3 Common Misconceptions about Bitcoin

October 11th, 2021

3 Common Misconceptions about Bitcoin

If there is one common denominator about human beings, it is that they are resistant to change. We are all creature of habit and at times seem to be stuck in that mundane thought pattern. Though this type of mentality may lead many to feel safe and secure in their decisions, it unfortunately often leads to misconceptions about new ideas.

For Bitcoin maximalists, there is essentially no better technological advance in the last century that compares to BTC. It not only provides a secure, lighting-speed digital network in which large amounts of money can be instantaneously transferred across the world from digital wallet to digital wallet, without the need for an intermediary, such as a bank, but also allows the underprivileged across the world access to a digital bank that cannot be confiscated or manipulated like a government’s currency system. Someone in a small village sending $20 has the same security and access to the Bitcoin network as a billionaire in the financial district.

There are many common misconceptions about Bitcoin, and today we will break them down, and hopefully provide clarity and an insight into what many loyal BTC followers have been raving about.

  • Bitcoin is too volatile

This is perhaps the longest standing argument around investing in Bitcoin as a true store of value or feasible investment asset class. The best way to explain this is to break it down to relatable terms. If you see someone on a TV screen, they appear to have flawlessly smooth skin, no wrinkles, no blemishes. Of course, this is due partly to makeup and television effects. However, the person is many feet away from the camera, and you too are many feet away from your TV set. If you were to simply zoom in on that same person by 50% or 75% you would start to notice small imperfections in the persons appearance, skin, etc. just as well all have. From the macro view this person is perfectly kept, most of the time not even a single strand of hair is out of place. From a micro view, or under a microscope, many flaws and imperfections start be become prevalent. The same can be said about an investment. If you are looking for an imperfection close enough, you surely will find one. You can view the one-day chart, one hour chart, or even one minute chart. The more you attempt to “zoom in” on the price action the more “volatility” you will surely experience. If you are looking for anxiety as a day-trader, it can be found in this way.

Large institutional investors have a much different approach to making a sound decision on whether an investment is of value or not. They typically look at the “bigger picture”. The bigger picture of Bitcoin reveals a very promising future for the asset.

Over the past decade, Bitcoin has well outperformed all other asset classes. Of course, there have been bumps and imperfections along the way, but a wise and educated investor would not be deterred by this small fact of the financial system. Bitcoin has risen to a one trillion-dollar market cap, much faster than its blue-chip counterparts. Reaching the same status it took Bitcoin only 12 short years to achieve, Google took 22 years, Amazon took 24 years, Apple took 42 years, and Microsoft took 44 years.

Another highly regarded metric to analyze the performance of an asset class is the CAGR, or compound annual growth rate. For this analysis we will use the 10-year since Bitcoin has only been around and relevant the past decade. Over the past decade Bitcoin has a CAGR of 196%, while the second-place holder comes in at only 63% for Tesla, third is Amazon at 33%. The traditional investments like S&P index comes in around 11% and the Nasdaq composite index comes in at roughly 16%. More conservatively the Long-dated US Treasury comes in at 4.5% and gold (the original store of value) has a CAGR of only 1.9%.

This is a statistically dense overview of the performance of BTC vs other asset classes, but to fully appreciate the macro view and combat this volatility angle, one must heavily consider these facts.

  • Governments will shut down Bitcoin

While this may certainly be true for governments who do not see the value or want to simply control the narrative of the people, not all world governments have the same pessimism over cryptocurrency. Bitcoin evangelist, Michael Saylor said it best in a Tweet from 2021, “Nothing has created more wealth in the past decade than technologies banned in China. #Bitcoin” He is referencing China’s recent totalitarian crackdown on Bitcoin and other cryptos, and how Facebook, Google, and YouTube have also been completely banned from the country, meanwhile are seen as immensely powerful tools for education and research in free societies like the United States. The government who wants to hold the key to decentralized banking and finance globally, is sure to mass adopt this new technology and embrace it with open arms. Regulation and adoption by a democratic government, such as the US, will certainly provide stability and decreases extreme volatility in its financial products, to encourage smart money to pour into this already scarce digital asset.

