“All truth goes through three stages: first, it's ridiculed, second, it's violently opposed, and finally, it's accepted as evidence.”
Cluncious people die hard when it comes to Bitcoin. There are countless interventions by the media and political leaders who broadcast false arguments about the latter.
The strength of these preconceived ideas lies in their simplicity. They are easily understandable and can be distributed to as many people as possible. Nobody has the time or the desire to find out if they are true, and deconstructing them requires a certain understanding of the Bitcoin electronic cash system. It therefore seemed appropriate to me to provide in this post some clarifications in the face of all these prejudices that come back tirelessly from year to year.
This article is intended to be a checklist, to be kept as a favorite, in order to be able to disprove these myths and other myths about Bitcoin, which are often widely disseminated among the population.
Bitcoin is an ecological disaster!
Here we have the cliché that is in fashion right now among Bitcoin detractors. There are countless press articles warning about the pseudo-ecological damage that it would cause. But what is the real situation? Is Bitcoin eco-friendly?
The criticisms made against Bitcoin in this area are based on its use of electricity. The functioning of the electronic cash system is based in particular on the mechanism of the Nakamoto consensus by proof of work.
Computers that use proof of work (Proof-of-Work) seek to find a block that, once passed through a certain random mathematical function, will give a result that is lower than a given target. They add a changeable number to the block and try multiple values for it to find a result that is less than the target. This search can only be done by trial and error, and therefore requires reproducing the calculation of the function numerous times. That's where Bitcoin's need for electricity comes from.
The source of this criticism, as with many others, lies in the misunderstanding of Bitcoin. If we see absolutely no use in the latter except for the stock market, we will never be able to accept any electricity consumption. There are many sectors that require much more energy that no one wants to stop because they are generally recognized as essential to the proper functioning of our society. I therefore think that we must first understand the advantages of Bitcoin in order to then be able to understand its energy consumption.
However, the consumption of Bitcoin is very much lower than that of the traditional banking system, which it can replace. According to Michel Khazzaka, in his report Bitcoin: Energy-efficient cryptopayments published in 2022, Bitcoin currently consumes 89 TWh per year, which is 56 times less than the banking system. When considering the Lightning Network, the top layer of this system, Bitcoin transactions are up to one million times more efficient than instant payment transactions.[1].
This consumption makes it possible to power Bitcoin and ensures the very high level of security that we know today. This is a level of security that is absolutely necessary to deal with global attacks and ensure the incensurability of transactions. This allows millions of people to leave the traditional financial system behind and make transactions that are almost instantaneous and at low cost, in a more efficient way than with the latter.
Moreover, there is no direct link between the general consumption of Bitcoin and the number of transactions carried out. Bitcoin could perfectly have a lot more users without increasing its need for electricity. There is indeed an incentive to mine due to the fee auction mechanism, however, there is no proportionality between the number of transactions executed and the consumption of Bitcoin.
Beyond consumption, it should be noted that the use of electricity in itself does not pollute. It is its production method that can sometimes be polluting. It is therefore important to consider the source of electricity used by the system to estimate its environmental footprint.
On Bitcoin, market mechanisms naturally encourage miners to look for the cheapest electricity. Since their industry is mobile, they can easily set up where it is located. This cheap energy comes from production surpluses that are often wasted. Today, the majority of energy surpluses are located on renewable energy production sites since they cannot adapt their production. In fact, when you produce electricity with a coal-fired power plant, you can adjust the supply according to demand. On the other hand, when they are produced with a wind turbine, solar panels or hydroelectric power plants, production evolves independently of demand. We then necessarily end up with surpluses in electrical production that cannot be stored.
Bitcoin miners will therefore generally connect to these surpluses. For them, this allows them to benefit from cheap electricity in order to maximize their margins. For the producer, this makes it possible to valorize his surpluses that were once wasted, and thus to make his production profitable. Finally, for the population, it helps to ensure a constant and always sufficient electrical distribution.
This is why today, according to the Bitcoin Mining Council, a large majority of miners' electricity consumption comes from green sources. In addition, Bitcoin could make these renewable production sites profitable by monetizing their previously wasted surpluses, and thus promote their new implementations.
