Debunking Bitcoin’s 5 Biggest Myths

By Nick Donaldson

The price of bitcoin has fallen to a two-year low and many people are concerned about it. However, many people are considering allocating a portion of their portfolio to crypto. In making this decision they will be confronted with several common myths about Bitcoin’s underlying value proposition, historical performance, and regulatory status that cloud their thinking such as:

• Bitcoin does not have any intrinsic value.

• Bitcoin isn’t secure.

• Bitcoin is too volatile.

• Bitcoin is illegal.

• Bitcoin is used only by criminals.

These misconceptions act as impediments to people making educated decisions about their financial future so it’s important to do your own research. This article aims to clear the way and get them the answers they need.

The most common misconception about bitcoin is that it is not real. In some circles, there is a belief that bitcoin has no intrinsic value due to:

• It isn’t issued and backed by a central bank.

• It has no long-established history of serving as a store of value like gold.

• It’s not a raw material used in the production of goods such as jewelry.

• Due to its digital nature, you can’t touch or feel bitcoin.

While meeting some or all of these conditions can help define an asset’s value, this list is not exhaustive. It’s also proving to be insufficient in today’s economy. The dovetailing of bitcoin’s electronic DNA with the shift to a digital economic system is forcing us to refine some of the criteria we use today to characterize an asset’s intrinsic value. Bitcoin has a unique set of key characteristics that make it uniquely valuable for the modern economy like:

Scarcity, Transportability, Divisibility, Decentralization

Let’s give each one of these a quick thought:

SCARCITY: Its blockchain, Bitcoin, is limited to 21 million bitcoin (BTC). This means that the BTC supply is finite, or not subject to change. We don’t have the same fear of finding a massive new gold deposit, creating a new gold mine, or a way to manufacture gold. (Although I could argue in another article that space mining will make gold as valuable as your kids’ art sparkles). This principle also makes it impervious to the effects of the devaluation of fiat money by central banks.

TRANSPORTABILITY: A standard gold bar weighs 27.5 lbs. If you have custody of your own bullion and need to transport it. I hope you don’t mind lugging around a heavy suitcase! However, BTC is digital and its digital nature means you only need access to a private key that can be kept on a piece of paper (NOT recommended!) or a dedicated hard wallet and fit right in your pocket.

DIVISIBILITY: Many people don’t know that bitcoin is divisible. BTC can be broken down to 8 decimal points meaning you can own 0.00000001 BTC (known as a Satoshi or sats). This feature can be very helpful for people who are interested in buying something with their BTC or just want to invest a small amount to start. If you don’t have smaller gold coins or a smelter in your home, it’s going to be a tough proposition to obtain the same result with gold or other precious metals.

DECENTRALIZATION: Bitcoin is the first truly decentralized cryptocurrency. This means that unlike fiat currencies or airline miles, there’s no central party that creates the currency or keeps track of ownership. It also guarantees that your holdings cannot be used for any other purposes, invalidated or confiscated which is especially important for owners in countries with less developed financial systems or with authoritarian governments. It’s genuinely a financial asset that’s beyond the reach of governments *(as long as you are not found to be purposefully engaging in illegal or malicious activity).

Oftentimes when bitcoin or crypto appear in mainstream media it’s due to a splashy headline story of theft or loss of money. This type of coverage creates the impression that bitcoin isn’t more secure than other financial assets. This is simply not true. You need a proper framework for a discussion about bitcoin security. To start, the conversation must be divided into the security of the underlying network, which is extremely secure, and that of service providers such as those of exchanges or custodians which may vary. The underlying security of Bitcoin’s network comes from the computing power used by miners to process the transactions and add them to the list of transactions on the blockchain. For the network to be compromised, a malicious actor must control at least 51% of the total amount of the hashrate (computing power for a network). However, Bitcoin’s hashrate is currently at an all-time high surpassing the amount of power used by Chile as of March 2020. Given this high barrier, it would be extremely expensive for virtually anyone without a well-funded state actor to do so. Even so, many have been victims of other types of security breaches. Threats when it comes to crypto such as having their login credentials stolen in a phishing scheme or hack attack on their exchange. Therefore, it’s important to keep your passwords safe, and never reuse, or share them. Conduct basic due diligence on potential service providers to see if security incidents have happened before.

Except in a country experiencing double-digit inflation many times over, bitcoin is probably too volatile to be used as a currency or exchange medium. If you think of bitcoin as an investment opportunity instead of a money substitute, the calculation changes. As Mr. Buffett likes to say, “there is no free lunch” or risk-free asset. All those that say otherwise are either misinformed or trying to manipulate you. For alpha generation, you must take risks. There is no other way.

As a result, it’s important to think about bitcoin’s volatility within the context of its lifetime performance, not the next few days. What’s the upside for the risk taken?

For bitcoin, the payoff has been outsized since its inception. It’s been the best-performing asset in the world over the last decade. Additionally, the measurement of volatility in the price action of bitcoin has recently dropped below that of the S&P 500 as well as the NASDAQ which many commentators had pointed out were becoming highly correlated to the top cryptocurrencies. As a speculative asset, bitcoin’s volatility has been a general concern for investors. In recent years, the market infrastructure continues to develop to allow derivatives trading. A popular instrument for traders, those seeking to hedge or find yield on existing positions. In addition, the recent influx of institutions making significant contributions to the development of blockchain technologies - interfaces between DeFi and TradFi has been nothing short of remarkable. Allocations of institutional portfolios to digital assets, which are generally seen as having steadier hands than retail folks, is dampening the fear of panic selling if the price experiences a small drop in the future.

Continue reading the article next month on debunking bitcoin’s 5 Biggest Myths

As a financial advisor since 2005, clients hire Nick for his holistic approach to financial planning. He optimizes clients’ personal economies to develop financial balance in their lives. This makes financial decision-making and understanding interdependent for clients. He leverages technology to deliver sound advice and build lasting client relationships. Since founding CryptoRothIRA.com & obtaining the Certified Digital Asset Advisor designation, he has helped clients own digital assets directly inside tax-qualified retirement accounts, separately-managed accounts, and within hedge funds focused on the digital asset economy. He maintains a network of professionals to collaborate with your existing trusted advisers and others.

LINKS:

• www.linkedin.com/showcase/cryptorothira

• www.linkedin.com/in/nickdonaldson/

• nick@cryptorothira.com

Advisory services offered through Investment Fiduciary Partners, LLC 720 S Colorado Blvd, Penthouse North, Denver CO 80246.

*Please seek advice from your CPA or attorney for tax or legal matters.