Do you really know bitcoin? Here are 11 myths

The simulated online currency was big news in 2013, and bad information sometimes mixed with the good. Here are some things you may have heard about bitcoin that aren't true.

By Money Staff Dec 27, 2013 7:25PM

This post comes from Jeff Cox at partner site CNBC.

 

CNBC on MSN MoneyWhile there were plenty of other big surprises in 2013, no business story likely was more unique than bitcoin, the online simulated currency that threatened to shake up the global monetary system.

 

An illustration model of a Bitcoin 
 © Thomas Trutschel/Photothek via Getty Images
Debate raged over bitcoin's legitimacy: Was it just a playful creation of hobbyists, or a new exchange medium brought about as a logical reaction to profligate currency manipulation from the world's central banks?

 

Nick Colas, chief market strategist at ConvergEx, was one of the early Wall Street analysts to take a serious look at bitcoin back in February. To wrap up 2013, he examined what he sees as 11 myths surrounding the subject.

 

Myth: Bitcoin is huge

For all the talk and hype, bitcoin is tiny with a total value of just $10.8 billion. That compares to the total stock of U.S. dollar at $800 billion, Colas said in a report. There's also about $4 trillion in global currency traded every day.

 

Myth: Bitcoin enables drugs and terrorism

Colas argues that bitcoin is "way too volatile" for the average drug dealer or terrorist. That's not to say that "some enterprising dealers" don't use it, but if it was widespread Colas contends its value would be "$10,000 or higher" compared to Friday morning's trading value of about $800.

 

Myth: Bitcoin is a currency

This is perhaps the most contentious observation, as bitcoin is often referred to as a "cryptocurrency." Colas offers that bitcoin is "a system much more than a 'currency'" in which holders agree to take part in a transaction of value.

 

Banking analyst Dick Bove may have been more to the point, where in a recent analysis he called bitcoin a "low-cost replacement for credit cards and other payment mechanisms." There are virtually no costs involved with bitcoin transactions, as opposed to wire transfers, for instance.

 

Myth: Bitcoin has never been more volatile than now

Untrue, according to a chart Colas prepared analyzing bitcoin's one-month returns and standard deviation. It actually was more volatile in May 2011, before most people even had heard of bitcoin.

 

Myth: Chinese citizens can't buy bitcoins

BTC China has been one of the most dominant exchanges for bitcoin, with nearly 10 million transactions over the past month, according to bitcoincharts. That's despite a government ban on financial institutions handling such transactions.

 

Myth: Bitcoin is not a store of value
This is an expression often given to gold and silver, and Colas said it does not apply to bitcoin. "Bitcoin may one day prove it deserves to sit alongside those assets," he said. "It isn't there yet."

 

Myth: Bitcoin is untraceable

Bitcoin transactions happen online. Enough said. (Though Colas does offer: "If you think anything you do online is secret, I can't help you.")

 

Myth: Losing anonymity will render bitcoin useless

Conversely, traceability doesn't dim bitcoin's allure, which is really in its low or no-cost transactions.

 

Myth: It's a Ponzi scheme

No, it isn't. Ponzi schemes have no other intent than to defraud. There's no evidence to suggest that bitcoin is in the same boat, despite the strong price volatility and attraction for speculators. The Federal Reserve has noted the "potentially significant positive social value" of bitcoin, Colas noted.

 

Myth: Bitcoin is "ready for prime time"

No, it isn't. As Bove, Colas and numerous others have pointed out, bitcoin won't get legit until price volatility gets tamped down and a truly safe, mainstream storage place emerges. Colas suggests banks, Paypal or Apple come up with a storage device.

 

Myth: Something better will kill bitcoin

This one doesn't get so much play, but it's worth considering. Bove has contended that being first gives bitcoin a tremendous competitive advantage, and Colas echoes that point. "There are other online money transfer products out there, of course, and more to come," he said. "The challenges will be the same for all of them: security, utility and legal compliance."

 

The quest to meet those challenges likely means bitcoin remains a serious story for 2014.

 

"I absolutely understand why there are so many bitcoin haters out there. But don't hate the player; hate the game," Colas said. "Technology is a tremendously disruptive force in society, and it knows no boundaries. It disturbs every status quo. That's what is does. Just don't make the mistake of thinking that you can reverse it by calling it a bubble."

