genius of the system is that everyone playing the puzzle must also register all bitcoin transactions that occur in the 10 minutes it typically takes to solve the puzzle.  Those are also all visible to the system, but by forcing everyone to keep track and reconcile at the end of the 10 minute window, the chance of double-spending the same bitcoin is very low. Bottom line: you don’t need to know how to code to use bitcoins.


“Currency”… This is actually the hardest part of the question.  Currencies exist primarily as a way for societies to avoid having to barter goods and services.  It is much more efficient to hand over a $10 bill for dinner rather than contract with the restaurant owner to wash dishes for your meal.  There are some places to spend bitcoin – a simple web search will find them.  But the most accurate thing you can say about bitcoin as truly useful currency is ‘Not yet’.

We’ve been writing about bitcoin since February 2013 because we thought it was a remarkable and intellectually elegant solution to one key social problem: it simply costs too much money to move money.  Want to send $100 to a friend in Argentina by Western Union?  That will set you back $12.  How about paying for a $1 bag of chips with a credit card in the US?  Good luck with that – you’ll likely have to buy a 10 pack to meet the card minimum at the store.  We had no idea the value of a bitcoin would skyrocket from our first report at $31 to about $900 today.  We just thought it was cool.

Still, with all that capital appreciation comes a lot of misinformation.  Part of that is understandable – bitcoin is new and very different from traditional notions of “Money”.  Still, in the rush to understand what bitcoin is – and isn’t – the public discussion on the topic has gotten a bit muddy.

Today we offer up 11 bitcoin myths and our interpretation of the reality under the hype and confusion.

Myth #1: Bitcoin is huge

Reality: By any objective measure, bitcoin is tiny at a total value of $10.8 billion.  Since one of the complaints about bitcoin is that it can enable hard-to-trace criminal activity, let’s compare that amount to the real enabler of drug sales, tax evasion, and even more heinous crimes the world over: the U.S. $100 bill.  There are about $400 billion of those floating around the world.  Total stock of cash money in the U.S.:  about $800 billion.  And when you look at total cash around the world, the number is about $3.8 trillion.  Bottom line: bitcoin at current valuation is 0.3% of the world’s cash money.  That is not huge.

Myth #2: Bitcoin is a major problem in dealing with drugs and terrorism

Reality: Bitcoin is way too volatile at the moment for any serious criminal element.  These are not people that take capital risks where they don’t have to.  Seriously – go try to steal 10% of a dealer’s cash and tell him it is frictional losses due to an illiquid market.  I have heard enough Biggie Smalls raps to tell you how that story ends…  Yes, some enterprising dealers clearly use bitcoin.  But a serious problem?  Bitcoin would be $10,000 or higher if it had any real share of the global drug trade.  Consider that the UN Office on Drugs and Crime estimates the heroin trade into Europe is worth $20 billion on its own. 

Now, it is entirely true that bitcoin businesses will have to develop the same anti-money laundering and know-your-customer rules as any other money transfer enterprise.  And, as we will discuss briefly, that is very good for bitcoin.

Myth #3: Bitcoin is a currency.

Reality: Bitcoin really is a cross between a mutually held company or large partnership and a money transfer business.  Its utility is that the bitcoin miners – those trying to solve the puzzles to get the 25 bitcoin reward – manage the transaction stack (blockchain, in bitcoin-speak) essentially for free.  You want to be part of the partnership? Great – buy some bitcoins and hold on.  But if you just want to send that friend in Buenos Aires money cheaply, you and she might both own bitcoins for a fraction of a second.  You drop dollars in, she gets pesos out.  Bitcoin is a system much more than it is a “Currency”.  Maybe one day she will buy a beer with bitcoins, but the entire system has tremendous utility even without that functionality.

Myth #4: Bitcoin has never been more volatile than now, with all the attention it is getting.

Reality: Check out the two charts we’ve included after this note.  They show trailing one month returns for bitcoin back to August 2010 as well as the standard deviation of those returns.  May 2011 was the peak for trailing 28 day returns at 853%.  The last peak was 11/30/2013 at 479%.

Myth #5: Chinese citizens are shut out of buying bitcoins by government regulation of the banking system.

Reality: According to data aggregator bitcoincharts.com, yuan-based bitcoin demand is still greater than dollar based transactions. Over the past 24 hours, 85,588 bitcoins changed hands on BTC China, while only about 56,000 traded on dollar-based exchanges.

Myth #6: Bitcoin is a store of value.

