Myths
Lets clear up common Bitcoin misconceptions.
Bitcoins don't solve any problems that fiat and/or gold doesn't solve
Unlike gold, bitcoins are:
- easy to transfer and store
- easy to verify authenticity
Unlike fiat currencies, bitcoins are:
- predictable, and decreasing, as far as the rate of monetary inflation
- not controlled by a central authority
Unlike electronic fiat currency systems, bitcoins are:
- potentially anonymous
- assets cannot be frozen
Bitcoin is backed by CPU cycles
It is not correct to say that Bitcoin is backed by CPU power. A currency being "backed" by something means that it is pegged to something else via a central party at a certain exchange rate. You cannot exchange bitcoins for the computing power that was used to create them. Bitcoin is in this sense not backed by anything. It is a commodity in its own right. Similar to gold - is gold backed by anything? No! It's just gold. Same thing with bitcoin.
The Bitcoin currency is created via processing power, and the integrity of the block chain is protected by the existence of a large network of computing nodes from certain possible attacks exists. And that is all.
Bitcoins value is based on how much electricity it takes to mine them
This statement is the application of the labor theory of value, generally accepted as false, to bitcoin. Just because something takes X resources to create does not mean that the resulting product will be worth X. It can be worth more, or less, depending on the utility thereof to its users.
Some trivial counterexamples:
- It may take you an hour to build a sandcastle on the beach, but you will not be able to sell it in exchange for your usual hourly wage.
- A 100 dollar bill does not cost anywhere near $100 in terms of labor and materials, but is worth $100.
Bitcoins have no intrinsic value (unlike some other things)
It is true that bitcoins have no intrinsic value, in other words, value in any realm outside of being used as a medium of exchange.
However, while some tangible commodities do have intrinsic value, that value is generally much less than its trading price. Consider that the price of gold, if it were not used as an inflation-proof store of value, but rather only for its industrial uses, would certainly not be worth $1400 USD or so that it is worth today, since the industrial requirements for gold are far smaller than the available supply thereof.
While historically intrinsic value, as well as other attributes like divisibility, fungibility, scarcity, durability, helped establish certain commodities as mediums of exchange, it is certainly not a prerequisite. While bitcoins lack 'intrinsic value', they make up for it in spades by possessing the other qualities necessary to make it a good medium of exchange.
Value is ultimately determined by what people are willing to trade for - by supply and demand.
Bitcoins are illegal because it's not legal tender
Short answer: chickens aren't legal tender either, but bartering with chickens is not illegal.
There are a number of currencies in existence that are not official government-backed currencies. A currency is, after all, nothing more than a convenient unit of account. While national laws may vary from country to country, and you should certainly check the laws of your jurisdiction, in general trading in any commodity, including digital commodities like bitcoin, game currencies like WoW gold or Linden dollars, is not illegal.
Bitcoin is a form of domestic terrorism because it only harms the economic stability of the USA and its currency
http://en.wikipedia.org/wiki/Definitions_of_terrorism#United_States according to this, you need to do violent activities to be considered a terrorist for legal purposes. This has no bearing on politicians and idiotic US attorney's public remarks.
Bitcoin will only enable tax evaders which will lead to the eventual downfall of civilization
It's up to you to follow the applicable state laws in your home country, or face the consequences.
Bitcoins can be printed/minted by anyone and are therefore worthless
It requires substantial computing power to generate new coins, and eventually all the coins will be generated.
Bitcoins are worthless because it's based on unproven cryptography
SHA256 and ECDSA which are used in Bitcoin are well-known industry standard algorithms.
Early adopters are unfairly rewarded
Early adopters are rewarded for taking the higher risk with their time and money.
In more pragmatic terms, "fairness" is an arbitrary concept that is improbable to be agreed upon by a large population. Establishing "fairness" is no goal of Bitcoin, as this would be impossible.
21 million coins isn't enough, doesn't scale
There are really 2,099,999,997,690,000 (just over 2 quadrillion) maximum possible atomic units in the bitcoin design.
The value of "1 bitcoin" or "1 BTC" represents 100,000,000 of these. In other words, each bitcoin is divisible by up to 10^8.
As the value of the unit of 1 BTC grows too large to be useful for day to day transactions, people can start dealing in smaller units, such as milli-bitcoins (mBTC) or micro-bitcoins (μBTC).
Bitcoins are stored in wallet files, just copy the wallet file to get more coins!
Bitcoin transactions are stored in the block chain. The wallet has your secret keys necessary to spend your money, that is, to enter new transactions into the block chain. Copying the wallet doesn't copy any coins.
