Five myths about bitcoin since debut in 2009 and its future
THIS month, bitcoin, the digital currency launched by Satoshi Nakamoto in 2009, hit a record price of US$ 17,428.42 ( RM73,200) per coin. It got its own futures market at a traditional brokerage firm, and it even earned a joke in a recent “Saturday Night Live” sketch. Perhaps because of its complicated technical design, zealous community of advocates and famously mysterious founding story (its creator was unknown for years), a variety of widespread myths about bitcoin have persisted. Here are five. Myth No. 1 There is a finite supply of bitcoin. Bitcoin has been described, per the title of one book, as “digital gold,” because it is supposedly impossible to create more than the 21 million units already planned for circulation. This past week Goldman Sachs published a research report stating that “bitcoin has a mathematically certain total supply.” Modernday gold bugs, such as Ron Paul, like the idea that no government can debase bitcoin by increasing the supply.
Yet there is no guarantee that the supply of bitcoin won’t change. The currency’s original design calls for the 21 million units to be slowly created over the next 100 years or so. But the protocol can be amended by community consensus – a majority of participants in the bitcoin network – as has already occurred several times, such as an update that helped users specify payment conditions. So far, the bitcoin community has fiercely defended the planned finite supply and is notoriously change-averse. But politics among users, not maths, keeps things that way for now. Myth No. 2 Bitcoin’s users are anonymous. Nakamoto, bitcoin’s founder, claimed that the currency offers privacy, since transactions are not listed under real-world identities. Bitcoin’s blockchain, the permanent public record of transactions, uses cryptographic pseudonyms. Users can create as many free pseudonyms as they want, and most bitcoin software generates a unique pseudonym for every transaction. WikiLeaks encourages donors to use bitcoin because it’s “anonymous” and “cannot be easily tracked back to you.” Harvard economist Kenneth Rogoff has even suggested that governments will eventually move against cryptocurrencies because of their anonymity features.
But the vast majority of bitcoin users don’t get significantly more privacy than they would with traditional bank transfers, and they probably get much less than they would by paying with cash. That’s because it’s possible to link a user’s pseudonyms together by studying patterns in the blockchain. Several blockchain analysis firms already offer their services to law enforcement. What’s more, most users leave a paper trail when they buy or sell bitcoin in exchange for dollars or other fiat currencies, as reputable exchange services record identities to comply with “know your customer” laws. Myth No. 3 Bitcoin is beyond the reach of the law. In bitcoin’s early days it was the currency of choice for a multi-million- dollar underground drug market called the Silk Road, prompting critics, from JPMorgan Chase’s chief executive to France’s financial-market regulator to Nobel laureate Joseph Stiglitz, to claim that bitcoin is a haven for those seeking to evade the law. ( Stiglitz said that it “ought to be outlawed.”) And even bitcoin’s advocates sometimes say, as one analysis put it, that the technology is “one step ahead of anti- competitive laws and unfriendly jurisdictions.”
Not really. New technology always requires updated interpretations of existing statutes and case law – in this case originally written for other parts of the financial sector – and that gradual process is well underway for bitcoin. Its exchanges are already regulated through specific laws in some states, such as New York, and by rules on money transmission services elsewhere. All mainstream bitcoin exchanges at least attempt to comply with “know your customer” laws to prevent money laundering. The IRS regards bitcoin as taxable property. The Securities and Exchange Commission recently began cracking down on initial coin offerings, a new type of blockchain-based fundraising mechanism, under its existing authority to regulate securities. Myth No. 4 Bitcoin wastes energy. Bitcoin mining is an energyintensive process. Anybody can become a miner, but he or she needs special hardware chips working constantly to solve the cryptographic puzzles that create new blocks in the bitcoin ledger (in exchange for the rights to newly created bitcoin). Because of its decentralised nature, nobody knows the exact amount of electricity this process consumes, but it’s likely to be several gigawatts at any given moment, roughly equal to the output of a massive power plant such as the Hoover Dam. No wonder observers have lamented bitcoin’s environmental impact, with reports that individual transactions use as much energy as a home uses in a week or, more hyperbolically, that bitcoin will consume all of the world’s electricity within a few years. Myth No. 5 Bitcoin will replace credit cards and/or cash. Many utopian bitcoin supporters, such as Kim Dotcom, creator of the Megaupload filesharing site, predict bitcoin will overtake other payment schemes. “In five years, if you try to use fiat currency, they will laugh at you,” says major Silicon Valley investor Tim Draper. But bitcoin does not yet have several key properties needed for a universal payment mechanism.
First, the design currently limits the system to handling only a few transactions per second, nowhere near the tens of thousands that credit card networks can handle, nor the tens of thousands more done in cash every second. The community has worked for years on various plans to improve bitcoin’s capacity, but there is no agreed-upon path forward.
Second, bitcoin transactions, once free, are increasingly expensive, with fees now averaging US$ 20 and reaching as high as US$ 400, based on demand. Developers are working to improve capacity, but for now the trend is going in the wrong direction.
Finally, bitcoin transactions do not take effect immediately because of the limitations of the blockchain. — WP-Bloomberg