Bitcoin myths and facts

Over the years, Bitcoin has often been called a bubble by various people. Although its price has had several significant drops that could have justified that label, the overall trend for bitcoin has been consistently upward.

Critics who have declared bitcoin dead after every market cycle have been badly mistaken, and the emerging digital currency has continued to thrive despite their predictions. Over time, as these critics run out of analogies, it becomes clear that their claims are unfounded and wrong.

It's subjective to expect bitcoin to maintain a specific price level, since it trades around the clock, every day of the year, all over the world. There are no registration requirements, bank holidays, temporary trading halts, or bailouts in the Bitcoin market, which operates as a true free market.

Any volatility in Bitcoin's price is the result of buyers and sellers reaching agreement in real time without government interference. As bitcoin continues its journey toward becoming a primary global store of value in the information age, it's unrealistic to assume this will be a linear process.

As the adoption of bitcoin increases, it becomes less risky, and the potential upside diminishes, leading to a decline in volatility.

The idea of backed money is self-contradictory, since the backing itself would then be considered money. Part of the value of money comes from its scarcity. Bitcoin doesn't need to be backed by anything else that's scarce, since it has absolute scarcity in itself.

By being verifiable and independently auditable, Bitcoin is free of counterparty risk. There's no third party you have to trust to store and secure goods or assets. If you were to imagine something realistic in this context, it would be more that the future will be backed by bitcoin.

As Parker Lewis put it: "Ultimately, Bitcoin is backed by something, and it's the only thing that backs any money: the credibility of its monetary properties."

Bitcoin represents a unique discovery of absolute scarcity, on par with the discovery of fire, electricity, or mathematics.

It's neither logical nor possible to compete with Bitcoin when it comes to scarcity, since there's no higher level of scarcity than absolute scarcity. Criticism of what some perceive as Bitcoin's limitations or drawbacks assumes that there are no trade-offs when it comes to security and incentive design, or that Bitcoin's current form doesn't already provide significant benefits for millions of users.

As a fast-growing, permissionless network with 99.98% uptime over more than a decade, that has processed billions in value and is secured by billions in hardware, it's unlikely that Bitcoin will lose its position as the dominant digital monetary network.

As Michael Saylor put it: "There's never been an example of a $100 billion digital network being surpassed after it reached the dominant position."

Bitcoin is a decentralized digital currency, available to users all over the world, and it's resistant to censorship because of its Proof of Work mechanism.

With an estimated four billion people currently living under authoritarian regimes, bitcoin allows people to send, receive, save, and preserve value. It's important to consider how much energy a monetary network like this should consume, and to carefully assess who is best positioned to make decisions about it.

Bitcoin mining offers a flexible solution for using energy resources in regions where there's no local demand or efficient transport options. By deploying equipment on-site where this energy is surplus, it's possible to produce bitcoin, which can then be stored or sold on the highly liquid and globally accessible Bitcoin market.

One way to think about Bitcoin's impact on global energy use is to imagine a topographic map of the world, where local electricity costs are represented as peaks and valleys. Adding bitcoin is like pouring a glass of water over the map — it runs down into the valleys and levels them out. This is because Bitcoin is a global buyer of energy at a fixed price, which helps balance the distribution of energy use around the world.

There's of course a risk that internet access could be cut off due to infrastructure failures, natural disasters, or deliberate shutdowns. However, it's possible to make Bitcoin transactions using offline methods and other communication networks.

For example, a signed Bitcoin transaction can be passed to a single node and broadcast to the network to be included in a block by miners. There are various ways to do this, such as sending a transaction via SMS, using a physical wallet with a single-use, tamper-evident private key, or receiving blocks via satellite. These options allow bitcoin to be used even in the event of an internet disruption.

Bitcoin is a neutral tool for exchanging value and has no beliefs, opinions, or values. Its significance depends on how it's used. It's not correct to claim that Bitcoin's properties have led to an increase in criminal activity.

Crime doesn't stem from access to tools, but rather from individual circumstances. If bitcoin is useful, it can be used by everyone, including criminals. If it's not useful, it can't be used by anyone, including criminals.

As Parker Lewis put it: "There are no fundamental properties of the tools used to facilitate crimes that make them criminal in themselves. Despite criminal use, no one calls for banning roads, the internet, the postal service, and so on."

Calling bitcoin a pyramid scheme shows a lack of understanding of both bitcoin and the definition of a pyramid scheme. Also known as a Ponzi scheme, it involves promises of returns higher than otherwise seen in the market, but as a permissionless network, Bitcoin has no central authority that can make such promises.

