Top 5 Bitcoin Myths

Bitcoins are illegal, they are useless, it’s a giant ponzi scheme and only drug dealers use them. These are just some of the few misconceptions surrounding Bitcoin.

Those who hear of Bitcoin usually aren’t familiar with cryptography and blockchain technology in general. As a result misconceptions about Bitcoin’s inner workings may arise as one’s intuitions takes over reality. We present the top 5 widely believed myths that are circulating about Bitcoin, hold on to your hats – its time to debunk them all.

Bitcoin is a Ponzi Scheme

This is by far the most popular myth which suggests that Bitcoin is in fact simple a Ponzi Scheme and buying into it would only mean disappointment later. By definition a Ponzi Scheme is a fraudulent operation in which the operator solicits investors by making promises of unrealistic returns. The primary objective of a Ponzi Scheme is to lure in as many unsuspecting investors as possible, as they keep the operation running. As soon as new investors stop injecting capital into the scheme the whole pyramid falls apart.

In the case of Bitcoin there are no unrealistic returns being advertised for users or investors. In fact, the only return that Bitcoin promises is a return of full control over your finances. Bitcoin provides a way to instantaneously and securely transfer value over a global network available to all those who have access to the internet. While it’s true newbies who hop on the bitcoin bandwagon might cause a price surge which will benefit early adopters who are still holding coins, the early birds aren’t profiting at the expense of the new guys. Lastly since Bitcoin is decentralized by nature there is no central entity leading the scheme, which clearly debunks the myth that Bitcoin is a Ponzi Scheme.

Bitcoins are backed by mining power

This is yet another misconception surround Bitcoin and cryptocurrencies in general. When people first learn about Bitcoin they believe that as a currency it is backed by the miners who are mining Bitcoins. However, Bitcoin’s value doesn’t come from the fact that a tremendous amount of hashpower is dedicated to the network, it’s value comes from the blockchain technology that it is based upon and the fact that it has certain advantages over the current fiat system.

When a currency is backed by a resource such as electricity, raw materials, or a company’s stock, it means that the currency can be exchanged for that resource via a centralized party and the value is pegged to a certain amount. In the case of Bitcoin one cannot exchange it for the hash power that was used to create it. Sure you can buy more hashes with the Bitcoins you own, but that hash power will reward you with a different amount of Bitcoin than you started with because the exchange isn’t set to a specific rate. Bitcoin isn’t backed by anything, it’s distribution was programmed to follow that of gold. Just like gold is “backed” by it’s scarcity and it’s demand,  Bitcoin is the same.

Bitcoins have no intrinsic value

According to investopedia, the definition of a resource having intrinsic value is:

The actual value of a company or an asset based on an underlying perception of its true value including all aspects of the business, in terms of both tangible and intangible factors.

To better explain where Bitcoin’s intrinsic value comes from it’s best to compare it to gold. Gold has value because it’s scarce, you cannot counterfeit it, and there is a high demand for jewelry and other products made with the material. Similarly Bitcoin is scarce because of the hard coded 21 million cap on the currency, one cannot counterfeit Bitcoins as the network backing it effectively has a $7 billion bounty on any person who can take over the network, and finally Bitcoin is the first decentralized trust less network which allows for brand new products and services to be deployed.

Those who first get introduced to Bitcoin usually only see it as a medium of exchange and store of value, however the technology backing bitcoin offers much more than that. As such, Bitcoin does have intrinsic value, even though it may be hard to give Bitcoin an exact valuation based on these features as it all depends on further user adoption.

Bitcoin mining is centralized

According to some experts, Bitcoin mining is centralized because when looking at the hash rate distribution one can see that a handful of mining pools control the hash power. However, what is ignored is the fact that those mining pools are comprised of individual miners. Sure there are mining pools like BitFury which have restricted access and are not available to the public, but by nature Bitcoin mining is decentralized as anybody can join a mining pool. Those who miss this important fact may think that Bitcoin is in fact controlled by a dozen mining pool which screams centralization.

There is some truth to the myth as it’s true that a handful of opaque pool operators have control over most of the network, however it wouldn’t make sense for a mining pool to try and take control over the network as it would cause Bitcoin’s value to plummet. Furthermore, even if an attacked gains access to a mining pool, it’s users can quickly switch to another reliable pool and avoid any disaster. We have seen that happen before when’s mining power approached 51% and a community uproar caused BitFury to pull 1 Petahash of power from the pool.

Bitcoin is anonymous

Another common misconception surrounding new users is that Bitcoin transactions are anonymous. The truth of the matter is that Bitcoin is pseudonymous and one’s anonymity lies in the connection between one’s identity and their Bitcoin address. Once an identity is linked to one’s address his transactions and funds can be traced on the network by anybody. However, if you keep your identity separate from your bitcoin address, while those coins can be traced around the network it would be impossible to tell who they belonged to.

Furthermore, IP addresses can be leaked when sending transactions which could compromise one’s identity. While IP addresses aren’t directly stored on the network, an attacker could watch transactions carefully and see what nodes they are coming from. If a certain pattern of transactions seems to come from a certain node one can assume that the owner of those bitcoins resides somewhere near that node. Furthermore, when using lite bitcoin clients like Electrum, Multibit, or wallet apps like Breadwallet, Mycelium, one’s IP address will be leaked to the servers one is connecting to. While not everyone will be able to associate your bitcoin address to your IP, the owners of those servers will have that info.


As a brand new technology Bitcoin is full of misunderstandings, as the knowledge gap closes with the increasing adoption and educational resources available for new users the public will realize Bitcoin is much more than magic internet money.

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