Bitcoin misconceptions

December 12, 2013

By now you probably know what bitcoin is. You probably have an opinion one way or another on bitcoin, since it's one of the most controversial new technologies right now. I'm going to go over some of the common arguments that have been made both for and against bitcoin. Some of them are plain wrong, but some are legitimate concerns.

For Bitcoin

It's anonymous!

Well, kind of. The block chain is the public record of all bitcoin transactions, so anyone can go in there and look at all the transactions for a particular address. Now, the anonymity comes from not knowing what addresses belong to who. For most people, you will be anonymous because nobody will bother trying to figure out what addresses are yours. For bigger players who have known addresses, people can and will track all your transactions, like what happened with Sheep Marketplace.

It's free!

Nope. For your transaction to go through, you have to pay a fee to the miners. The default fee is 0.0005 BTC, which was 5 cents when BTC was $100. Now that it's around $1000, the fee is 50 cents, which is definitely not free. You can specify how much you want to pay in fees, but the lower of a fee you pay, the less priority your transaction has. You can also choose to pay no fees, but there's only room for a few of those in a block. There have been instances where I paid 0.0001 BTC in fees and had to wait a day for my transaction to be confirmed. Which brings me to...

It's fast!

Sometimes. If you pay the suggested fee, sure, your transaction will probably be in the next block. The next block might happen now, or it might happen in 20 minutes. On average, it takes about an hour for your transaction to be confirmed 6 times, which is considered "good enough" that it can't be reversed. But wait, you say, I can pay at Subway with Coinbase and it happens immediately! That's because with POS systems, you're not waiting for 6 confirmations. It's just assumed that you won't try to double spend your coins, and that no forks or orphans in the block chain happen. This is not 100% reliable - if you wanted a guaranteed, irreversable transaction immediately, well, you're out of luck. Permanent or immediate: pick one.

It's easy!

For who, consumers? Sure, once you get an account set up at exchange or Coinbase, all of which require some proof of ID and a linked bank account. Then you have to wait to get verified, which can take up to a month at some exchanges. Once you do, it might be hard to get money in and out. But once you finally do all of that and buy your first bitcoin, you're good to go.

For businesses who want to accept bitcoin as payment, all they have to do is set up a merchant account at Coinbase or Bitpay, which is relatively straight forward.

It's decentralized and unregulated!

Unregulated... for now.

Against Bitcoin

It's a bubble!

Maybe? Probably? So what? The current price gain since October has been fast and furious, and the fundamentals haven't changed much, if at all. Sure, a couple more businesses accept bitcoin, but not enough to justify a $1000 price. But, since the price is based off of speculation, it can be whatever price it wants to be, and that's ok. Bitcoin bubbles have historically resulted in higher prices and greater awareness of it, so even if this current bubble pops, it has a net positive impact.

It's a Ponzi scheme!

Only if the underlying asset is worthless. Bitcoin is far from that. It's a technology, and as with all technologies, the adoption rate will start slow and increase exponentially until everyone who can use it is using it. When that happens, the value of Bitcoin will be unmeasurable. Sure, the early investors and miners will benefit greatly from this, but so will the last people to buy in. In the short term there will be winners and losers due to the volatility, but in the long term, everyone is a winner.

It's too volatile to be used as a currency!

Only if you are setting prices in BTC. If you're a merchant, you can use Coinbase/Bitpay and set a price in whatever currency you normally do. When customers pay with BTC, Coinbase/Bitpay will automatically convert that BTC into your local currency. No volatility at all.

But wait, look at these 20% daily fluctuations! Isn't that bad? Not really. This doesn't mean it's a bad currency, it just means the price hasn't stabilized yet.

It's only used for illegal activities!

Nope. More and more businesses are accepting bitcoin, so you can buy anything from domain names to video games to Subway sandwiches to drinks at bars. Coinmap adds new locations every day. Of course, you can always go to the darknet and visit the latest reincarnation of the Silk Road for all your illegal goods. But don't forget, people have been using cash for this purpose since the dawn of currency.