To this point, in early October 2021, SEC Chair Gary Gensler, a once blockchain tech professor at MIT, formally announced the U.S. SEC “will not bring a China-style crypto ban” on Bitcoin and other stable coins. If the United States holds the majority of mining power for the Bitcoin network, it then holds the power to the global banking system of the 21st century and more to come. This was furthered by Federal Reserve Chair Jerome Powell stating the US central bank has “no intention to ban cryptocurrencies.” Bitcoin has become inevitable.

  • Bitcoin wastes energy

Perhaps the largest and most held misconception/concern, to this day, about Bitcoin is the energy consumption needed to uphold the BTC network through its proof-of-work mining algorithm. For those who need a brief summary of what exactly this means, stay tuned.

Bitcoin is a decentralized peer-to-peer digital payment network. Think of it as a bank in cyberspace with only 21 million units issued. This provides a scarcity, which then creates an inherent value, and many believe will ultimately lead to its explosion in overall price per unit (each Bitcoin). In order to securely process these transactions, without the need for an intermediary or central banking system, each transaction is verified by a computer running an algorithm. For those interested, it utilizes the SHA-256 (secure hashing algorithm) protocol. Computers across the world, called nodes, keep a running ledger of all transactions performed on this blockchain. If one single digit is changed, the entire blockchain after it is altered, therefore cannot be validated. This is what keeps the Bitcoin blockchain protocol the most secure technology of today. These nodes are using hashing power, in the form of computing power (graphics cards, central processing units, or application specific integrated circuits called ASIC) to “crunch” the numbers to verify the transactions coming through the blockchain are legitimate and can be validated, therefore allowing the funds to be sent from one wallet or exchange to the destination. This proof-of-work consensus mechanism is physically anchored to the real world. Without physical computer power (hashing power) the network cannot validate transactions and cannot run the Bitcoin protocol.

Those who run these computers to uphold the Bitcoin network are paid in Bitcoin to do so. Most people join a pool so all the hashing power can be added together, and the rewards split amongst the miners.

Furthermore, as technology increases, the Bitcoin network pays out more BTC to the strongest group of miners solving the algorithm, in turn making it more desirable and profitable to engage in upholding the Bitcoin network. This also makes the network more and more secure as time goes on because as technology increases the computing power becomes stronger and the incentive to participate becomes more lucrative to those running these nodes/mining rigs.

All this said, many environmentally green advocates argue that Bitcoin uses “too much” energy to uphold this network. Looking at the facts, this cannot be further from the truth.

According to a CCAF study, Cambridge Center for Alternative Finance, Bitcoin uses roughly 0.55% of global electricity production. Less than one percent of energy produced would be equally to a small country like Malaysia or Sweden. When put in these terms it may seem excessive.

However, consider the world generates 160,000 terawatt hours of energy annually. Of that, 50,000 terawatt hours of energy is wasted every year. Bitcoin uses roughly 120 terawatt hours to uphold the network. To give perspective, Bitcoin uses only 25 basis points of all the wasted energy in the world annually. Providing hope of a decentralized, unmanipulated currency system across the globe is well worth using 1/4 of one percent of the wasted energy in the world.

In other words, if Bitcoin did not exist, this wasted energy would be completely in vain and of no real use and would be wasted anyhow. Bitcoin provides hope and prosperity for 8 billion citizens globally and solves a financial problem all of us have grown accustomed to, which is relying solely on central banks to regulate and distribute our global monetary policy and system.

Forecasts, estimates and other information included in this blog should not be considered as investment advice or as a recommendation that you purchase any cryptocurrency or any particular investment product. Past performance is not indicative of future results. The author of this blog and Bitcoin of America in no way guarantee any specific outcome, gain, or profit.

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