Latest news about Bitcoin and all cryptocurrencies. Your daily crypto news habit.
When I started my first company in the cloud computing space in 2011, much of it was similar to what I see in cryptocurrency today. Itâs a seemingly complicated subject that has terms and acronyms that the average person canât wrap his or her head around, which leads to confusion and misrepresentation. As a result, manipulation and deception thrive on both ends of the spectrum, creating both fear and admiration for this enigmatic topic; at the end of the day, misinformation wins.
Attempt to explain cloud computing or blockchain, and many will realize itâs about as complicated as explaining how the processors in their iPhone generate the display on the screenâââbut therein lies the trick to understanding. With the iPhone, you donât need to learn the intricacies of semiconductors, ALUs, or binary representations of strings to understand that it provides you value (if youâre actually curious, this explainer video is a good place to start, and then read But How Do It Know). You know that you can take or make calls, send or receive photos, and connect to the Internet to use social media, among other things.
The inside of iPhonesâââmost of the space is used to just hold battery power!
The same is said about anything, from aspirin to sleep to Bitcoin; in fact, scientists canât fully explain why we sleep. But that doesnât stop you from trying to get eight hours, right? The value you receive from services, objects, or even your own body, can be understood and utilized without needing to fully understanding the underlying mechanisms that enable it. Donât get me wrongâââIâm not saying that you shouldnât take the plunge and educate yourself on the technical intricacies if you want toâââblockchain is a great technology that solves problems that decentralized systems have faced in the past such as trustless consensus.
At the end of the day, though, the value that Bitcoin brings to the table is its potential to replace the current digital currency system with a more efficient and democratized methodology built for a global economy. Yes, replacing. Digital currency already exists.
90% of existing money is only digitalâââi.e., a digital currency. Only $6 trillion, or approximately 10%, of the worldâs current money supply is in the form of cash (Sapiens, 2011). So believe it or not, youâre already using digital currency when you swipe your credit or debit card. Bitcoin has the potential to replace the underlying engine that powers the same transactions you make today by being more efficient and entirely trustedâââironically, by being trustless. A mom-and-pop coffee shop wouldnât have to pay VISA $0.25 for a $10 transaction. Wire transfers in and out of the country could happen in minutes to hours, rather than days. Creating new accounts can happen in seconds with privacy, rather than days filling out paperwork and waiting for approval.
With all of this value at hand, though, misinformation continues to permeate conversations about cryptocurrency. Most of these conversations are regurgitation of rumors and claims fortified by incomplete understanding. Three common arguments against Bitcoin I witness are:
- Bitcoin is used for illegal activities,
- Bitcoin is not backed by anything, and
- Bitcoin is unregulated.
First and foremost, let me say this: all three are true. But there is a deeper examination to be had for each to better understand exactly what impact it has on Bitcoin, or what impact Bitcoin has on it.
1. Bitcoin Is Used in Illegal Activities
One of the primary arguments is that Bitcoin is used for illegal activities. There has been many studies done on this behalf, and one of the most recently published research papers is Sex, Drugs, and Bitcoin: How Much Illegal Activity is Financed Through Cryptocurrency. In this paper (published in January 2018). researchers argue that âaround $72 billion of illegal activity per year involves bitcoin, which is close to the scale of the US and European markets for illegal drugs.â Considering that the entire market cap of Bitcoin at the end of 2016 was only $14 billion, that speaks volumes (pun intended) to the amount of illegal activity conducted through the cryptocurrency.
There is no doubt that Bitcoinâs early use cases were for obfuscation purposes that suited the needs of the Internet black market. In 2013, the FBI seized the Silk Road (the largest known black market at the time), and as a result, also seized almost 150,000Â Bitcoin.
âIn recent years (since 2015), the proportion of bitcoin activity associated with illegal trade has declined⊠[due to] an increase in mainstream and speculative interest in bitcoin.â- Sex, Drugs, and Bitcoin: How Much Illegal Activity is Financed Through Cryptocurrency?
