Bitcoin Myths Exposed: A Video Response
This is a video response to address the concerns that bbyersusn tabled at the Modern Coins Forum (MCF). It is important that we properly address these concerns if we wish to see a wider adoption of Bitcoin (BTC) and other cryptocurrencies such as FastCoin (FST). Now while this video response might not be it, it is certainly part of an attempt to properly address the concerns stated below. Now needless to say, this video response can be applied to similar concerns tabled when it comes to other cryptocurrencies.
bbyersusn posted the following at the Modern Coins Forum (MCF) in two separate posts:
“I appreciate the worth of the BitCoin as it is presented here but have a few concerns that I have not yet been able to resolve. First, the BitCoin is not backed by something physical which raises buyer concern with regard to system failure both technologically or with regard to those who would steal from the system. You have made an argument for the intrinsic value of it as “information currency” but I am not sold. Secondly, you say it cannot be counterfeited, I say never say never and hackers are at work all of the time. I am concerned that the BitCoin is not freeze proof given anything that is sold over the internet is subject to government regulation. I would hope that if those with ill intent were using BitCoins to finance illegal practices by storing $10 dollar documents at the rate outlined above, they would have their BitCoins frozen. I see the benefit and feel you laid out the argument for the BitCoin well except for the two points of concern just raised.“
“I personally am concerned about a currency that is reliant upon the solving of an algorithm by computers to earn. The process offers too many areas for corruption and if the whole thing falls what do you have? Nothing. Also, to be a serious currency more will have to offer services or merchandise. Currently the dollar is not backed by precious metal and runs the same risk. If China were to flood our market with all of the currency they have bought the dollar would be worth less and yet they continue to buy a lot of gold…very telling in my opinion.”
“I appreciate the worth of the BitCoin as it is presented here but have a few concerns that I have not yet been able to resolve. First, the BitCoin is not backed by something physical which raises buyer concern with regard to system failure both technologically or with regard to those who would steal from the system. You have made an argument for the intrinsic value of it as “information currency” but I am not sold” – bbyersusn
Allow me to quote out of What’s The Deal With Bitcoins? by Ryan Lancelot and Jack Tatar: “The digital nature of the currency is a pain point that Bitcoin cannot provide any real rebuke to. No, there is no physical representation of the currency. However, it should be noted that its lack of physicality does provide some benefits. One is that Bitcoin’s entirely digital existence saves more trees than its paper counterparts. Another boon is that in can be very easily accounted for with regard to taxes. While it does remain a problem that taxes themselves cannot be paid for in Bitcoins, the proper accounting for transactions utilizing the currency is possible and easily accessible. Lastly, the lack of a physical presence means that Bitcoins cannot be stolen as a credit card could be and renders identity theft nearly impossible. Bitcoin wallets don’t need to have any personal information attached to them and thus, none of that information could be lost in the event of some kind of hacking attempt” (What’s The Deal With Bitcoins?, p.27).
Thus, to sum up some of the benefits of Bitcoin’s entirely digital existence:
- Saves more trees than its paper counterparts.
- Can be very easily accounted for with regard to taxes.
- Renders identity theft nearly impossible.
To continue, let’s quote from the same source mentioned above: “It can be hypothesized that the true reason for the backlash against the practicality of using Bitcoins as a common currency stems from the fact that it is entirely digital. There is no physical representation of Bitcoins that can be held as paper money, as seashells, or as any other form of currency can be. That said, Bitcoins effectively do the exact same thing as dollars in the online payment space. While they cannot be used for paying the kid who mows the lawn, they can enable your ability to purchase goods and services online much the same as the dollar can. There is an obvious hurdle to overcome in relying on a currency that is literally nothing more than code, but the same could be said of the money that is held in a bank. Banks can’t possibly have an inventory of every dollar for every one of their clients’ holdings. As a result, the money that individuals claim to have in their name is only a line of code in a computer system at the bank rather than their computer at home. The only difference between the two in that regard is that you cannot cash out your digital Bitcoins as physical Bitcoins” (What’s The Deal With Bitcoins?, p.24).
Thus, to sum up:
- Bitcoin is literally nothing more than code in terms of its existence, but this doesn’t take away from the fact that Bitcoin “…can enable your ability to purchase goods and services online much the same as the dollar can.”
Ok, let’s continue and quote from the Bitcoin Wiki: “Bitcoins have value because they are useful and because they are scarce. As they are accepted by more merchants, their value will stabilize. See the list of Bitcoin-accepting sites.
