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 are worthless because they aren't backed by anything

Gold isn't backed by anything either. See myth https://en.bitcoin.it/wiki/Myths#Bitcoin_is_backed_by_CPU_cycles

Bitcoins value is based on how much electricity and computing power it takes to mine them

This statement is an attempt to apply to bitcoin the labor theory of value, which is generally accepted as false. 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.

In fact the causality is the reverse of that (this applies to the labor theory of value in general). The cost to mine bitcoins is based on how much they are worth. If bitcoins go up in value, more people will mine (because mining is profitable), thus [difficulty] will go up, thus the cost of mining will go up. The inverse happens if bitcoins go down in value. These effects balance out to cause mining to always cost the amount of bitcoins it produces.

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 for example that 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 what it is 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.

Also bitcoin isn't domestic. It's a worldwide community. See this map of bitcoin nodes http://www.bitcoin.org/smf/index.php?topic=2346.0

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.

The vast majority of the 21 million Bitcoins still have not been distributed. By starting to mine or acquire Bitcoins today, you too can become an early adopter.

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 BTC" represents 100,000,000 of these. In other words, each 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!

No, your wallet contains your secret keys, giving you right to spend your bitcoins. Think of it like having bank details stored in a file. If you give your bank details (or bitcoin wallet) to someone else, that doesn't double the amount of money in your account. You can spend your money or they can spend your money, but not both.

Lost coins can't be replaced and this is bad

Bitcoins are divisible to 0.00000001, 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.

A related question is: Why don't we have a mechanism to replace lost coins? The answer is that it is impossible to distinguish between a 'lost' coin and one that is simply sitting unused in someone's safe.

It's a giant ponzi scheme

In a Ponzi Scheme, the founders persuade 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 is a game that really is self-described as a Ponzi scheme.

Finite coins plus lost coins means 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 can't work because there is no way to control inflation

Inflation is simply a rise of prices over time, which is generally the result of the devaluing of a currency. This is a function of supply and demand. Given the fact that the supply of Bitcoins is fixed at a certain amount, unlike fiat money, the only way for inflation to get out of control is for demand to disappear.

Given the fact that Bitcoin is a distributed system of currency, if demand were to decrease to almost nothing, the currency would be doomed anyway.

The key point here is that Bitcoin as a currency can't be inflated by any single person or entity, like a government, as there's no way to increase supply past a certain amount.

Indeed, the most likely scenario, as Bitcoin becomes more popular and demand increases, is for the currency to increase in value, or deflate, until demand stabilizes.

Bitcoin community are anarchist/conspiracy theorist/gold standard weenies

CONFIRMED

Anyone with enough computing power can take over the network

CONFIRMED, see Weaknesses.

That said, as the network grows, it becomes harder and harder for a single entity to do so. Already the bitcoin network's computing power is on par with some of the world's fastest supercomputers.

What an attacker can do once the network is taken over is quite limited. Under no circumstances could an attacker take anybody else's money. An attacker's capabilities are limited to taking back their own money that they very recently spent, and preventing other people's transactions from receiving confirmations. Such an attack would be very costly in resources, and for such meager benefits there is little rational economic incentive to do such a thing.

Bitcoin violates some sort of government regulations

Name them if you can.

See also the legal tender question.

Fractional reserve banking is not possible

Yes, it is.

1. Start Bitcoin Bank.

2. Accept deposits from customers

3. Make loans, using part of the funds deposited by customers, keeping a fraction thereof in reserve.

4. ????

5. PROFIT!

See Fractional reserve banking.

Peanut Gallery: But how does the bank guarantee that account holders can withdraw 100% of their bitcoins?

Same way non-bitcoin banks do it - they don't. They rely on the government's FDIC program to insure depositors up to a certain amount (currently $250K USD per depositor). The FDIC is widely known to have reserves sufficient to cover only a very small fraction of the total deposits it insures.

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.

(But the point of bitcoin is you don't need trust to execute the transaction, in the above you replaced the bitcoins with a trust-based centralized authority.)

After 21 million coins are mined, no one will generate new blocks

When operating costs can't be covered by the block creation bounty, which will happen some time before the total amount of BTC is reached, miners are expected to earn profit from transaction fees.

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 funds from the seller's account 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 are centrally controlled. This means that:

• they can be printed at the subjective whims of the controllers
• they can be destroyed by attacking the central point of control
• arbitrary rules can be imposed upon their users by the controllers

Being decentralized, bitcoin solves all of these problems.

Quantum computers would break bitcoin's security

Yes, but quantum computers don't yet exist and probably won't for a while. Bitcoin's security can be upgraded if this were considered an imminent threat.

See the implications of quantum computers on public key cryptography here http://en.wikipedia.org/wiki/Quantum_computer#Potential

The risk of quantum computers is also there for financial institutions, like banks, because they heavily rely on cryptography when doing transactions.

Bitcoin mining is a waste of energy and harmful for ecology

No more so than the the wastefulness of mining gold out of the ground, melting it down and shaping it into bars, and then putting it back underground again. Not to mention the building of big fancy buildings, the waste of energy printing and minting all the various fiat currencies, the transportation thereof in armored cars by no less than two security guards for each who could probably be doing something more productive, etc.

As far as mediums of exchange go, bitcoin is actually quite economical of resources, compared to others.

Shopkeepers can't seriously set prices in bitcoins because of the volatile exchange rate

The assumption is that bitcoins must be sold immediately to cover operating expenses. This might not be the case for various reasons, make sure you need to do that.

It's true that due to the small size of the bitcoin market, there's relatively high volatility. In the future volatility is expected to decrease, as the size and depth of the market grows.

In the meantime, many merchants simply regularly pull the latest market rates from the exchanges and automatically update the prices on their websites. Also you might be able to buy a put option in order to sell at a fixed rate for a given amount of time. This would protect you from drops in price and simplify your operations for that time period.

Like Flooz and e-gold, bitcoins are great for criminals and so will be shut down

• Hopefully bitcoin will grow to the point where no single organization can disrupt the network, or would be better served by helping it.
• Terrorists fly aircrafts into buildings, but the governments have not yet abolished consumer air travel. Obviously the public good outweighs the possible bad in their opinion.
• What some consider criminal others do not.

Bitcoins will be shut down by the government just like Liberty Dollars were

Liberty Dollars consisted of a commercial venture to establish alternative US currency, including physical banknotes and coins, backed by precious metals. They were officially shut down for counterfeiting and intent to fraud. Bitcoins aren't commercial, physical, or backed by something. Different animals entirely.