But there has come an inflection point in the adoption and use of Bitcoin; researchers in the paper point out that âin recent years (since 2015), the proportion of bitcoin activity associated with illegal trade has declined.â While one of the supposed reasons for this transformation argued by the research is âthe emergence of alternative cryptocurrencies that are more opaque and better at concealing a userâs activity,â the other one is âan increase in mainstream and speculative interest in bitcoin.â
In other words, as more people are starting to get interested in Bitcoin, the amount of transactions used for illegal activities is decliningâââthe new wave of Bitcoin enthusiasts are embracing the idea of using it for different purposes, whether it is to conduct legal transactions, hold for investments, or other uses.
âThe very nature of cash, as opposed to bank deposits, is that it is pretty much untraceable. In practice, the currency in our wallets is only the tip of the monetary iceberg: the vast majority lies beneath the surface of the economy, stashed away in mattresses and warehouses, held overseas or circulating illegally on the black market.â- We Donât Need Cash, Letâs Abolish It Outright
On the other hand, on March 24, 2015, economist Ed Conway published an editorial We Donât Need Cash, Letâs Abolish It Outright. Donât get confusedâââthe argument for getting rid of cash is applicable only to cold, hard, physical cash. But only 10% of all money exists as cash today; the other 90% already exists as digital currency. In other words, out of the $60 trillion in global circulation, only about $6 trillion of it is in cash (Sapiens, 2011). So if everyone in the world decided to cash out immediately⊠Well, I recommend you grab some popcorn!
Over 50% of cash in most countries is used to hide transactionsâŠ
Anyway, much like Bitcoin, â the very nature of cash⊠is that it is pretty much untraceable. In practice, the currency in our wallets is only the tip of the monetary iceberg: the vast majority lies beneath the surface of the economy, stashed away in mattresses and warehouses, held overseas or circulating illegally on the black marketâ (Conway, 2015).
In the Harvard-published paper entitled Costs and Benefits to Phasing Out Paper Currency, Economist Kenneth Rogoff points out that over 50% of cash in most countries âis used precisely to hide transactions.â The anonymity of paper money, a property inherent in Standard Monetary Theory (Kiyotaki and Wright 1989), is catalyzing the use of physical currency in illicit activities as well. In 2013, (Rogoff, 2014) nearly 78% of cash in circulation in the United States were $100 bills; only 4% of cash was $10 or below. When was the last time law-abiding citizens like you or me used a $100 bill in a transaction?
Although illegal Bitcoin transactions are diminishing with increased adoption and development in the cryptocurrency economy, it seems that cash transactions are becoming increasingly used for the same reasons. Itâs become such an issue that âregulators are beginning to collect intelligence on whether households and banks are stockpiling cash, stacking it away on pallets in warehouses behind lock and keyâ (Conway, 2015).
While research suggests that almost 48% of Bitcoin transactions are used in facilitating illegal activity, the same can be said about cash, where economist Kenneth Rogoff points out that over 50% of cash in most countries is used to hide transactions. With the increased adoption of Bitcoin, the percentage of illegal transactions is falling due to newfound enthusiasm for its use in other activities such as investment; by contrast, cash is becoming more of an issue.
Of course, the amount of illegal transactions occurring through Bitcoin is alarming. The idea that the percentage is diminishing with increased adoption is a good sign. But the reality is that illegal activities and transactions will continue to be fueled regardless of Bitcoinâs existence. The culprit isnât Bitcoin or cash alone, but both, because they are hard to trace.
Whether or not the privacy of such transactions benefit the economy is an argument of principle and will ultimately boil down to a decision of whether or not the anonymity should be preserved. With criminal use inversely correlated with the recent adoption of Bitcoin, and the emergence of alternative cryptocurrencies specializing in anonymity/privacy, Bitcoin is not required to be an anonymous currency. After all, the paper Sex, Drugs, and Bitcoin: How Much Illegal Activity is Financed Through Cryptocurrency points out that âthe emergence of alternative cryptocurrencies that are more opaque and better at concealing a userâs activityâ than Bitcoin is.