When we say that a currency is backed up by gold, we mean that there’s a promise in place that you can exchange the currency for gold. Bitcoins, like dollars and euros, are not backed up by anything except the variety of merchants that accept them.
It’s a common misconception that Bitcoins gain their value from the cost of electricity required to generate them. Cost doesn’t equal value – hiring 1,000 men to shovel a big hole in the ground may be costly, but not valuable. Also, even though scarcity is a critical requirement for a useful currency, it alone doesn’t make anything valuable. For example, your fingerprints are scarce, but that doesn’t mean they have any exchange value.
Alternatively it needs to be added that while the law of supply and demand applies it does not guarantee value of Bitcoins in the future. If confidence in Bitcoins is lost then it will not matter that the supply can no longer be increased, the demand will fall off with all holders trying to get rid of their coins. An example of this can be seen in cases of state currencies, in cases when the state in question dissolves and so no new supply of the currency is available (the central authority managing the supply is gone), however the demand for the currency falls sharply because confidence in its purchasing power disappears. Of-course Bitcoins do not have such central authority managing the supply of the coins, but it does not prevent confidence from eroding due to other situations that are not necessarily predictable” (Where does the value of Bitcoin stem from? What backs up Bitcoin?, Bitcoin Wiki).
In addition, one could make the argument that all value is subjective as Erik Voorhees made in the interview that’s available here: http://youtu.be/XBF7Sev2dZM
Thus, to sum up:
- Bitcoin derives its value from its usefulness and its scarcity.
- There is no central issuing authority of Bitcoin.
- Bitcoin can suffer if confidence is lost.
- Scarcity alone doesn’t make anything valuable.
- All value is subjective.
“Secondly, you say it cannot be counterfeited, I say never say never and hackers are at work all of the time. I am concerned that the BitCoin is not freeze proof given anything that is sold over the internet is subject to government regulation. I would hope that if those with ill intent were using BitCoins to finance illegal practices by storing $10 dollar documents at the rate outlined above, they would have their BitCoins frozen. I see the benefit and feel you laid out the argument for the BitCoin well except for the two points of concern just raised” -bbyersusn.
He seems to raise two different concerns here, namely: Counterfeiting and Government Regulation. Allow me to address each separately…
Counterfeiting: If you’re really good, you can modify the code in order to create more coins, but it will be rejected by the economic majority (see below).
To quote an answer that was left at Bitcoin Stack Exchange: “There is no such thing as a “bitcoin” that can be copied. Rather, there is a list of all the transactions that have taken place on the bitcoin network and the order they have taken place. Every client has a copy of this list. Essentially, the only way to counterfeit bitcoins would be to spend them in more than one place. This is called a double-spend attack. However, because of the design of the bitcoin block chain (the list of all the transactions) and the way that list is secured by mining, this requires a tremendous amount of computer power” (Bitcoin Stack Exchange). More info relating to double spending can be found here.
To quote, Bitcoin Forum member, shawshankinmate37927: “Anyone that modified the code to create additional coins would be creating a fork–a seperate ledger.”
So does Stephen Gornick: “technically it is as easy as changing one line of code. But getting the economic majority to accept the change is the hard part (essentially the impossible part, for the change you are suggesting).” More about the economic majority can be read here.
Birdy gives us an idea of how difficult it is to create additional Bitcoins: “If you want to know how difficult it is, try imagining this: There are 1 million people and your task is convincing over 0.5 million of them to take 90% of their dollars and throw them into a big fire. That’s how difficult it is to make this change (the dollars in this scenario must still be considered as valuable).“
Thus, to sum up:
- Trying to modify the code to create additional Bitcoins is technically possible, however: Firstly, immense computing power will be needed, and secondly, even if successful, the economic majority as mentioned above will have to accept the change.
Government Regulation: Allow me to quote from What’s The Deal With Bitcoins?: “Many of Bitcoin’s most avid supporters cite the lack of a government as a positive. Without monetary policies or any governmental department controlling the currency, Bitcoin is essentially free of human error and political agendas. No great, sweeping political changes will change the way Bitcoin works, nor effect how many are in existence at any given time. Bitcoin’s functionality will remain fundamentally unchanged, whereas the dollar could be subject to any number of restrictions on the currency’s use and circulation” (What’s The Deal With Bitcoins?, p.25).
