Last updated on October 29th, 2020
Bitcoin mania is alive and well to the point that “How to buy bitcoin” was one of Google’s most popular searches in 2017.
One of the driving forces behind bitcoin’s popularity is the fact that it is a global phenomenon. It is not confined to a few countries but instead, the entire world has an interest in bitcoin even if their governments are not fans of cryptocurrencies.
Despite the digital currency’s rapid acceleration into mainstream society, there is still a great deal of misinformation surrounding bitcoin.
Let’s review a few of the biggest bitcoin misconceptions.
Misconception #1 – Bitcoin is in a bubble
The most famous bubble in recorded history was the Dutch tulip bulb mania, which saw Amsterdam residents trading single tulip bulbs for five times the value of an average house. The bitcoin skeptics claim the digital currency will suffer the same fate as the tulip bulb owners.
Most likely, this forecast will be wrong.
There’s no denying the fact that bitcoin has experienced some incredible volatility during the past several years. It’s uncommon for the digital currency to move 30% + in the span of only a few days. However, volatility does not equal a bubble.
In reality, bitcoin is acting no different than any other asset which is used as a store of value. This would include such things as:
- Fine art
- Rare coins
If the supply is limited and the demand continues to grow, the basic laws of economics tell us the price must increase.
The “bottom line” is that the number of bitcoin users is growing exponentially. Coinbase, one of the most popular digital currency exchanges, is currently adding over one million users per month. This helps explains the incredible rise in the price of bitcoin over the course of the past several months.
It has nothing to do with bitcoin being in a bubble.
People are interested in Bitcoin and as more are exposed to it, the growth should continue.
As long as financial pundits and digital currency skeptics continue to claim that bitcoin is in a giant bubble, the more likely bitcoin will forge ahead.
Financial bubbles are like a thief in the night. They creep in very slowly when we least expect it.
This certainly doesn’t describe the current state of affairs with bitcoin.
Misconception #2 – Financial regulation will destroy bitcoin
One of the fears within the bitcoin community is the possible increased government regulation of digital currencies. Of course, the ultimate fear is a complete shutdown of all digital currencies by governmental agencies.
Most likely, these fears will prove to be unfounded.
Any attempt to control bitcoin by government action will be rather ineffective although several countries have banned trading and using Bitcoin for purchases.
In terms of complexity, bitcoin is near the top of the list. Even bitcoin experts have a difficult time explaining blockchain technology to the average person on the street. History has shown us that governments (along with their regulatory bodies) lack the ability to understand complex technological topics.
As an example many countries during the past few years have attempted to ban Tor, which is a software used for anonymous communication. The cumulative results of banning Tor by regulators have been mediocre. It seems unlikely that attempts to eliminate digital currencies will prove to be any more effective.
Governmental authorities will continue to monitor the use of bitcoin along with the entire digital currency universe. In fact, a proper dose of financial regulation would probably prove to be beneficial in the long run for digital currencies. It would add a layer of transparency and also serve to legitimatize the asset class.
For the past several decades, stock exchanges, commodity exchanges and Forex OTC markets have proven that they can peacefully co-exist side-by-side with governmental agencies and bureaucratic oversight.
Within the next few years, it is possible the digital currency universe will discover that they, too, can successfully operate with a modicum of financial regulation.
Those members of the digital currency community who fear a complete elimination of this asset class, can put their fears to rest.
An eradication of bitcoin and other digital currencies by the government is impossible at this point. Bitcoin has been in existence for nine years. There are way too many “big players” in the bitcoin space for the government to knock out digital currencies.
Bitcoin is not going anywhere.
Misconception #3 – Banks will win the block-chain war
Thanks to technological advances during the past decade, several industries have encountered an enormous amount of disruption from outside forces. One industry that is in the early phases of being disrupted is the banking industry. This area is currently undergoing radical changes in the way consumers interact with their banks and lending institutions.
Blockchain technology is another hurdle that banks must overcome if they want to maintain their market share within the financial services industry.
Unfortunately, lending institutions have a history of being notoriously slow at adopting new changes. Therefore, it’s highly unlikely that the domestic banking industry will be able to successfully implement any type of blockchain technology.
By its very nature, the blockchain is all about disintermediation. Its job is to cut out the middle man. Financial intermediaries (like banks) stand to lose a tremendous amount of market share if they are unable to integrate this new technology into their current platform.
There is no denying the fact that the large money center banks in the United States have a huge “leg up” on the competition.
Because they already have an extensive customer base to work with. If the banks can successfully introduce their clientele to the world of digital currencies and blockchain technology, they will maintain their choke-hold over the financial services industry.
Most likely, the banks will not succeed in this endeavor.
Who will be the final victors in the war on blockchain? It could take several years before this question can be answered with any degree of accuracy. However, it’s reasonable to assume that it won’t be the banks.
Misconception #4 – Bitcoin is used mainly for drug trafficking and terrorism
Silk Road was an online black market, best known as a platform for selling illegal drugs. The website was launched in February 2011. The FBI shut down the website in October 2013, and arrested the Silk Road founder, Ross Ulbricht.
Unfortunately, for the bitcoin community, Ulbricht was a big proponent of digital currencies. In fact, bitcoin was accepted as a method of payment on the Silk Road website.
Today, when Silk Road is mentioned in a news story or blog post, invariably there is a bitcoin reference in the story. Most likely, bitcoin will be forever linked to Ulbricht and Silk Road.
For many different reasons, there are a number of people who want digital currencies to fail.
These “bitcoin haters” love to regurgitate the Silk Road story and constantly remind the general public that bitcoin is primarily used as a method of payment for drug trafficking, terrorism and other forms of illegal activity. Of course, they have no concrete data to verify these claims.
Is bitcoin used as a method of payment which involves illegal activity?
The answer is, “Yes.”
However, all valuable items are used in illegal activity.
This list includes:
- fiat currency
- precious metals
- gift cards
- prepaid credit cards
- ECB cards
People involved in illegal dealings will accept practically any form of payment. Therefore, it’s disingenuous to single out bitcoin as the primary method of payment involving the exchange of illegal goods and services.
At the end of the day, cash is still the preferred payment method among criminals. It always has been and probably always will be.
Misconception #5 – Bitcoin is the new gold
Gold has been used as a store of value and medium of exchange for over 5,000 years. It is the preferred store of value among all G20 central banks. The idea that bitcoin will eventually replace gold in the global economy is highly unlikely.
However, the likelihood of major central banks creating their own digital currency is certainly possible.
Bitcoin was never designed or intended to replace gold. The fact that bitcoin and gold are mentioned in the same conversation, is an excellent indication of how much acceptance bitcoin has garnered within the financial community. (Citation: Was genau ist Bitcoin UP?)
There’s no need for these two assets to compete against each other. They each serve a useful purpose. In the long run, bitcoin and gold will continue to play an important role in the capital marketplace as they provide investors with an excellent store of value.
Bitcoin is in the very early stages of its life cycle and this digital currency has only been in existence for nine years. Most likely, bitcoin will continue to be misconstrued by the general public until consumers gain a better understanding of this new asset class.
Eventually, bitcoin will achieve a broader acceptance from the investment community as it develops a major role within the global investment landscape.