Bitcoin myths – 10 things bitcoin naysayers say

Eliza

by Eliza

Updated Aug 10

We wish to address some of the myths and misconceptions surrounding bitcoin, as perceived by a wider audience particularly of non-bitcoin users.

For a general introduction to bitcoins, please read our getting started guide, What is a bitcoin. For more detailed information, please read our Detailed Guide to Understanding bitcoin.

Bitcoin is illegal

Before jumping to the conclusion that bitcoin is illegal, consider how similar it is to other digital currencies including game currency such as Linden Dollars (Second Life) and World of Warcraft (WoW) gold.

Laws are going to be different from country to country, or state to state (so by all means check your local jurisdiction), but there are currently no known legal issues with the trading of bitcoins.

Bitcoins are used for money laundering

The AUSTRAC Typologies and Case Studies report, 2012, released by the Australian Government lists bitcoin as a potential vulnerability alongside other digital currencies such as Linden dollars, as well as voucher systems and offshore money remitters.Is bitcoin money laundering?

The document clearly states “The MLA 2011 report identified the banking system, money transfer and alternative remittance services, the gaming sector and high-value goods as major money laundering channels.”

As you can see, money laundering is not reserved for bitcoins. Major money laundering channels include banking and the sale of high-value goods. Just because money could potentially be laundered via a channel does not make that channel automatically evil or illegal.

In March, 2013 the US government moved to apply anti money laundering rules to online currencies. The move included a statement from FinCen that cases would be viewed according to the “factors and circumstances” of individual businesses, not as a sweeping judgement against all users of online currencies.

In order to investigate money laundering, the government looks for indicators on a case by case basis. It is up to individuals to ensure they are operating within the law. The bitcoin community should not be held accountable for unlawful use of bitcoins.

Bitcoins are used for tax evasion

Cash is used for tax evasion. Think of all the people and places asking for “cash only”. Many trade people work for cash, because cash is anonymous and untraceable. Sound familiar?

Tax laws exist, and it is the responsibility of individual bitcoin users and bitcoin business to follow the applicable laws and declare income, or handle the consequences. Bitcoin businesses are certainly not exempt from paying taxes.

At Spend Bitcoins, we fully conform to tax regulations around the world. This is our business and we have no intention of jeopardising ourselves.

Bitcoin is a Ponzi scheme

To understand that bitcoin is not a Ponzi scheme, we must first understand what a Ponzi scheme is.

What is a Ponzi scheme?

A Ponzi scheme is a corrupt investment structure which pays out returns on investments entirely from the funds invested in the scheme. There is no actual profit generated by the organisation running the Ponzi scheme.

Is bitcoin a ponzi scheme?The Ponzi scheme is destined to fail because there is more money being paid out in returns than is actually invested, and no means of generating extra profit. A Ponzi scheme is recognisable if the organisation promises unusually large or consistent profits, usually over short periods.

Early investors in the scheme who withdraw their funds early will benefit from the money paid in by later investors, but by the time the later investors want to withdraw their funds there will be no money left in the scheme and they will lose.

Bitcoin is not a Ponzi scheme

Bitcoin is not a Ponzi scheme. The value of bitcoin is not guaranteed. Bitcoin users are not promised huge windfalls.

Bitcoin value is established through the market. As long as there are people trading bitcoins, they will retain some value.

Early adopters of bitcoin may or may not have succeeded in profiting from the rise in bitcoin value, but the important thing is that any profits earned by early adopters was not at the expense of later bitcoin users.

You can purchase bitcoins at any time. You will profit if the value of bitcoin increases. The value may decrease, it is a risk that all bitcoin users share. The greatest risk, of course, was taken by early adopters who had no way of knowing if bitcoins would be successful at all.

A single bitcoin can be divided into 100,000,000 smaller units called Satoshis, you therefore don’t need to buy a whole bitcoin to start using bitcoins. In this way, it doesn’t really matter what a bitcoin is really worth now or what they were worth last year.

Bitcoin is a get rich quick scheme

No one is promising anyone will get rich quickly through bitcoins.

There are many bitcoin users and business working tirelessly at great personal risk to build the bitcoin economy. No one is expecting something for nothing.

Early adopters of bitcoin have an unfair advantage

The early adopters of bitcoin were risk takers who put their money on the line to test out a new digital currency. It is thanks to their risk and financial investment that bitcoins still exist.

Many people take financial risks every day, and most of those financial risks don’t pay off. For those people who have the rare success, can’t we just say “congratulations”?

In one popular piece of bitcoin history, an early adopter celebrated being able to buy pizza with bitcoins. The cost of a $25 pizza at the time was 10,000 bitcoins. Early adopters didn’t necessarily keep their bitcoins and may well be kicking themselves today for spending all those bitcoins on a pizza.This guy paid 10,000 bitcoins for two pizzas!

Regardless of all that, bitcoins are still relatively new, so if you get started with bitcoins today you too can be an early adopter. Nothing is stopping you.

Bitcoin miners have an unfair advantage

Miners offer expensive processing power in order to legitimise transactions, they are rewarded in bitcoins for their service and sacrifice. The algorithms that need to be solved become increasingly complex and more and more processing power is required, prompting miners to spend more and more money on better computing rigs. Miners now form groups and take a share of the bitcoin reward. They are certainly not profiting unfairly.

Anyone can be a bitcoin miner if they are willing to front the costs of setting up an expensive computing rig.

Bitcoin is a pyramid scheme

A pyramid scheme promises payment for recruiting new people into the scheme, without making profit from the sale of anything. It is unsustainable because ultimately there will be no new people to recruit and no new investments. Also, new recruits usually drop out quickly, wasting their initial investment and getting nothing in return.

Is bitcoin a pyramid scheme?There is no pyramid structure to bitcoins. There is no user at the top. Users are not rewarded for recruiting new users. No one makes money by inviting people to join.

If a new bitcoin user decides to stop using bitcoins, they can sell their bitcoins and cash out. They might even make a profit, but at the very least they’re unlikely to lose everything.

Bitcoin is a bad investment

See Investing in bitcoin for more information.

Bitcoin is worthless because it isn’t backed by anything

Bitcoin has value as long as people use it. Bitcoin has value simply because people want it. Bitcoin is not alone in being defined in value like this, in fact pretty much everything we buy or desire is valued in this same way.

What are bitcoins backed by?

German coin of 1920, made of aluminum

Prior to the late 1880s, aluminium (the most abundant metal in the Earth’s crust) was so difficult to extract from ore that it was more valuable than gold. Once they discovered how to extract it, it was basically worthless. Gold, on the other hand, is rarer, desirable and therefore carries high value. Imagine what would happen if we discovered the moon’s core was entirely made of gold. Most things have a fairly arbitrary value.

Bitcoins are released at a set rate through the process of mining. There will be a total of 21,000,000 bitcoins released. The total number of bitcoins is finite, and known, and there is a limited number available for trade at present. This allows bitcoins to have value.

If you would like to buy even of a fraction of a bitcoin, the easiest way is explained here.

 
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