 

More from CNBC:

VIDEO ON MSN MONEY

25Comments
Dec 28, 2013 3:43AM
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Gold and Silver, two of the rarest most conductive metals around utilized in all sorts manufactured products. 
Bitcoin, a man made product which only exists in the virtual world…. 
Sounds like more of a speculator than an independent analyst. 
Dec 28, 2013 1:50AM
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I am starting a new currency.  Confederate Spitcoins.  I an starting off with 1 billion.  The south will rise again.  I will trade mine for anything of value suckers...er customers will give me for them online.   I really like Tesla cars, gold and silver coins, diamonds and blue chip stocks.  I am selling franchises for 1 million  (American dollars) each. 
Dec 28, 2013 1:04AM
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LOL Whenever an analyst tells you to buy, do the opposite as he has clients that need to get out. What a pump and dump piece. Ponzi scheme, you betcha...last one holding loses. Gotta get my investors out this dog before it collapses type article. FYI, Analysts that are competent will mention downside risks Hmm, competing interests disclosures? Bitcoin has huge downside risks. Imagine buying raw material for your product at $1K bitcoin couple a months ago only to find that your net profits just got eroded big time with no bottom in site. Oh just one more little thing.

 

India's biggest Bitcoin trading platform said on its website Friday it had suspended operations after the central bank warned against the risks of using virtual money.

BuySellBitCo.in closed its platform, citing an advisory by the Reserve Bank of India issued on Christmas Eve highlighting the risks of trading in digital currencies.

 

A virtual currency backed by nada!

 

HaHa

 

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This idiotic idea is perfect for scam artists and hipsters who think they're onto something new until every nation bans it.
Dec 28, 2013 1:02PM
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if it is virtual currency..why do I pay hard currency to get it? why do we not hear of the thefts of coins from virtual wallets? and whenever you purchase something, do u need to check the bit price?
Dec 28, 2013 5:54PM
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It appears to me to be a digital "Beanie Baby".

No intrinsic value

No backing by any enmity (country or corporate)

No base value (much like Beanie Babies)

If it is hacked, and billions in Bitcoins are created, who is going to fix it?

To many issues for it to be accepted by most people.

Dec 28, 2013 1:16PM
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So let me see if I have this right.  Bitcoin is "way too volatile" for the average drug dealer, but not too volatile for the average Joe? In the wonderful flash crash world of HFT where the fastest connection wins. Lovely.

A fool and his bitcoins are soon alt-ctrl-deleted...
Dec 30, 2013 2:10AM
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I don't "hate" bitcoins. How could you hate nothingness? As was famously said of Oakland "There is no 'there' there". If the formulas underlying bitcoins were valuable and copyrighted or patented, and you were buying a share of them, then that would have value. All bitcoins have is a scheme to limit their creation and make them relatively rare (and that artificially). Albino ticks are also rare, but that doesn't make them valuable.
Dec 30, 2013 10:30AM
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Can someone explain to me how Bitcoin is different from Beanie Babies?
Dec 27, 2013 10:04PM
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Also you don't have to borrow it and pay interest on it, to use it, like the Rothschild federal reserve bank.  Guess they just forgot to mention that part. 
Dec 28, 2013 12:11AM
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The mention of China was not lost on me? Most of the un-free world would like to see the dollar fall. Sorry to say the way the libbies are going, I think that may be a forgone conclusion?
Dec 30, 2013 3:27PM
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Why would anybody buy into something like this? Do you want to buy some tulip bulbs?
Dec 30, 2013 3:13PM
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Can you avoid transaction taxes by trading in bitcoins?    
Dec 30, 2013 3:47PM
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If bitcoins are not currency, then it isn't counterfeiting if you make copies of the physical coin.  Interesting...  At $800 a pop, it might be worth it to knock a few off.
Dec 30, 2013 3:32PM
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Holand's tulip craze all over again...
Dec 27, 2013 11:31PM
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When you have to spend this much article disclaiming, you should just stop. This is a dead topic and waste of time and resources. Recover careers, pay family-sustaining wages, hang inheritors who dodge taxes.
Dec 27, 2013 11:32PM
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 Does bitcoin print money hand it out to wall street and send a flapping gum moron out into the public to promote class warfare? Opps Sorry I thought this was about Obozo and the Fed my mistake.
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