Reality: The phrase “Store of value” should be used very carefully and only with specific historical proof. It implies that when social or political floodwaters come, the asset in question will allow you to buy shelter, clothing and food.  Gold has that history, as does silver.  Perfect one-carat diamonds also make the grade, albeit only in the last 50-100 years.  Bitcoin may one day prove it deserves to sit alongside those assets.  It isn’t there yet.

Myth #7: Bitcoin is untraceable.

Reality: Bitcoin transactions flow through an open-source piece of software, so everyone sees every trade.  No, there are no name/address identifiers, but Forbes magazine showed how easy it is to trace bitcoins through the system back in September. Methods to “Launder” bitcoins certainly exist, but so do the risks of handing over your coins to an online thief.  Bottom line: after hearing about what the NSA can do with your computer and phone records, if you think anything you do online is secret, I can’t help you.  OK, if you have mad hacking and crypto-skills, maybe.  But chances are pretty good that you’d just screw it up.  And get caught.

Myth #8: Loss of anonymity will make bitcoin worthless.

Reality: Remember, as long as banks and money transfer businesses have to maintain expensive data centers to run their businesses, bitcoin will always be a cheaper way to transfer money.  Now, how many business build attractive and secure consumer and business offerings on the core bitcoin system – that is an interesting question and is certainly the most important issue regarding its long term price.

Myth #9: It’s a Ponzi scheme!

Reality: A Ponzi scheme is one that has no use other than to defraud later victims into giving money to earlier participants.  Again, bitcoin has a potentially significant positive social value.  Two regional Federal Reserve papers, published in the last month, agree with that statement.  But if you still think bitcoin is a Ponzi scheme, you should probably get rid of your Federal Reserve notes as well.  They aren’t “Backed” by anything either.  Please remit them directly to: Nick Colas, ConvergEx, 1633 Broadway, NY NY 10019.  I will forward them to one of my favorite charities – the USO - where they will do a world of good.

Myth #10: Bitcoin is ready for prime time.

Reality: I don’t own any bitcoin (I lost the 0.10 someone gave me in a demo) and I won’t be using them any time soon.  The reason?  I am afraid that there is simply no safe place to hold them.  Hackers attack bitcoin “Wallets” with disturbing regularity.  As the price continues to rise, their incentives to up. Their game goes higher as well. I don’t think I am alone in this sentiment.  I want a company I recognize to start a bitcoin storage site.  It could be a bank, or Paypal, or Apple.  I don’t care which.  There are plenty – they call me regularly – bitcoin millionaires out there.  How about some of you start reinvesting in the system that has made you so wealthy?

Myth #11: Something better will come along and wipe bitcoin off the map.

Reality: Of course something better will come along.  That’s what happens in technology.  I personally think a charity-based bitcoin product would be huge.  Donate bitcoin in New York, and let the charity redeem them at very close to 100 cents on the dollar where they are needed.  Somalia, as one example, is facing almost total isolation as Barclay’s - the last foreign bank in the country - threatens to leave at the end of the year.  The $100 million remitted by Somalis working abroad will then have to pay even higher fees to send their money home.  What if a famine or other calamity occurs?  And how will the economy have a chance with no access to outside capital?



At the same time, I simply do not see why a competing product will wipe out the utility of bitcoin.  It has a first mover advantage and a large existing network of miners to support it.  There are scores of early adopters with eight and even nine figure net worths to reinvest and build the system.  There are other online money transfer products out there, of course, and more to come.  The challenges will be the same for all of them: security, utility and legal compliance.

Let me sum up with a final thought: I absolutely understand why there are so many bitcoin haters out there.  But don’t hate the player, hate the game.  Technology is a tremendously disruptive force in society, and it knows no boundaries.   It disturbs every status quo.  That’s what is does.  Just don’t make the mistake of thinking that you can reverse it by calling it a bubble.  Sticks and stones, that…

Now, if someone hacks the entire bitcoin system just to crash it (there’d be no actual value in the effort, since bitcoin would be worthless), then of course will go to zero.  But that won’t be the end – something else will come along.  Technology doesn’t stop.  Get used to it.

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fonestar's picture

The next time Bitcoin crosses gold it should blast right through it like silly putty and remain there.

bitcoinbear's picture

Not if the thermonuclear arms race bubble bursts first. Then the all the goldbugs will ride brand new donkeys right past you and your tesla. 

Chain Gun Smoke's picture

All these bitcoin bastards are polluting this site. Bitcoin won't go up forever. Take profits and move on before you all get fucked by a big black swan. It's coming. 

I like to skim the comments to gain other peoples insight, but damn, the average IQ of ZH is crashing. You all read like a get rich quick scheme. 