The Bitcoin Mining Council (BMC) is an open organization bringing together the main players in Bitcoin mining. Its aim is to promote transparency in this industry, share best practices, and educate about how Bitcoin mining works and the benefits.
There are plenty of other examples of virtuous uses of bitcoin mining like this one. For example, I could have mentioned the valorization of the heat produced by miners, the reduction of greenhouse gases produced by flaring (Flairing) or the financing of power plants for remote populations[5]. Mining is often the last solution of use for so-called “fatal” energies.
Finally, Bitcoin mining is the link in the electricity value chain that we were missing. Not only is it not an environmental disaster, but it could well be the driver of the global ecological transition. For the first time, it makes it possible to align economic and societal interests with sustainable production goals.
In an electrical value chain that cannot be controlled and does not require mining, the difference between supply and demand is experienced either by the customer or by the producer. When supply exceeds demand, the producer wastes the electricity produced and loses money. Conversely, when demand is higher, the population experiences power outages. Mining makes it possible to eliminate this risk of difference between supply and demand. With a value chain that includes it, when supply is higher than demand, miners value excess production. The fleet can thus maintain a high level of production without reducing its economic profitability. When the demand of the population increases, the producer can unplug the miners in order to be able to ensure the necessary distribution. The producer will naturally prefer to provide electricity in priority to the population, since they are in a position to pay a higher price than the minor.
Beyond the ecological and societal benefits of mining, we can also think about the environmental benefits of using a hard currency such as bitcoin. The strict limitation of its money supply to 21 million units allows the establishment of a deflationary economic system. This type of system would put an end to overconsumption, which is partly responsible for the current climate crisis. It is even the only mechanism that makes it possible to reach all economic agents, by promoting savings for consumption, without requiring them to reduce their individual freedoms.
Bitcoin is also the first system to ensure the separation of currency and state. Its adoption could help us put an end to the rescues and nationalizations of zombie businesses. According to Joseph Schumpeter, and his theory of creative destruction, bankruptcy ensures the appearance of new great human innovations. It is then possible that we are currently missing out on disruptive innovations, allowing us, for example, to get out of this climate crisis at the top, simply because of the mismanagement of our currency. Bitcoin could also solve that.
In general, to have value, an asset must be considered useful and rare. However, value estimation is still a purely subjective concept. His judgment varies from person to person, and from object to object, depending on a number of complex factors. From a subjective estimate, an individual will be able to attribute an objective value to an object through its price.
To illustrate this value theory, let's take an example with Tesla shares and water. If Elon Musk is offered today to exchange 10,000 of his Tesla shares for a liter of water, the latter will surely refuse. In this environment, he believes that the value of his shares is greater than that of a liter of water. Now, let's imagine that Elon Musk is lost in the desert, close to dehydration and far from any water source. He meets a shepherd who has a liter of water and who offers to exchange it for 10,000 Tesla shares. He will certainly accept this exchange since his life depends on it. At this very moment, in this given environment, the individual Elon Musk estimates that a liter of water is more valuable than 10,000 Tesla shares. Value is thus a judgment that a being places on the ability of an asset to meet its needs. It varies according to the object, the individual, the environment, the moment and the availability of substitutes.
Like any other currency, bitcoin is just an asset. It naturally undergoes the same judgment specific to each individual that its valuation represents. Bitcoin may not be valuable to you, maybe a bit more to your friend, and probably a lot more to me. This difference is explained by the subjectivity of our judgments on this object.
If you feel that Bitcoin is not able to meet one of your needs today, you may feel that it is devoid of value for you. On the other hand, it is fallacious to make a general statement since other individuals do not make the same judgment as you. These people attribute an objective value to bitcoin and demonstrate their interest in concrete terms by accepting a price for its purchase.
This received idea is in part similar to the previous one. We have seen that the value of a property depends on individual judgment. It is affected by the ability of the object to meet one of my needs, in other words by its usefulness, and also by its rarity.