Moreover, bitcoin is not an investment vehicle; it's a form of money. Unlike opaque investment opportunities that may be promoted to unsuspecting individuals, Bitcoin's code is open source, and its supply can be independently verified at any time.

Paying with bitcoin isn't the same as using a credit card to make a purchase. When you use a credit card, your payment passes through several parties before it reaches the merchant's bank account after days or even weeks of processing.

By contrast, when you pay with bitcoin on the base layer, you send actual money directly to the recipient with no intermediaries. This means there's no risk of censorship, and the transaction is considered final once it has been confirmed by six blocks on the blockchain.

The correct comparison would be between Bitcoin's base layer and the bank as currency issuer and clearing mechanism.

Since the Lightning Network emerged, the criticism that "Bitcoin is too slow" has largely fallen silent.

Bitcoin's decentralized nature allows its maximum supply to be validated independently by every node on the network, ensuring that it can't be corrupted. This is achieved through a consensus process where every transaction confirmed on the Bitcoin network is validated independently.

Although anyone can fork the code and change the rules, it's unlikely that such a version of the code would be adopted by the broader network. The decentralized consensus process and the incorruptible supply of bitcoin are crucial to its appeal as a form of money.

The maximum supply of bitcoin is fixed at 21 million, and any attempt to increase this limit would require consensus from a significant portion of the Bitcoin network, which is highly unlikely to happen.

It's technically possible for governments to ban bitcoin, but enforcing such a ban would be difficult because of Bitcoin's decentralized nature.

Bitcoin relies on private keys, which are simply random numbers, to control access to transactions recorded on the blockchain. These private keys can be generated and stored anywhere, making them virtually impossible to trace.

Moreover, the infrastructure required to access the Bitcoin network is relatively simple and widely available, making it easy for people to verify transactions trustlessly.

As Saifedean Ammous said: "Banning bitcoin is not much different from trying to ban mathematics. It will only prove its usefulness and drive more people toward it."

It's often said that a small number of wallets hold the majority of all bitcoin. While this is technically true, it's important to note that these wallets are typically owned by exchanges that have millions of customers.

Many people choose to leave their bitcoin on an exchange, but it's generally considered best practice to store bitcoin in a personal wallet for security and privacy reasons.

It's also worth noting that a single Bitcoin address can hold bitcoin belonging to multiple users, and a single user can control multiple wallets. To maintain privacy, it's recommended to generate a new address for each receiving transaction rather than reusing the same address.

Some people believe that mining pools — groups of miners working together to increase their chances of finding a block — could potentially disrupt the Bitcoin network or censor transactions.

But this concern is the result of a lack of understanding of miners' incentives and their role in the network. In reality, miners have a strong incentive to follow the network's rules and uphold Bitcoin's integrity, since their own profits depend on it.

As Jimmy Song said: "A majority of miners cannot: take bitcoin you already hold, change the rules of bitcoin, or harm you without harming themselves."

A common misconception about bitcoin is that it's too expensive to buy.

This belief, however, is based on unit bias, since it's more accurate to compare the total market value of bitcoin with other assets rather than just the unit price of a single bitcoin.

It's also worth noting that a single bitcoin can be divided into 100 million smaller units called satoshis. As the saying goes: "You can buy a fraction of a bitcoin!"

Another misconception about bitcoin is that transaction costs are unmanageably high.

But confirmed transactions on Bitcoin's base layer provide a degree of final settlement with no equivalent in the traditional financial system. While it's true that transaction fees can occasionally rise due to the limited capacity of each block, the Bitcoin network remains an efficient and reliable settlement layer for high-value transactions.

In fact, Saifedean Ammous said: "Between October 2010 and July 2021, the daily average transaction fees came to around 0.02% of the value of the transactions."

In addition, smaller transactions, including micropayments, are often migrated to secondary layers such as Lightning, Liquid, or federated sidechains, where fees are significantly lower than those offered by retail banks.

There's a common belief that bitcoin's fixed supply encourages hoarding — the act of holding on to bitcoin rather than spending it in the economy.

This logic has some flaws, however. First, saving — the act of setting income aside for future use — is often confused with hoarding. In fact, saving is a necessary precursor to meaningful investment and can be seen as responsible financial practice.

Second, holding bitcoin — or any form of money — doesn't necessarily mean it isn't being used. It's a common way to hedge against future uncertainty, as Pierre Rochard pointed out: "All bitcoin is always held by someone; payments only change who holds them." In other words, holding bitcoin is itself a use of Bitcoin.