Moneycontrol
Nov 10, 2017 04:40 PM IST

Busting the myths on bitcoins

Shikha Mehra

There are certain uninformed beliefs regarding bitcoins commonly held amongst most savvy individuals looking at the crypto currency space for the first time. In this article, I attempt to provide readers with a more balanced view on some of these beliefs.

MYTHS

1. BITCOINS ARE ONLY USED BY CRIMINALS FOR MONEY LAUNDERING & OTHER ILLICIT PURPOSES

The Underlying technology behind Bitcoin is the bitcoin protocol and just like the TCP/IP- the underlying technology behind the Internet, it is purpose agnostic, that doesn’t differentiate between good and bad actors.  How many of us remember that, the Internet in its early days was disproportionately misused by criminals for illicit purposes (child pornography and drug trade).

The Bitcoin Blockchain is nothing but the internet of value as it democratises ‘exchange of value’ much the same way that internet democratised production and consumption of information (news, entertainment, communication). Similar to the early days of the internet back in 1990-91, we are at the very beginning of the development cycle of Blockchain technologies.

As far as money laundering and financial crimes are concerned, a  recent report estimated that 98 percent of an estimated $1.6 trillion of global money laundering goes through nets in the traditional financial system i.e. banks and intermediaries.

Also frankly, serious criminals looking to hide their tracks are more likely to choose a virtual currency that is issued and managed centrally and thus be willing to lie to regulators for a fee, rather than a decentralized currency like Bitcoin that is a open-source, public, peer-to-peer virtual currency that has no central administrating authority, and as a technical matter must make a record of every transaction and the database of all such transactions is distributed over millions of computers on the bitcoin network.

Not Surprisingly, there is a growing awareness amongst criminals and governments alike that only dumb criminals would use it for money laundering or terrorist financing.  There is evidence that supports this awakening.

For example, in the US, IRS has successfully developed tools to unmask owners of bitcoin wallets thereby making completely transparent and traceable the identity of people transacting in bitcoins.  Recently the US Department of Homeland Security and Interpol have partnered with companies (ChainAnalysis, Coinfirm) using advanced BlockChain forensic tools (e.g. Cluster analysis, entity merging) to successfully glean identities and shut down Alpha Bay and Hansa, two of the largest dark-web marketplaces for drugs and illegal goods.

Previously they shut down BTC-E, a large digital-currency exchange, that was being used by criminals to cash out their ill gotten bitcoins, and arrested its Russian-born founder. Bitcoin has largely earned its bad reputation for being used on the online black market Silk Road,  which is estimated to have generated barely $200 million in drug sales, whereas centralized virtual currency schemes like Liberty Reserve is believed to have laundered more than $6 billion related to credit card fraud, identity theft, computer hacking, and child pornography.

2. BITCOIN HAS NO INHERENT VALUE/ BITCOIN PRICE TOO VOLATILE

Nothing can be further from the truth. The disruptive potential and value of Bitcoin lies in how its ‘network centric architecture’ allows for decentralized security and control, i.e. a payment mechanism that does not depend on banks and governments, but on a governance system that is algorithmic and cryptographic.

This eliminates any single point of control and failure from the ecosystem. Making it not only censorship resistant but also allows people to make online electronic payments, just like making cash payments in the physical world without suffering delays and fees charged by Western Union, PayPal and Correspondent Banks.

Bitcoin’s  network value is determined by network economics just like that of any  other social network, meaning that more the number of users on its network the greater its value rises–just like Facebook, Alibaba & Google, whose  rising valuation follows Metcalfe’s law. However, the non proprietary nature of the bitcoin network means that all its users benefit from upside valuations and that’s what explains recent spikes in prices.

As far as volatility is concerned few pointers to historical data might be useful to put it in perspective–

Bitcoin volatility is approximately similar to Gold’s volatility in the immediate 4 -year period following the removal of the Gold standard in the 1970s

Out of the 194 currencies existing in the world today, Bitcoin is less volatile than 20-25 of those and its volatility has been trending southward as global mass adoption picks up.

Author is a bitcoin expert

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol are their own and not that of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions.
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