Lost coins can't be replaced and this is bad
Bitcoins are divisible to 0.00000001 at this moment, so this is not a problem. If you lose your coins, all other coins will go up in value a little. Consider it a donation to all other Bitcoin Users.
It's a giant ponzi scheme
In a Ponzi Scheme, the founders guarantee investors that they’ll profit. Bitcoin does not make such a guarantee. There is no central entity, just individuals building an economy.
Not to be confused with the Bitcoin Randomizer which really is a Ponzi scheme.
Deflationary spiral
As deflationary forces may apply, economic factors such as hoarding are offset by human factors that may lessen the chances that a Deflationary spiral will occur.
Bitcoin community are anarchist/conspiracy theorist/gold standard weenies
CONFIRMED
Anyone with enough computing power can take over the network
CONFIRMED
Bitcoin violates some sort of government regulations
Which?
Fractional reserve banking is not possible
True - kinda. If you accept deposits in Bitcoins, you can lend out some fraction of these Bitcoins, but since you can't actually create more, it's impossible to lend out more bitcoins than you have received in deposits.
For a more traditional fractional lending scheme, where you are actually creating money, you could:
1. Start BitBank and create your own currency, BitBucks.
2. Accept deposits of Bitcoins from customers. Tell customers that they may exchange a BitBuck for a BitCoin at any time.
3. Make loans of BitBucks. Loan more BitBucks than you have Bitcoins.
4. ????
5. PROFIT!
Point of sale with bitcoins isn't possible because of the 10 minute wait for confirmation
Tansactions can take tens of minutes to become confirmed, and this won't change for the forseeable future. Even after the computing power of the network is orders of magnitude larger than today, the difficulty of generating a block will self-adjust to maintain a target of 6 blocks per hour. Two potential solutions to allow POS transactions are:
1) For small transactions, simply assume the customer isn't ripping you off. Give the customer his latte immediately after the transaction posts to the network. The transaction should propagate through the network almost instantly, allowing the seller to see the transaction within seconds (albeit with zero confirmations.) The cost of a double-spend attack should make small-scale fraud not worthwhile.
2) Create a network of transaction hubs. These entities would communicate using a common API. They would float short-term loans between each other to facilitate instant transactions.
Imagine that Alice uses Carol's Clearinghouse as her hub, and Bob uses Dave's Anonymous Exchange. Both Alice and Bob have accounts with their respective hubs, and have already deposited some Bitcoins in their accounts. When Alice wants to buy a latte from Bob at a point of sale, Alice tells Carol "I want to send Bob x Bitcoins. He uses Dave's Anonymous Exchange." After checking that Alice's account does contain at least x Bitcoins, Carol sends a message to Dave, saying "Credit Bob's account with x bitcoins immediately; I'll send you the real Bitcoins in the next block." Bob instantly sees his balance increase, and gives Alice her latte.
As always, trust is required - Alice has to trust Carol, and the hubs have to trust each other. Due to competition, various hubs could develop with vastly different fee structures, membership requirements, trustability, etc.
After 21 million coins are mined, no one will run network nodes
When operating costs can't be covered by mining production, which will happen some time before the total amount of BTC is reached, miners are expected to earn profit from transaction fees.
Actually, all 21 million coins will never be fully mined. Before the 21 million mark is reached, an infinite amount of fractions from the final BTC will be generated for nodes.
Actually, a finite amount of fractions will occur before zero BTC is mined per block.
Bitcoin has no built-in chargeback mechanism, and this is bad
Why some people think this is bad: Chargebacks are useful for limiting fraud. The person handling your money has a responsibility to prevent fraud. If you buy something on Ebay and the seller never ships it, PayPal takes a hit and gives you back the money. This strengthens the Ebay economy, because people recognize that their risk is limited and are more willing to purchase items from risky sellers.
Why it's actually a good thing: Bitcoin is designed such that your money is yours and yours alone. Allowing chargebacks implies that it is possible for another entity to take your money from you. You can have either total ownership rights of your money, or fraud protection, but not both.
The statement "The person handling your money has a responsibility to prevent fraud" is still true; the power has been shifted into your own hands. Fraud will always exist. It's up to you to only send bitcoins to trusted entities. It is possible to trust an online identity without ever knowing their physical identity; see the OTC Web of Trust.
Bitcoin is just like all the other virtual currencies, nothing new
All other virtual currencies can be printed at the subjective whims of their creators. Bitcoin is limited.
Quantum computers would break bitcoin's security
Yes but Bitcoin's security can be upgraded.
See the implications of quantum computers on public key cryptography here http://en.wikipedia.org/wiki/Quantum_computer#Potential