Let's clear up some common Bitcoin misconceptions.
- 1 Bitcoin is just like all other digital currencies; nothing new
- 2 Bitcoins don't solve any problems that fiat currency and/or gold doesn't solve
- 3 Bitcoin is backed by processing power
- 4 Bitcoins are worthless because they aren't backed by anything
- 5 Bitcoins value is based on how much electricity and computing power it takes to mine them
- 6 Bitcoins have no intrinsic value (unlike some other things)
- 7 Bitcoins are illegal because they're not legal tender
- 8 Bitcoin is a form of domestic terrorism because it only harms the economic stability of the USA and its currency
- 9 Bitcoin will only enable tax evaders which will lead to the eventual downfall of civilization
- 10 Bitcoins can be printed/minted by anyone and are therefore worthless
- 11 Bitcoins are worthless because they're based on unproven cryptography
- 12 Early adopters are unfairly rewarded
- 13 21 million coins isn't enough; doesn't scale
- 14 Bitcoins are stored in wallet files, just copy the wallet file to get more coins!
- 15 Lost coins can't be replaced and this is bad
- 16 It's a giant ponzi scheme
- 17 Finite coins plus lost coins means deflationary spiral
- 18 Bitcoin can't work because there is no way to control inflation
- 19 The Bitcoin community consists of anarchist/conspiracy theorist/gold standard 'weenies'
- 20 Anyone with enough computing power can take over the network
- 21 Bitcoin violates governmental regulations
- 22 Fractional reserve banking is not possible
- 23 Point of sale with bitcoins isn't possible because of the 10 minute wait for confirmation
- 24 After 21 million coins are mined, no one will generate new blocks
- 25 Bitcoin has no built-in chargeback mechanism, and this isn't good
- 26 Quantum computers would break Bitcoin's security
- 27 Bitcoin mining is a waste of energy and harmful for ecology
- 28 Shopkeepers can't seriously set prices in bitcoins because of the volatile exchange rate
- 29 Like Flooz and e-gold, bitcoins serve as opportunities for criminals and will be shut down
- 30 Bitcoins will be shut down by the government just like Liberty Dollars were
- 31 Bitcoin is not decentralized because the developers can dictate the software's behaviour
Bitcoin is just like all other digital currencies; nothing new
Nearly all other digital 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.
Bitcoins don't solve any problems that fiat currency and/or gold doesn't solve
Unlike gold, bitcoins are:
- easy to transfer
- easy to secure
- easy to verify
- easy to granulate
Unlike fiat currencies, bitcoins are:
- predictable and limited in supply
- not controlled by a central authority(Ex. Fed)
Unlike electronic fiat currency systems, bitcoins are:
- potentially anonymous
- freeze proof
- faster to transfer
- cheaper to transfer
Bitcoin is backed by processing power
It is not correct to say that Bitcoin is backed by processing 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 currency in its own right. Similar to gold - is gold backed by anything? No! It's just gold. The same applies 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. And that is all.
Bitcoins are worthless because they aren't backed by anything
Gold isn't backed by anything either. Bitcoins have properties inherent to its design that are subjectively valued by individuals. This valuation is demonstrated when individuals freely exchange for or with bitcoins. Please refer to the Subjective Theory of Value. See also myth Bitcoin is backed by processing power.
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 the numismatic sense, 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' in this sense, they make up for it in spades by possessing the other qualities necessary to make it a good medium of exchange, equal to or better than commodity money.
Value is ultimately determined by what people are willing to trade for - by supply and demand.
Bitcoins are illegal because they're 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 currency 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://forum.bitcoin.org/?topic=2346.0
Bitcoin will only enable tax evaders which will lead to the eventual downfall of civilization
Cash transactions hold the same level of anonymity but are still taxed successfully. It is 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
Bitcoins are not printed/minted. Instead, Blocks are computed by miners and for their efforts they are awarded a specific amount of bitcoins + transaction fees. See Blocks for more information on how this process works.
