Debunking Popular Bitcoin Myths

Prominent and respected gold investors, including the likes of Doug Casey and Peter Schiff, generally seem to have some resistance to bitcoin due possibly to flawed notions about the new digital currency now currently making waves.

Let’s review and debunk some of these misconceptions.

Myth #1: Bitcoin have no worth

In Austrian economics, a common theoretical foundation of gold advocates, monetary worth evolves from a value regression theorem originally proposed by the great economist Ludwig von Mises. Many gold proponents of the Austrian school have looked upon the regression theorem as reason to deny bitcoin any worth.

The basic theorem states that purchasing power must arise from somewhere. If we trace a currency’s ability to purchase items down the historical line, we must eventually find a value origination. This leads to the conclusion that all monies must have some value as a commodity prior to becoming a medium of exchange to justify a market value of worth thereafter.

The basic accusation then leveled at bitcoin by those attempting to interpret Mises’ theory is that they contain no utility outside of being a medium of exchange and, therefore, no worth.

Debunking the Myth

Its an odd thing to have to prove the purchasing power of bitcoin when items retail for them, and all major currencies have reasonably liquid markets into them. The more noble effort is describing the phenomenon at this point.

Nonetheless, the regression theorem is powerful and this theory was my first inclination as well when I initially learned about bitcoin. As much as a couple years later and a better reading of Mises and understanding of bitcoin have led me to realize the theorem is simply being misapplied as bitcoin are misunderstood.

Bitcoin are merely a free floating transaction environment that has evolved into a money. Bitcoin at the start were acquired not for cash, but were mined by those providing the computational needs and basic support of the network infrastructure. Once a trusted network was constructed, it was only then market makers bartered in and out at prevailing market rates of bitcoin services to cash or goods and services. And as the story of all monies go, since this bartered trade is inherently network friendly, the increased usage increases the attraction and the early self-propagating compounding effect of monetary development and domination gets underway.

Myth #2: Bitcoin are like fiat money

Bitcoin are digital in a similar nature as Federal Reserve liabilities and, therefore, harbor no supply restraints like gold.

Debunking the Myth

Bitcoin function under a highly encrypted algorithm which control the output of their creation at about 1 bitcoin every 10 minutes, and this rate is halving every four years until all coins are expectedly created in the year 2140. All spending of bitcoin updates a central ledger which the network verifies down the chain of all bitcoin ever spent. The bigger the trusted network grows the harder penetrating its chain will be. Bitcoin are about as difficult to recreate now as performing gold alchemy or stumbling on newly accessible mineral deposits for all intensive purposes.

The Federal Reserve, on the other hand, has no such network verifying against double spending. This gives ways to the Fed and bank’s practice of double spending money all the time. None of these features of central bank issued fiat money are present in the bitcoin network.

Myth #3: Bitcoin are a bubble on the brink of bursting

Bitcoin prices have been driven to astronomical heights in a short period. So the thinking goes, ‘I do not know many retailers dealing in bitcoin and therefore the market must be filled with hot air. Perhaps bitcoin are even a ponzi scheme, with early holders and buyers reselling promises for more money and so on’.

Debunking the Myth

The speed at which Bitcoin prices have risen is directly related to their market exposure. More interest has come into bitcoin from mainstream media and the demand to purchase them is heavily queued even still. Given the restrained supply, whose growth rate is halving this year, this spells price increases no matter how you look at it. The growth in bitcoin prices alone has improved the allure of the industry, with even wider coverage spawning by the day and more fundamental industry services and merchants popping up.

In today’s world bitcoin are particularly sought after for more than their general efficiency and anonymity. Central banks around the world are on a race to the bottom with respect to their sovereign currency value. Moreover growing fears of capital controls following the crises in Cyprus and Latin America have increased the need of a mobile anonymous transaction medium such as bitcoin.

Retail acceptance is just getting underway with merchant tools on the rise and if major inroads are made the current price will seem an extreme bargain. There is certainly nothing inherently unstable or ponzi about bitcoin.

What Bitcoin Mean for Investors

Bitcoin are definitely stealing some shine from precious metals like gold as they serve similar purposes. Bitcoin show superiority in some ways, however, given that they are cheaper to access, store and transact with. Bitcoin are still a very small market in comparison to gold or silver, however, and while this will mean increased volatility perhaps it also means increased opportunity.

I suspect we are in the early days of this market and there is a lot of catch up before bitcoin can be considered as overvalued relative to precious metals.

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