TeamDepends's picture

Let them enjoy their Kool-Aid.  We do agree though that some of them are beyond tedious.

foodisgood's picture


Why the heck are you not in on the develoment stages of the new bitCoin wallet that will TRULY decentralize the currency?


You are missing out man.

mmanvil74's picture

Look folks, Bitcoin belongs in the same sentence as electricity, automobile, telegraph, the computer and the Internet.  It is the most important invention of this decade and maybe even of this century.  And you can't un-invent something.  

Doubters will wake up eventually.  That doesn't mean Bitcoin isn't the commodore 64 of computers or the My Space of social media - we don't know if it will be the leading or best coin of its kind.  What we do know is that crypto currency is world changing, it is here to stay, and unless you want the lights to turn off so we can go back to living in caves and tribes, you should embrace it (and get some while still cheap)!

Ayr Rand's picture

Please, everybody, please BUY BITCOIN!! Since the NSA invented it, there is every reason to believe that the mysterious core of users who own but rarely trade most of the bitcoins are either NSA employees, former NSA employees, or the NSA itself. This is your contribution to their pension plans. They have done their job. Do yours. Thank you.

BTW, this article correctly pointed out that Bitcoin is not anonymous. In fact, it was engineered to be 100% traceable if you have the tools and resources.

With all that, it still has enormous potential value as a medium of exchange.

tmosley's picture

You do realize that you are, in fact, in a bitcoin thread?

Or are you saying Tyler is a bitcoin bastard?  

If the latter, we can agree that they seem like clickbait.  It does have the possibility to become a new paradigm that could reshape the financial system and end central banking once and for all, but it seems like any story that has the word "bitcoin" in it gets reposted here so we can argue about it.

fonestar's picture

Exactly.  Why are they posting on Bitcoin threads?  Maybe because it pisses off the conspiratards to learn millions of people are actually buying and using Bitcoin?  Kinda blows all of their stupid cries of conspiracy, pump-and-dump and pyramids out of the water?

Stackers's picture

Myth #10: Writer does not understand how wallets work. No need for 3rd part secure wallet storage. You can create a wallet on your own hard drive and short of someone hacking your personal pc and installing malware keystroke logging software on your PC it is un-hackable.

outamyeffinway's picture

Right. Don't store them on your primary pc. Also you could get an ipod, download a wallet, put your BTC on it when you get them and put it in a fire proof safe. Many options.

fonestar's picture

I like SSDs.  I don't trust hard drives and USB sticks.

Balvan's picture

Bitcoin is dead, Quarkcoin is next big thing

Ignatius's picture

Bill Still, is that you?!

fonestar's picture

Haha, yeah that certainly made me wonder.  I enjoyed his shows but he attacks Bitcoin for two years and then jumps onboard with this scam coin?  WTF?

fiftybagger's picture

Maybe because he's a statist shill fraud?

Balvan's picture

It's not a scam, here's a video that explains Quark (3:50 mark Quark-Bitcoin comparison)


Scarlett's picture

it's a complete scam with 99% of coins already mined

Ignatius's picture

I like Bill Still.  Sometimes it takes awhile for people to come around.  Bill Fleckenstein really ragged on bitcoin in a KWN interview.  I think he'll be wrong.  When one knows a lot it can be a hinderance to new developments.

fonestar's picture

I still enjoy listening to Fleckenstein's interviews and I don't think he's really part of the Wall Street crowd.

Bitcoin is pretty far out and abstract for a lot of people to grasp.  It's also really interesting to see how far divided technically our society has become.  A few are able to grasp and understand these new creations while others are able to discount world-wide global networks as being not "real"?  Thinking about that astounds me and frightens me.  The people bitching and moaning the most about technology would be the first ones going crazy if all the creature comforts that software provides them were taken away.  They don't notice it in their daily lives but they'd certainly notice it if it were gone (it's not going anywhere).

Bay of Pigs's picture

What happened to fiatleak.com? It doesn't work anymore. Why?

edotabin's picture

Just wait till Bling coin is introduced.

BigJim's picture

I'm waiting for CntCoin, a crypto-currency backed by the International Legion of Harlots and redeemable for specie* on demand.

*hot, slavering poontang.

tmosley's picture

UBS sticks are SSDs, though.  Just in a small form factor.  They are damn tough too.  I must have put one through the wash (and the dryer) 10 times and the data read fine afterwards each time, no problem.

fonestar's picture

True but it depends on quality.  I've had several USB cards smoke on me.