The rarity of Bitcoin is well established. Its strictly limited issuance is maintained by consensus, making it certainly one of the rarest assets in the world. On the other hand, the very usefulness of the Bitcoin system is unique to each individual. Some people see it as a way to protect themselves from inflation over the long term. Others appreciate its incensurable electronic cash system...
Finally, maybe Bitcoin does not meet any of your current needs according to your judgment. Or maybe you just prefer one of its substitutes. In this case, your subjective analysis of the latter makes you say that it has no use for you at the moment. On the other hand, it is wrong to say that Bitcoin is useless for everyone. Your judgment can only be applied to yourself since, naturally, you are not in a position to know all the complex and unique needs of eight billion human beings.
What is certain is that bitcoin is frankly not identical to other existing currencies. It even has interesting features. It allows each individual to benefit from a hard, free and incenseable currency. Considering this, we can easily imagine that some people will find it useful. In any case, for more than a decade, its course against state currencies does not seem to indicate the opposite.
There is no shortage of examples of groups of individuals finding a use for Bitcoin. In El Salvador, where bitcoin was recently proclaimed legal tender, a large part of the country's gross domestic product relies on international transfers from expatriates. According to The World Bank, using IMF and OECD data, these transfers represented 24% of Salvadoran GDP in 2020[6]. The President of El Salvador Nayib Bukele estimates that his fellow citizens will save 400 million US dollars each year on the transfer fees associated with these international transfers only thanks to Bitcoin.[7].
Bitcoin is also useful for populations living in countries where the state currency no longer plays its role. It allows millions of individuals to escape currency collapse or capital controls, as in Lebanon.[8], in Venezuela[9], in Zimbabwe[10], in Turkey, or even in Argentina[12]...
Bitcoin is the money of freedom. It has been used by some Afghan women to access a form of financial freedom since the rise of the Taliban to power.[13]. It has also been used by whistleblowers like Edward Snowden. Or, it is used by associations to promote the financial inclusion of poor populations in the Democratic Republic of Congo.[15].
The origin of this received idea is fairly easy to identify. It is the consequence of the previous axiom. Some people don't understand the usefulness of Bitcoin for others. However, they can see in the media that bitcoin is sometimes used for illicit activities. So they quite logically think that it is only useful for criminals. This myth, like many others, is rooted in the general misunderstanding of what Bitcoin is.
This cliché is thus established on the difference in media treatment between the usefulness experienced by a group of individuals and the usefulness experienced by the rest of the population. But, as we saw in the previous sections, the value given to an object is the result of a subjective judgment on the ability of the object to meet an individual need. An outside observer is unable to estimate the judgment of others. As a result, he often applies his own judgment to everyone:” I am an honest man andI think Bitcoin is useless ➔ Bitcoin is then useless for all honest people like me ➔ Therefore, Bitcoin can only be a criminal tool ”.
This fallacious reasoning naturally pushes many individuals to the desire for a simple action: the prohibition of Bitcoin.
Bitcoin is just code. It's a computer system, it's a tool. Like any other tool, it can be used constructively and destructively. For example, the hammer can certainly be used to hit another individual, but it is especially widely used to build beautiful buildings.
A civilization that prohibits tools under the justification of their most marginal uses is a step towards authoritarianism and naturally tends towards widespread poverty. If the hammer is banned, what will be the consequences? All the constructive entities that specially used this tool, in a lawful manner, will be the most impacted. They will be able to drive nails with the handles of screwdrivers, but it will be much less effective. On the other hand, people who used it illegally will not be so affected by this ban. Indeed, an unbalanced person who wants to hit his neighbor, if he no longer has access to the hammer, will take a knife, a rolling pin, or even a glass bottle. The operation will not be made less effective. It should therefore be understood that the prohibition of tools, under the pretext of their marginal uses, levels our society downwards while not preventing criminals from operating.