Bitcoins are worthless because they're based on unproven cryptography
SHA256 and ECDSA which are used in Bitcoin are well-known industry standard algorithms. If you believe that these algorithms are untrustworthy then you should not trust Bitcoin, credit card transactions or any type of electronic bank transfer.
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 have 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
One Bitcoin is divisible down to eight decimal places. 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 the rights 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.
A ponzi scheme is a zero sum game. Early adopters can only profit at the expense of late adopters. Bitcoin has possible win-win outcomes. Early adopters profit from the rise in value. Late adopters profit from the usefulness of a stable and widely accepted p2p currency.
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. Temporary inflation is possible with a rapid adoption of Fractional Reserve Banking but will stabilize once a substantial number of the 21 million "hard" bitcoins are stored as reserves by banks.
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.
The Bitcoin community consists of anarchist/conspiracy theorist/gold standard 'weenies'
The members of the community vary in their ideological stances.
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 quite ahead of the world's fastest supercomputers, together.
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.
Furthermore, this attack scenario would only be feasible for as long as it was actively underway. As soon as the attack stopped, the network would resume normal operation.
Bitcoin violates governmental regulations
Name them if you can.
See also the legal tender question.
Fractional reserve banking is not possible
Fractional reserve banking arises when issuers of money substitutes create more substitutes than the reserves they have. The process is described in more detail in Wikipedia article on Fractional reserve banking:
As most bank deposits are treated as money in their own right, fractional reserve banking increases the money supply, and banks are said to create money.
Practicing fractional reserve banking without issuing money substitutes is not logically possible.
With fiat money, the base money are the reserves commercial banks have with the central banks, and the substitutes are the account balances of the customers of commercial banks. With gold, the base money is the gold bullion/coins stored at the bank, and the substitutes are bank notes, cheques, account balances or other instruments the commercial banks provide to the depositors.
The reason why substitutes are accepted as if they were the base money is that the base money has in some circumstances high transaction costs (for example, gold might be too heavy to carry around, or the buyer and seller are not at the same location and want to perform the exchange electronically), or are not legally permitted (normal people are not allowed to obtain central bank reserves). This creates a demand for forms of money which have lower transaction costs. With gold/fiat, this requires the creation of money substitutes.
The situation with Bitcoin is different, because other forms can be created without substitutes, for example Casascius physical bitcoins or BitBills. Bitcoin in its "classical" form is the equivalent of a bank deposit. An issuer of a Bitcoin substitute, before they even think about practicing FRB, would need to find a way of creating demand for these substitutes. This is problematic, because such substitutes are incompatible with the Bitcoin network, and need to compete against not only Bitcoin, but against other currencies, payment methods and services. Currently, the only examples of such substitutes are account balances on exchanges, and most e-wallets (Strongcoin being an exception, using client-side encryption, the balances of their deposits are just another way of storing a Bitcoin wallet, so they are not substitutes). Even in these examples, Bitcoin substitutes do not circulate outside of centralised systems, so performing FRB with them has a limited impact on the money supply and is very risky.
If in the future, P2P exchanges and distributed wallets are available (both have been suggested already at bitcointalk.org forums), this would decrease the demand for Bitcoin substitutes even further.
Historically, in all the situations where fractional reserve Bitcoin substitutes were produced, this resulted either in a voluntary elimination of the excess substitutes (Mt. Gox hack from June 2011), bankruptcy (the demise of mybitcoin) or a new investor bailout (the demise of bitomat.pl and subsequent takeover by Mt. Gox). Here we have empirical evidence that FRB with Bitcoin is possible.
In face of the lack of demand for Bitcoin-substitutes, it is doubful whether FRB with Bitcoin can be conducted in a profitable manner and have a similar impact and scale than with fiat/gold.