BigJim's picture

USB sticks (hey, what this 'UBS' stick? Did you get it from a Swiss bank?) usually fail at the card/interface level, ie, where the card is soldered to the USB connector. I've seen this quite a few times and it's usually a fairly easy fix.

Sonic the porcupine's picture

USB sticks use flash memory, so do most SSDs. So if you don't like USB sticks, why do you like SSDs?

Mike Hunt III's picture

Wow, your getting massively down voted for liking SSD's. Tough crowd.

Duke of Earl's picture

I disagree.  The 3rd party secure storage is not for those who can responsibly backup and protect PC's.  The storage is for everyone else who doesn't understand or makes regular mistakes.  Think of small storefronts who want to take the currency, but none of the overhead of being a bank.  All they want to have is an address for people to send money and some sort of insurance if it gets stolen.

This is why you are seeing startups like Coinbase get $25MM rounds of financing.

outamyeffinway's picture

Technology, get used to it bitchez!

fonestar's picture

Has anyone else experienced a much harder time sending money (EMT) through legacy banks lately?  I certainly have and my bank has been making me jump through hoops to do anything now.  My EMT was blocked by Interac due to "suspicious activity" (buying Bitcoin from Bitcoin sellers) so I don't know if it's related to that or not.  I've been reading online about many others having trouble and some have said the banks are now getting hacked left, right and center.

Just one more reason to avoid and ignore legacy banks and one more selling point for Bitcoin.

fiftybagger's picture

I'm not sure Fone.  But I'm pretty sure these banks are very close to going POOF, and then the bailins start.


gold/silver/bitcoin/altcoins/food/preps 99.9%

cash .01%

foodisgood's picture

You really are an idiot.

I bougut at $11in 2011 and was locked out when it crashed after $37. Cause I am a whining nagger I got my coins back. 

Why do you remind me of myself. Just wait till you find your senses


BigJim's picture

 My EMT was blocked by Interac due to "suspicious activity" (buying Bitcoin from Bitcoin sellers)

Dude, of course you've been tagged for "suspicious activity" - you're probably the most prolific poster on one of the world's greatest dissident sites.

gallistic's picture

WTF! Hyperbole much?

Sorry to burst your little bubble, but Zero hedge is decidedly not "one of the world's greatest dissident sites". Anyone who believes that is severely deluded.

Zero hedge is neither dissident nor subversive. It is a multitude of fears mixed with the collective illusions of faux rebels which fills a particular human need. It is tragically trapped in a very narrow range of views and "discussion". It is the spectacle, nothing more.

If there was a true "Marla Singer" foil with equal power to the Tylers engaging in the dialectical method and demolishing hackneyed paradigms, Zero Hedge might actually threaten to reach the exalted position of Petri dish.

Pseudonymous's picture

Child Labor in Bitcoin Mines Exposed

</sarc> I know I post this link with the risk of adding even more confusion, but it is just worth the laugh.

BLOTTO's picture

'Again, bitcoin has a potentially significant positive social value.  Two regional Federal Reserve papers, published in the last month, agree with that statement.'

fonestar's picture

I do not believe the Fed is endorsing Bitcoin as some do.  I think Bernanke was just stating the obvious that they have no control or jurisdiction over Bitcoin.  And their paper is right, Bitcoin offers tremendous positive social value.

Sixdeuce062's picture

the fed isnt endorsing fiatcoin they are creaming their panties over it is moar worthless then what they "digitize" if anything they are looking to move and take over so they can "manage"  and i use this term only from the perspective of the FED "currency" . fiatcoin is just a cenntrall planners wet dream

fonestar's picture

Bull.  All currencies are digital currencies and have been for many, many years.

foodisgood's picture

You have to be a moron of the highest order to believe that fonehomestar


fonestar's picture

I can totally believe that Bitcoin makes no sense to you (or people like you).

giggler321's picture

My internet goes down all the time, since it's decision making is all network based, it would seem this is a weak point, I mean if I want to spend something, I take a coin from my pocket, so now the shop owner says, sorry you can't buy that soda because internet down due to collapse of xxxx (make up what you like here).  However my metal coin still works...

fonestar's picture

Actually that's not correct.  Many times I have been in businesses during a power failure.  The cashiers do not even do cash transactions because they do not show up in their systems.  I have asked the cashiers, "well why not write it down and enter it later?".  They just say no can do.

giggler321's picture

You're mistaken - so then they're not gonna take coin or bitcoin then?

BigJim's picture

Actually, for most stores now this is true - all the till operations are based on scanning the barcodes of the products. No can scan? No can sell.