2. Bitcoin Is Not Backed By Anything
Another common critique of Bitcoin is that it isnât backed by anything of value. But the current cash system isnât back by anything, either. In the United States, President Roosevelt eliminated the Gold Standard (having the U.S. dollar backed by gold) in 1933. Even prior to 1933, the existence of the Gold Standard or any other standard for backing currency was little more than a psychological comfort; after all, gold has little practical value.
Do you love Gold because of its conductivity?
Sure, one can argue that gold is conductive and people could use it for circuit boards and stuff, but onecould also argue that paper is flammable and people could use it to heat places up, so therefore cash itself has value and has no need to be backed by gold. Face it, most people wonât mold gold into conductive material for circuit boards just as they wonât burn money to warm up a cold winter. The majority of goldâs value is in its supply and demand. By transitive property, the majority of the value in currencies that were pegged to gold was also in its supply and demand. Therefore, by eliminating the Gold Standard, the United States effectively eliminated the middle man in currency valueâââtransforming it into a pure supply-and-demand game, where the United States can control the supply side.
Bitcoin is also a supply and demand game. Because it isnât regulated by a single entity, though, there is no control on the supply side, unlike with government-backed currencies. Furthermore, the entire market cap and volume is a grain of sand compared to the beach that is existing currency supplyâââthe current supply of Bitcoin equals to about $100 billion in value, while the total available money in the world (both digital and fiat) is around $60 trillion.
âThe sum total of money in the world is about $60 trillion.â-Sapiens by Yuval Harari
The small total valuation of Bitcoin, combined with the lack of centralized control on the supply side, are two contributing factors (of course, among a plethora of others) to its pricing volatility.
3. Bitcoin Lacks Regulation
Another argument against Bitcoin is that it is unregulated. Whether the lack thereof is an advantage or disadvantage is subjective and quite a matter of heated debate. Because the cryptocurrency world is nascent, though, it provides the world with an opportunity to apply only necessary regulations and policies, resulting in a much more streamlined system.
And it must be done carefully; regulation blankets policies over an entire population, which can leave many citizens victims of circumstance. On March 2018, Donald Trump enacted a trade tariff on China that severely increased the cost of imported steel and aluminum. In response, on April 2018, China enacted its own tariffs on the United States on imports of things like pork, fruit, and steel. Now, the world sits and watches as fears of a potential trade war are slowly inching towards reality. Many fear Chinaâs potential tariffs on U.S. soybeans, which account for 1/3 of soybean sales in the United States.
Steel, pork, fruits and soybeansâââso what? Who cares if the U.S. canât sell soybeans to China anymore? Well, we, as humans, should care. Humanity isnât a list of social security numbers lined up for their turns at daily eight-hour tasks. Individuals that farm the soybeans, pigs, and fruits, will be directly impacted as potential sales drop as a direct result of the tariffsâ and the most impacted individuals are not privy to the decisions made by the figureheads of the nations. These are the same figureheads that currently regulate the existing money system.
Just because something is regulated or has rules doesnât mean itâs good. Itâs similar to receiving a new phone, only to find that itâs already full of bloatwareâââapps that you have no intentions of using but canât delete. They only take up space, and at worst, slow your phone down.
With 90% of the worldâs current money supply existing as digital currency, the world is slowly phasing out paper money. Bitcoin is a digital currency, and the major difference is that it uses a decentralized methodology that is fairer than the existing system because it does not depend on trustâââjust logic. Of course, more regulation is needed and will emerge as it becomes more widely adopted. With the right regulation in place, though, it can become a much more efficient and fair currency model than our existing systems.
Reach Out to Me:
- Twitter: https://twitter.com/kennymuli
- Call Me: https://clarity.fm/kennymuli
3 Urban Legends of Bitcoin Debunked was originally published in Hacker Noon on Medium, where people are continuing the conversation by highlighting and responding to this story.
Disclaimer
The views and opinions expressed in this article are solely those of the authors and do not reflect the views of Bitcoin Insider. Every investment and trading move involves risk - this is especially true for cryptocurrencies given their volatility. We strongly advise our readers to conduct their own research when making a decision.