Commentary: Misconceptions

Commentary: Misconceptions

This is the first part of an article I am working on for someone. I don’t really know who they are, other than they are an editor for an online magazine I read. I just complained to them about an article, and they suggested I write one instead. So, here is part 1.

Bitcoin: Misconceptions

Bitcoin. What is it really? There are so many misconceptions, half-truths, and straight lies spoken regarding Bitcoin that sifting the wheat from the chaff can be a full time occupation. Instead of delving into what Bitcoin is and what it represents for the future, let us explore what Bitcoin really isn’t, though you may have heard otherwise:

Bitcoin is a Ponzi Scheme!

 Taken from the first paragraph of the U.S. Government’s Securities and Exchange Commission’s website. Seems like a good place to start, with those who know it best.

A Ponzi scheme is an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors.

Bitcoin is not an investment. Bitcoin is an exchange mechanism that exists and is propagated without the needs for banks or governments. The only thing it requires is the distributed network of computers which run the protocol.

In many Ponzi schemes, the fraudsters focus on attracting new money to make promised payments to earlier-stage investors and to use for personal expenses, instead of engaging in any legitimate investment activity.  

There are no “promised payments” with Bitcoin. The price of each coin is determined solely by the market forces of supply and demand. You buy a bitcoin, and it is yours.

Ponzi scheme organizers often solicit new investors by promising to invest funds in opportunities claimed to generate high returns with little or no risk.

This is the only part of a Ponzi that Bitcoin bears any relation to. Many early adopters of Bitcoin have already become millionaires in the issued paper currency of their government. The promise of future returns such as they enjoyed has certainly caught the attention of the public. This is not the same as solicitation based on an investment plan, but rather the natural byproduct of a finite commodity whose use is rapidly becoming more widespread.

Bitcoin got Hacked!

The concept of hacking Bitcoin is an ever present fear to those who do not yet understand the resilience of the Bitcoin Protocol. The idea that wealth that could be confiscated by an evil third party is one of the more laughable arguments against Bitcoin. Ask the Cypriots how much faith they have in the Euro now? Ask the Russian depositors who trusted the EU to play by their own rules on capital controls. Article 73 B of the Maastricht Treaty specifically forbids the hindrance of capital across the EU zone and to third-parties. That did not stop them from rewriting the laws in the middle of the night. Talk about a hack, or rather a large group of!

Bitcoin is international, it is not controlled by a government. In such instances where a government acts in its own preservation and rather for the good of its people, the utility of a currency exchange like Bitcoin is invaluable to preserving wealth. The only hack it relates to is best related to these kind folks.

 

Bitcoins can be duplicated, it happened already!

There is no way to copy a bitcoin. Bitcoins come into existence  through the efforts of “miners.” Rather than digging into the ground in search of shiny metal, these techno-alchemists transform computing power and electricity into new coins. There is also a hard limit on the amount of coins that can be created, about 25 every 10 minutes. When these miners “strike gold” they are simply solving a very difficult math problem, while creating a new record for all transactions that have taken place recently. This builds the “blockchain” so that each and every transaction is recorded, but not the identity of those who are transacting.

There was an issue when a bug was found which caused some Bitcoins to be double-spent.  Rather than do damage to Bitcoin, it had the effect of strengthening the overall network as users and holders of Bitcoin saw the community come together asynchronously to fix the problem. New transfers were halted, Mt. Gox reacted instantly, and the few who lost moneywere compensated from within the community.

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1 comment
  1. Hello, just wanted to say, I enjoyed this post.
    It was funny. Keep on posting!

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