Moreover, when bitcoin is used by criminals, it is only a small parameter in their operations. Take the example of ransomware, viruses that encrypt a computer and demand the payment of a ransom, sometimes in bitcoin. To succeed in this operation, the hacker uses a computer connected to the Internet. It probably also has a chair and a desk. In the morning, he may be eating a banana to have sufficient sugar intake during the programming of this virus. Since this operation is criminal, is the use of the Internet also criminal? Are tables, chairs, and bananas criminal tools? I don't think so. However, if these parameters were forbidden, do you think that would have prevented the computer attack? No, the hacker can replace the chair with a stool, he can replace the banana with an apple, and above all, he can replace the payment in bitcoin with a payment in another currency.
Bitcoin is not a criminal tool. It is an electronic money system that can be used by criminals, as it can be used by the majority of the population. The argument that Bitcoin would only be useful for criminals is only a purely subjective assumption that is impossible to demonstrate given the complexity of estimating utility. The desire for a ban based on this fallacious thinking is a false good idea. Legitimate targets of such a measure will not be affected, but honest individuals will.
I could also give you as an argument the well-known estimate of the rate of illicit cryptocurrency transactions. It was 0.15% of the total trading volume in 2021, which is about 10 times lower than that of state currencies[16] [17]. Despite these statistics, no one is suggesting that the euro is a criminal currency. Moreover, the majority of illicit transactions included in this rate are linked to decentralized finance (DeFi)[16], a domain completely independent of Bitcoin.
Moreover, as you will discover in the next part, privacy on Bitcoin is not an easy thing. This payment method is not the best option for criminals. Indeed, this phenomenon can be observed precisely on the most recent types of ransomware. The hackers have set up a penalty system, to be paid in addition, if the victim chooses to pay in bitcoin[18]. Laundering bitcoin is risky, complex, and expensive. So, hackers are setting up incentives to avoid receiving too many Bitcoin payments.
Finally, it is important to note that the term “criminal”, in the sense of the offence, is not unchangeable. It is subject to the volatility of legislation. It is also crucial to differentiate it well from the subjective concept of immorality. For example, some whistleblowers may be considered criminal under the law, but their actions are not necessarily immoral from the point of view of individuals.
Surely one of the oldest and most debunked lies is that Bitcoin is a completely opaque and anonymous system. Today, this criticism of anonymous Bitcoin has been worked on so much that we can hear another misconception, which is antagonistic to the first:” Bitcoin is completely transparent ”. Fortunately, Bitcoin is not entirely transparent. Nor is it absolutely anonymous. The truth is in between. The level of confidentiality of the user will then depend on his use of the protocol.
One of the initial problems in implementing a peer-to-peer electronic money system is double spending. You have to be able to make sure that each piece will not be spent twice. To solve this problem without a central authority, Satoshi Nakamoto chose to implement a distributed timestamp server. This is what is colloquially called “Blockchain”.
Thus, all transactions are announced publicly and broadcast to each node in the network. Payment confidentiality is therefore impossible on Bitcoin. Instead, the initial privacy model, as imagined by Nakamoto, was based on the fact that there was no link between a cryptographic key pair and the identity of its owner. Today, this model is being undermined by the evolution of chain analysis capabilities. There are thus tools at the application level and tips at the protocol level allowing the user to enforce their fundamental right to respect for their privacy by confusing the tracking process.
Even with all the best tools out there for privacy on Bitcoin, a user will never be able to achieve the same level of privacy that simple payment with a physical medium such as cash provides.
Bitcoin is then not completely anonymous, nor completely transparent. It provides a certain level of confidentiality to the user that can be improved with the adoption of some best practices.
Bitcoin is not a currency
Money is a tool that arises spontaneously through a market process. By definition, no one is in a position to filter out which assets can be used as such and which cannot. If I consider an asset to be a currency, and a person agrees to make a transaction with me, then that asset is a currency at that point in time.
However, we can define a multitude of characteristics that, empirically, make one asset a better currency compared to another. On this point, bitcoin is particularly interesting. Indeed, it is the only asset that perfectly meets the eight main characteristics of a good currency: unfalsifiable, fungible, transportable, divisible, rare, incenseable, incensurable, storable and durable.
