Autosurf Central

Tuesday, June 14, 2011

10 Bitcoin Myths

Myth: Bitcoin is a currency

It is just an online wallet and transaction system for a commodity.
In the current shape, Bitcoin trading is not different from trading baseball cards. Scaled to millions of cards and tens of thousands of traders that is.

In the same spirit, Mtgox.com used to be a place to trade fantasy cards online:

MagicalTux, owner of mtgox.com:
initially it was "Magic The Gathering Online eXchange", it was adapted to bitcoin a while ago, and now changing the name would make the exchange lose part of its charm


Myth: Bitcoin is secure

Only as long as enough people use it.
Those who control the majority of the network control the Bitcoin network itself. It's one of the biggest strengths and flaws of the system.
As long as hash rates remain high, it is unlikely for a single individual to reach 50% of total hashing power. But once there is not enough interest into Bitcoin anymore, expect hell on earth.
The same goes for the arrival of quantum computing. When that happens, nothing is secure regardless of hashing power.



Myth: The Bitcoin network created a "perfect market"

The flea market around your block is a better market.

To make it simple, let's look at the Wikipedia definition of a perfect market:

  • Perfect market information
  • No participant with market power to set prices
  • No barriers to entry or exit
  • Equal access to production technology

Perfect market information?
Let's just look at the exchanges which play a main part in today's Bitcoin universe anyway.
While many consider Bitcoin Charts to be a perfect source of information, it is basically the only information we have. When it is down for maintenance we know nothing.
But BTC traders have a different problem: They are mostly amateurs who never had the money or training to go on the stock market. Given the vast amount of different exchanges and slow transactions, they can easily be fooled into wrong buys and sales by lack of information.
There is also no intra-exchange protocol which could even out the differences between markets.

No participant with market power to set prices?
Black Friday taught us a different lesson.
The difference between "early adopters" and June 2011 starters is so big that one early miner could crash the BTC price by dumping.
This is why mtgox.com enforces a daily limit on sales (which can be bypassed easily by the way). They know about the flaw.

No barriers to entry or exit?
To trade Bitcoins, you need a computer with fast internet access.
That pretty much rules out all third world countries.
But you also need a way to fill your Bitcoin wallet to get started. I would call international wires which take 5 business days to process a pretty huge barrier.
With the current trading set-up, it will take at least a week (or a $100 graphics card) before you can start using BTC.

Equal access to production technology?
This one is fulfilled at least.
It does not mean "production" of BTC by mining, but production of goods which can be traded using BTC. Mining should only be seen as a way of initial currency distribution, not as a "free production of money" which some miners believe it to be.



Myth: Bitcoin can be THE new virtual currency

e-gold, Stormpay, Bidpay, Bidpass. Many tried, they all failed.
The Bitcoin Wiki seems to imply that it cannot fail because it is P2P. It is just an advantage, it comes with many disadvantages such as scalability problems and generally means nothing.
You may remember Kazaa being peer-to-peer as well.



Myth: Bitcoin cannot be shut down by governments because it is P2P

Shutting down "single point of failures" (exchanges, pools, miners) would be enough to stop it.
Right now, 90% of BTC exchange volume is being processed via mtgox.com. If a government shuts it down, all money from the mtgox.com wallet is lost forever, both "virtual" BTC and "real" US dollars and Euro.
Once investors' trust into open exchanges is broken, it will be very hard to establish Bitcoin



Myth: Bitcoin exchange rates will always rise because Bitcoin is deflationary by design

Bitcoin suffers from too much perceived value to know for sure. Nobody knows how many coins will be needed to satisfy the market in the future.

As long as the "Silk road" drug website on TOR remains to be the #1 use of Bitcoins, 21 million coins are more than enough.
There is no need for hundreds of millions of USD floating around in darknets. Buyers will realize they don't need it, sell coins and the price will go down.

If, on the other hand, Bitcoins become a huge success, they will run into scalability problems.
With hundreds of thousands of people downloading blockchains from a P2P network, it will come to an halt. In the end, Bitcoin should be seen as an experiment rather than a "Paypal alternative".
Even the developers acknowledged that.



Myth: Bitcoin is in the media so prices will go up

"Pump and dump" strategies will nullify the gains from temporary high buyer interest.
There are lots of miners and traders who got into Bitcoin when it was easy. These "early adopters" hold the vast majority of BTC right now. They must have dollar signs in their eyes and cash out on "Bitcoin victims" who believe the media hype to BUY BUY BUY.



Myth: Major online businesses will accept Bitcoins and boost their value

They cannot afford to do so.

At least not as long as BTC-USD and BTC-EUR remain highly volatile currency pairs which they currently are.
If Amazon started selling books for 1 BTC each, BTC value drops by more than ??% before they can cash out Dollars (like on "Bitcoin Black Friday" for example), they lost money.



Myth: Buying a mining rig now can be profitable

You are better off trading BTC than mining.
If the price falls, you will not have made enough money to justify hardware costs. Also your rig will not be worth much on Ebay because everybody and their grandma will dump their AMD HD 5850 cards.
There is also another benefit of trading in case of loss management:
If you are daytrading and see a downward spiral coming, you can almost instantly react.
As a miner, you have no choice but to hoard your BTC while the price goes down and hope for better days. Once prices rebound to an acceptable level, you can finally unload all your BTC into the market.
Thousands of other miners will do the same. Guess what?

Finally, if the price goes up, there seems to be the misconception that miners profit more from rising BTC prices than traders.
How could they? Miners always have the extra costs of hardware and electricity which is way more than mtgox charges for incoming wire transfers and trades.



Myth: Difficulty will fall when it becomes unprofitable to mine coins

There is too much "free electricity" around for difficulty to fall.
Short-term, mid-term and long-term.

Short-term: Look at University-backed student homes, hotels, work, parents' basement - there are so many places where mining will never become unprofitable because you don't have to pay a dime for electricity.

Mid-term: Expect tens of thousands of gamers and "computer enthusiasts" to throw their GPU hashing power at mining just for the sake of it. They have a long tradition of doing useless work despite of their electricity bills (SETI@Home, Folding@Home, etc.).
Also botnets will mine into the wallets of their vicious programmers for free, using their victims' electricity.

Long-term: Electricity will basically become free as we approach 100% power generation from inexhaustible natural resources such as wind and solar power. This might sound fictional to some of you but there are already a couple of miners using all solar power for their mining rigs.


+ Bonus Myth: Bitcoin is the greatest Bubble on the Internet

Far from it. With the USD inflation worries millions of dollars of "dumb money" are being pumped into useless Internet start-ups.

When those "real-life" tech bubbles burst, they leave unemployment, a housing crisis and crashing financial markets behind.

If Bitcoin bursts, nobody loses anything except the money people voluntarily gave to support a new idea of freedom and democracy.
Nobody of us should be ashamed to be part of the Bitcoin universe.


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