Bitcoin is a complex topic that’s drawn plenty of praise as well as criticism. Here we identify a few of the more common misconceptions and factual errors seen in the discussion.
Myth: Bitcoin is anonymous
Bitcoin use is said to be “pseudonymous”, not fully anonymous. Every bitcoin transaction is recorded in a global, public ledger called the “blockchain”. Each transaction entry contains details about how much bitcoin was transferred, from one bitcoin address to another.
Bitcoin addresses themselves, which look like strings of random letters and numbers, do not in-and-of-themselves identify the real-world parties to a transaction. But by looking at chains of transactions in the public blockchain, it’s possible to identify transaction patterns, and with enough effort, often the real-world owner of a specific address.
Myth: If more people mine bitcoin, more bitcoins are released
The bitcoin mining process is set at the protocol level such that no matter how many computers are mining bitcoin, the same quantity of bitcoin is created every day. Specifically, every 10 minutes on average, 25 new bitcoins are released, no matter if there’s only one computer in the world mining bitcoin, or a million computers mining bitcoin.
Myth: The Bitcoin network needs the enormous mining power in order to quickly process transactions.
While it’s intuitive to think that more computational power on the Bitcoin network yields faster transactions, the two are unrelated. The massive computational power spent processing transactions on the Bitcoin network serves to secure the network, not to speed up transaction processing or verification.
In fact, a single standard desktop computer is capable of processing Bitcoin’s ~100,000 transactions per day. The extreme computational power seen on the Bitcoin network serves to protect the network from malicious actors who may wish to disrupt transactions or Bitcoin’s record of transactions and ownership (the “blockchain”). The Bitcoin network protocol is defined such that any malicious actor would have to out-compute at least half of the network in order disrupt the blockchain. Therefore, the more miners there are contributing processing power, the harder it is to disrupt the network.
Myth: Bitcoins are only useful for buying drugs.
Since Bitcoin is often a faster, cheaper, and more secure way to transact online, it is useful for just about any type of purchase. As is often the case with sudden technological advances, criminals figured out how to use it quickly, and consequently some of the widely publicized early use-cases of Bitcoin centered around the now-defunct Silk Road marketplace. But Bitcoin has quickly grown out of its infancy and more and more businesses and law-abiding individuals are benefiting from the utility of Bitcoin every day.
Myth: Bitcoin is insecure
Bitcoin services have suffered various hacks and thefts over the years, especially the first generation of Bitcoin companies and services. While some of these hacks have resulted in large customer losses, they have all been hacks on the 3rd party custodian companies, and not on the core Bitcoin protocol itself. In response to these incidents, new services have emerged which employ fundamentally new and better security protocols that are unique to Bitcoin, and which are often more flexible and secure than traditional funds management procedures.
Myth: Bitcoin was hacked in the MtGox incident
As with the myth that Bitcoin is insecure, the idea that Bitcoin itself was hacked in the MtGox incident is false. MtGox is by far the largest Bitcoin custodian to have lost customer bitcoin funds, but the core Bitcoin protocol was not breached.
Myth: Bitcoin miners are working on extremely complicated mathematical problems
In reality, the work Bitcoin miners are doing is relatively simple by mathematical-complexity standards. The work is simply being done extremely fast. Bitcoin mining amounts to quadrillions of relatively simple calculations per second, all of which contribute to the overall security of the system.
Myth: Bitcoin is illegal in China
While the regulatory situation in China can be considered vague, bitcoin use is not illegal in China. The confusion stems from regulations issued in December 2013 which forbid banks and some other payment processors from dealing directly with bitcoin or Bitcoin-related companies.
Myth: Bitcoin violates legal-tender laws
In most countries, legal-tender laws specify what currency citizens and businesses are obligated to accept for the settlement of debts. This typically does not preclude people from voluntarily settling via other means if they so choose to do so. Bitcoin is one such alternative means.
Myth: Bitcoin’s supply cap of 21 million coins would not be enough coins if Bitcoin gains more market share
A single bitcoin is divisible to 8 decimal places, which means there are actually 2,100,000,000,000,000 (2.1 quadrillion) total units in the system. At the protocol level, Bitcoin transactions define amounts in terms of this smallest possible unit (nicknamed a “satoshi”). For example, if Alice sends 5.25 bitcoins to Bob, the bitcoin network sees a transaction that says “Send 525,000,000 from <Bob’s address> to <Alice’s address>”. It’s effectively just a convention that we call 100,000,000 of these base-units a “bitcoin”.