Thus, it cannot be said in a general way that Bitcoin is not a currency. It may not be a currency for you, but more and more people see it as such. Moreover, if we objectively compare bitcoin with other assets used as money, we see that it seems to be a much better option than the currencies offered to us by state powers.
This cliché is based on well-known information indicating that 2% of “accounts” on Bitcoin would own 95% of the bitcoins. It originally came from the analyst Flipeside, then was taken over by Bloomberg in 2020.[19] and by The Economist in 2021[20]. From this observation, these media quickly concluded that bitcoin ownership was concentrated among a few ultra-rich individuals. Bitcoin detractors were able to use this pseudo-analysis to influence many people by making it appear that Bitcoin is an unequal monetary system.
First of all, there seems to be a debate about the initial data. Analysts at Glassnode say that the richest 2% of addresses actually own only 71.5% of the bitcoins[21]. This is very different from the figures announced earlier.
This difference is probably due to the calculation method used, since Glassnode indicates that it grouped some addresses together. They also indicate that their method is very conservative and that many other smaller addresses should be grouped together. This blunts the difference due to partitioning. Moreover, they exclude known exchanges and miners from this calculation.
While we admit that these numbers are good, they're still impertinent. Those claiming this untruth rely on the confusion between the word “account” used in the media, and the technical term “address.” In reality, there are no “accounts” on Bitcoin, only pairs of cryptographic keys represented by addresses. The operation of these has nothing to do with the functioning of a bank account. An address can be represented by multiple bitcoin holders, and a single person often has a multitude of addresses. The conclusion drawn from this, namely that bitcoins would be concentrated, is thus fallacious since it is based on the erroneous assumption.” 1 address = 1 person ”.
However, we cannot deny that a majority of the bitcoins in circulation are blocked on a minority of addresses. This concentration is due to several factors, each of which seems to thwart the criticism mentioned.
First of all, the vast majority of these rich addresses belong to exchanges, investment funds, producers of overlying assets (WBTC), companies, states or even mining pools. Each of these players represents thousands, if not millions, of small investors. Some even include several other big players, who themselves belong to millions of small carriers. For example, the company MicroStrategy (MSTR) owns about 130,000 bitcoins[23]. These bitcoins do not belong to a single person, but to the company. It itself is owned by multiple shareholders. These include BlackRock for 7.5%[24] which still represents many other investors.
Contrary to what this cliché suggests, the 2% of addresses that own a large portion of bitcoins do not represent a few wealthy individuals, but rather millions of small investors. Since their investments are indirect, their activity cannot be discovered by looking at the blockchain alone.
Second, the receiving addresses were designed to be single-use, in order to add an additional firewall to Bitcoin's original privacy model. The idea is that the user, if they want to maintain a minimum of their privacy, should use a new, blank receiving address for any incoming payments to their wallet. As a result, each transaction in principle involves a movement of bitcoins to new, freshly created addresses. This naturally leads to a gradual division of units over a larger number of addresses for the smallest carriers. On the other hand, the largest carriers are much less encouraged not to reuse addresses since they are exchanges, pension funds or producers of overlying substances. As a result, bitcoin dilution on smaller addresses is faster than on larger ones. At first glance, this may suggest a concentration in the monetary system. However, it is not one because an address does not necessarily belong to one person, and a person does not necessarily have a single address.
Finally, many extremely rich addresses considered in the calculation are said to be “dormant”. That is to say, the funds locked on them have not moved for several years. Their owners, often among the first users of Bitcoin, have surely lost the private key giving access to it. These funds are then lost as long as the cryptography on Bitcoin remains safe. That means they don't actually belong to anyone. All these addresses further distort the conclusion of monetary concentration.
It is also important to compare this data with the traditional system. According to Credit Suisse, in their report Global Wealth Report 2021[25], 12% of the world's population owns 85% of total wealth. Note that in this report, we are talking about individuals and not about receiving addresses.
This cliché is therefore based on questionable data, and deduces fallacious conclusions. In reality, the Bitcoin monetary system is much less concentrated than the traditional financial system.
Bitcoin is a Ponzi scheme!