Point of sale with bitcoins isn't possible because of the 10 minute wait for confirmation
Transactions can take tens of minutes to become confirmed, and this won't change for the foreseeable 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. Three 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. Utilize a 'listening' period prior to rendering the service or good. This has yet to be formally implemented in the standard Bitcoin client, but would allow a vendor to receive the transaction and then monitor the Bitcoin network for a certain period of time (maybe 10 seconds) for possible double spends. Vendors might utilize specialized payment processors with multiple well-connected nodes for this purpose. As explained by Satoshi, the network nodes only accept the first version of a transaction they receive to incorporate into the block they're trying to generate. When you broadcast a transaction, if someone else broadcasts a double-spend at the same time, it is a race to propagate them to the most nodes first. If one has a slight head start, it will geometrically spread through the network and get many times more nodes. Additionally, a payment "processing" company could blast out the transaction to thousands of nodes instantly and listen for double spend attempts. The probability of the attacker thwarting such a system would be so low that a payment processor could guarantee payments and eat the cost if a double-spend attempt actually succeeds. If a double-spend attempt is detected, the vendor is notified: no latte, and a call to the police should be put in immediately.
3. 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.
Optionally, option 3 allows all parties to circumvent use of the block-chain and its associated fees altogether. If Alice and Bob have accounts with Carol and Dave, then Carol and Dave are effectively functioning as banks. Carol and Dave can credit and debit millions of accounts millions of times daily and only "re-balance" money owed at the end of each business day through a single transaction in the Bitcoin block-chain.
Option 3 requires trust. Alice has to trust Carol's Clearinghouse, and the hubs have to trust each other. Due to competition, various hubs could develop with vastly different fee structures, membership requirements, trustability, etc. The advantage of option 3 is that it is instant. The disadvantage of option 3 is that trust is required. If trust is not established, option 2 can be used.
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 will earn some profit from transaction fees. However unlike the block reward, there is no coupling between transaction fees and the need for security, so there is less of a guarantee that the amount of mining being performed will be sufficient to maintain the network's security.
Bitcoin has no built-in chargeback mechanism, and this isn't good
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. That said, nothing prevents the creation of services overlayed on top of Bitcoin that provide fraud protection services.
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.
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 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
Your assumption is that bitcoins must be sold immediately to cover operating expenses. If the shopkeeper's back-end expenses were transacted in bitcoins as well, then the exchange rate would be irrelevant. Larger adoption of bitcoins would make prices sticky. 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 serve as opportunities for criminals and 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 aircraft into buildings, but the governments have not yet abolished consumer air travel. Obviously the public good outweighs the possible bad in their opinion.
- Criminal law differs between jurisdictions.
Bitcoins will be shut down by the government just like Liberty Dollars were
Liberty Dollars started as a commercial venture to establish alternative US currency, including physical banknotes and coins, backed by precious metals. This, in and of itself, is not illegal. They were later shut down for counterfeiting and intent to fraud after the coins, which contained less than $1 worth of silver, were put into circulation with the general money supply, supposedly having a value of 1 USD. These actions were encouraged by the makers of Liberty Dollars.
Bitcoins are not necessarily equal in value to dollars or any other currency and no one is saying they are. No member of the public will be tricked into accepting a bitcoin instead of a dollar.
Of course, actually 'shutting down' the decentralized Bitcoin network is rife with its own set of difficult considerations.
Bitcoin is not decentralized because the developers can dictate the software's behaviour
The Bitcoin protocol was originally defined by Bitcoin's inventor, Satoshi Nakamoto, and this protocol has now been widely accepted as the standard by the community of miners and users.
Though the developers of the original Bitcoin client still exert influence over the Bitcoin community, their power to arbitrarily modify the protocol is very limited. Since the release of Bitcoin v0.3, changes to the protocol have been minor and always in agreement with community consensus.
Protocol modifications, such as increasing the block award from 50 to 100 BTC, are not compatible with clients already running in the network. If the developers were to release a new client that the majority of miners perceives as corrupt, or in violation of the project’s aims, that client would simply not catch on, and the few users who do try to use it would find that their transactions get rejected by the network.
There are also other Bitcoin clients made by other groups of developers that adhere to the Bitcoin protocol. As more developers create alternative clients, less power will lie with the developers of the original Bitcoin client.