It's too complicated!

Yes, to fully understand the bitcoin protocol you'd need to understand cryptography, hashing, distributed systems, networking, and more. To fully understand the Internet, you need to understand HTTP, TCP/UDP, IP, DNS, TLDs, and more acronyms that I don't even know. Yet, your grandma can still use the Internet. Nowadays, companies like Coinbase make it easy enough that the average person can use bitcoin.

It's too expensive!

Expensive for what? Sure, spending $1000 for a whole BTC is getting to be prohibitively expensive for the average person. So, just buy 0.1 BTC (100 mBTC). Most people don't realize that you can have fractions of a bitcoin. In fact, they are currently divisible down to 8 decimal places. To divide it down even further, all that needs to happen is an update to the protocol. We can keep dividing it down infinitely until that unit becomes the standard unit of bitcoin.

My bitcoins will get stolen!

Only if you do something dumb. If you use a brainwallet with a bad password, use a sketchy online wallet, or give someone access to your private keys, you're gonna have a bad time. For most people, storing your coin in a secure online wallet like Coinbase is good enough. Coinbase is backed by USV and A16Z; their employees come from places like Airbnb, Goldman Sachs, and Google; and Gavin Andresen is an advisor. In other words, they're legit - the opposite of As time goes on, regulation and security of bitcoin companies will increase and all these thefts will happen less and less.

I don't need to use bitcoin.

Did you need to use the Internet in 1993?

Arguments that are actually valid

Why would I spend my bitcoin if the price keeps going up?

In the short term, this is absolutely right. I have no incentive to spend my BTC if they went up in value 10x in a month. However, once we reach the saturation point, the price will stabilize to something like the USD. It will still be deflationary, but the deflation rate will be similar to the inflation rate of the USD.

At that point, you'll spend your bitcoin because you'll have to. When people are using BTC to buy toilet paper, you will need to buy toilet paper. The present value of having the toilet paper is greater than the present value of bitcoin. The opposite is happening with the USD - your dollar tomorrow is worth less than it is today. Why then are you not going out right now and buying all the toilet paper you can? Because you don't need it. The present value of your dollar is still higher than the present vaue of all that toilet paper.

If that doesn't happen though, then bitcoin won't ever be a true currency. It will remain a deflationary commodity, but with much greater usability than gold.

An altcoin is better

Sure, each altcoin has their advantages and may eventually supplant bitcoin as the cryptocurrency of choice. It wouldn't be that hard, either: A few major exchanges start trading the altcoin and Coinbase/Bitpay start allowing users to use the altcoin. The harder part would be switching all the miners over to the altcoin. In the end this is all possible, but bitcoin has first mover advantage and is already established.

It will be manipulated or outlawed by governments

Well, governments can't control the Internet, right?

Yeah nope. This is entirely possible. Satoshi might even be the NSA. That would suck.

Technical issues

These are real issues that hopefully will be solved by people smarter than me.

  • Block size: There's a hard limit on the size of a block. More transactions means we need to increase this limit otherwise transactions won't get processed.
  • Blockchain size: Since all transactions are saved, the size of the block chain will only increase. To run a bitcoin node now means downloading a few gigabytes, but in the future it will grow to terabytes and then petabytes.
  • Hard forks: If a controversial update to the protocol happens, miners can choose to switch or not. We're then left with multiple incompatible bitcoins.
  • Transaction throughput: Currently we can process about 7 bitcoin transactions per second. Visa can handle 20,000. Not even close.
  • 51% attacks: The US government could simply throw a bunch of money at some ASICs and take over 51% of the network, then do whatever they want.
  • Decline of miner rewards: As block rewards halve and the cost of mining goes up, we may eventually reach the point where it is never profitable to mine. Without miners, there is no bitcoin.

Bitcoin: It's complicated

Bitcoin isn't the perfect solution to all of our problems, nor is it a fad that will quickly go away. It's here to stay, and if we do manage to fix all of the above problems then it might just have a chance.