A Ponzi scheme is a fraudulent financial system. It represents an entity that promises impressive returns on a financial product, without risks taken by the investor. These returns on savings do not come from value production, but are taken from the investment of new entrants. Profitability in this system is based solely on the flow of new investors. When demand for the product falls, there is not enough money left to pay the promised returns, and the whole pyramid collapses.
The name of this fraudulent financial technique comes from Charles Ponzi, an Italian who operated this scam scheme at the beginning of the 20th century in the United States. However, there are various writings that describe this concept as early as the 19th century. It was during this same period that two women, Adele Spitzeder in Germany and Sarah Howe in the United States, probably each operated the first Ponzi pyramids in history.
Some people then think that Bitcoin is a similar system since the price of its asset depends in part on demand. This is obviously wrong, because this postulate confuses the pyramid system and the natural mechanisms of the market. Indeed, the price of any good in a capitalist system is determined by supply and demand. Thus, the price of all assets depends in part on demand, as long as it is not manipulated.
For example, the demand for cameras from the giant Kodak fell sharply at the end of the 20th century with the arrival of digital cameras.[26]. The shareholders of this company lost a lot of money following a collapse in demand. But was Kodak a Ponzi scheme?
Because money is primarily an asset, its price fluctuates according to supply and demand. The price of Bitcoin evolves using relatively the same mechanisms, such as the American dollar, the euro, and any other currency. So there is nothing wrong with a price based on demand. It is even its primary nature. What is fraudulent is promising returns without producing any value. Certainly, the trigger for the collapse of a Ponzi scheme is a fall in demand. However, this debacle is primarily due to the voluntary absence of value creation in the face of the promised returns.
Performance is the keystone of a pyramid system. It makes it possible to recruit new investors through an aggressive marketing strategy, and thus to keep the pyramid alive. Bitcoin does not promise returns. It's just another form of currency. It is a peer-to-peer system, in which each participant has no other incentive than to use it. There is no entity behind Bitcoin that could take advantage of this type of system.
The demand for bitcoin is not based on performance, but on a value proposition that is to offer a better monetary tool for everyone. When you use Bitcoin as it was imagined by Satoshi Nakamoto, you don't lose ownership of your funds at any time. This by definition prevents its use as a pyramid scheme. Bitcoin is therefore not a Ponzi scheme, it is almost even its opposite thanks to its horizontal, peer-to-peer organization.
The Bitcoin system does not offer you to make money, it offers you to be your money.
To conclude, here are the key points to remember for each of these cliches:
Bitcoin is not an ecological disaster. On the contrary, it could well be the engine of our transition to clean energy production.
In line with the subjective conception of value, it is a fallacy to say that Bitcoin is devoid of value.
Estimating the usefulness of Bitcoin is a subjective judgment. It is a lie to say that absolutely, for everyone, it is useless.
Bitcoin is not a criminal tool. State currencies are proportionally much more used for illicit activities. Banning a tool levels our society downwards while being ineffective against criminals.
Bitcoin is not completely anonymous, nor completely transparent. The level of confidentiality of an individual's actions depends on how they proceed.
Money comes about through a spontaneous market process. It is therefore disingenuous to say that not every asset is a currency. In addition, bitcoin is the only asset that perfectly fulfills the eight main characteristics of a good currency.
Bitcoins are not ultra-concentrated among a few individuals. They are relatively concentrated in a few reception addresses. But these addresses often represent multiple investors. An address can be owned by several people, and one person can have multiple addresses.
Bitcoin is not a Ponzi scheme. It does not promise any returns and is a peer-to-peer system with no central authority. Bitcoin is surely the farthest thing from the characteristics of a Ponzi scheme.
The aim of this post was not to develop long arguments. I just wanted to list various misconceptions that we hear about Bitcoin, and explain to you the main arguments invalidating them. However, some of these commonplaces deserve to be studied in even greater detail. These will be the subject of future dedicated articles, in which I will develop an even more thorough and documented argument.
These articles will also be published on the blog Understanding Bitcoin from Bitstack. Subscribe to their newsletter to make sure you don't miss out on future publications.