The government will not be able to freeze Bitcoin, perhaps third party accounts that are attached to the buying, selling and/or trading of Bitcoins, but not the currency itself. The currency itself is freeze proof. E.g. the government can step in to freeze bank and other accounts that are used to buy Bitcoins, but then people will find alternatives ways to buy, sell or trade Bitcoins. However, this will not eliminate and/or disable our ability to use Bitcoin to purchase goods and services online. Except if they manage to somehow permanently switch off the whole Internet, which is highly unlikely, especially considering the political backlash it will create and other difficulties they will face. Thus, to freeze an account is possible, but to attempt to freeze a currency such as Bitcoin (including Bitcoin addresses), or a whole economy for that matter, is something completely different.
In layman’s terms: It would be equal to trying to eliminate the online pirating of videos and other material which is primarily driven by peer-to-peer networking, similar to the networking power utilized to mine and/or reveal Bitcoins and to transact in Bitcoins.
To sum up:
- The idea with Bitcoin is not to establish a currency that is in contravention with any government regulations and/or laws. The idea is to establish a currency that is based on a free monetary system, one that “…is essentially free of human error and political agendas” (as noted above) and where individuals take full responsibility for their actions.
“I personally am concerned about a currency that is reliant upon the solving of an algorithm by computers to earn. The process offers too many areas for corruption and if the whole thing falls what do you have? Nothing” – bbyersusn.
The aim of a currency is not to earn, but to for one enable our ability to purchase goods and services. E.g. one of the primary aims of Bitcoin is to enable our ability to purchase goods and services online. Now those goods and services don’t come for free, people expect to be rewarded for their efforts. Naturally, part of this reward come in the form of earning currency and/or getting paid in currency for one’s efforts. However, the currency itself is not in the market to earn. People who choose to support Bitcoin through mining, and/or the unveiling of Bitcoins, get rewarded for their efforts in the form of Bitcoin. The hardware and other resources utilized are certainly not free. Just as companies that help to maintain and/or support banking systems expect to be paid and/or rewarded for their efforts, Bitcoin miners expect to be rewarded for their efforts. There is nothing strange or unnatural about it.
In terms of bbyersusn’s concerns relating to “…the process offers too many areas for corruption and if the whole thing falls what do you have? Nothing”…
Unfortunately bbyersusn fails to mention such an area, especially an area “for corruption” that stands to threaten the very existence of Bitcoin. In addition, should “the whole thing falls”, logic dictates that the hardware utilized and the goods purchased (and/or traded), won’t just disappear.
“Also, to be a serious currency more will have to offer services or merchandise. Currently the dollar is not backed by precious metal and runs the same risk. If China were to flood our market with all of the currency they have bought the dollar would be worth less and yet they continue to buy a lot of gold…very telling in my opinion” – bbyersusn.
Yes, the more merchants that accept Bitcoin, the better. Needless to say, great progress is being made in this regard, especially considering that a large online retailer such as OverStock.com now accepts Bitcoin. This is not even to mention various other merchants across the globe that accept Bitcoin.
In terms of “backed by precious metal”, one could argue as mentioned above, that all value is subjective or that the value of something is only as high as the value people will attach to it. E.g. Of how much value is gold to you when you’re stranded in the middle of the desert? Of how much value is gold to you when you want to transfer money across border, within less than a minute, and at low cost?
Thus, from that perspective, intrinsic value is a complete misnomer. Now even assuming that all value is not subjective, doesn’t take away from the fact that backing a currency by a precious metal, or anything else for that matter, is nothing short of a promise that can be broken (as mentioned above). This happened several times in history when gold standards were used.
Yes, China continues to buy gold, but this doesn’t take away from the value of Bitcoin, especially considering that Bitcoin has many similarities to gold. This will be addressed in another dissertation. The fact that the Chinese Government has recently stepped in to hamper the adoption of Bitcoin in China… is very telling in my opinion. In fact, I see a future where Bitcoin and other cryptocurrencies will be primarily used as facilitators of transactions, while gold, silver and other precious metals will be primarily used as stores of value.
Thus, to sum up:
- Wide scale adoption or acceptance is a vital component of any currency’s success.
- Great progress is being made towards the adoption of Bitcoin across the globe.
- All value is subjective.
- The Chinese Government continues to buy gold and sees Bitcoin as a threat.
- Bitcoin and precious metals can be complimentary.
Now it must be noted that many of the concerns bbyersusn raised can be applied to other currencies as well, including currencies consisting of or backed by precious metals such as gold and silver.
Modern Coins Forum (MCF)
Bitcoin Stack Exchange