Chief amongst the myths surrounding Bitcoin are that it is a scam and has never been backed by anything real, it’s an ideal investment vehicle for criminals, and that it will only be secure and by extent, valuable until quantum computers become widespread, at which point its’ cryptography(security) will be broken. Below, we’ll break down those ideas for you and draw conclusions as to whether they have any shred of truth or are just full-fledged myths.
Since Bitcoin’s launch, numerous personalities, some of them well-known professionals in economics and traditional finance, have consistently taken the above as a rallying cry. Perhaps the most notorious examples of these critics are Nouriel Roubini, Peter Schiff, and Jamie Dimon. By breaking down their stances and comparing them to the facts about Bitcoin on a technical level, however, it’s easy to see where they’ve gone wrong.
First, let’s take Nouriel Roubini, who is a New Keynesian economist. What that means is that he and others like him believe that the current financial system works and that certain fiscal policy strategies that central banks and their overarching governments take, lead to turnarounds from economic crises. If you consider this, together with the foundational case for Bitcoin’s value, then it’s clear that Bitcoin’s growth is a threat to the mental models of Roubini and everyone like him. If, for example, Bitcoin does become a ubiquitous part of the global financial system, then New Keynesian Economists will have been proven wrong in that a fully debt-driven system will have failed. In a simpler sense, what we’re referring to here is that such a system needs an asset like Bitcoin to serve as a call option against everything else.
With this in mind, let’s move on to Peter Schiff, who is perhaps the most well-known investor and money manager of gold-focused funds today. The mere fact that he makes all of his money and garners all of his notoriety from his success with gold investments speaks to why he is a consistent critic of Bitcoin. On a basic level, Bitcoin is a better gold. It has a provably fixed supply and provably limited issuance, both of which are publicly verifiable by its code and cannot be changed. Gold, on the other hand, fluctuates in issuance based on mining operations as well as how much is discovered each year. Additionally, the relatively recent finding that gold and other metals can be harvested from space with the right technologies adds fuel to the fire that gold won’t ever be truly scarce.
Now imagine the situations of both Roubini and Schiff, as one. Together, they make up Jamie Dimon’s historical stance against Bitcoin. Because he runs JP Morgan Chase & Co., one of the world’s largest banks, the mere existence of Bitcoin was always a threat to his key business model, at least in the beginning. Now, 2020’s changing everything both due to Bitcoin’s rising market cap and hedge funds and similar investors taking the leap into Bitcoin in a major way. With their example, Dimon and his company have done a major about-face. From calling it a “fraud” in 2017, JP Morgan analysts have now indicated that they believe Bitcoin’s core value proposition, judging by a report that they released this October. All in all, what that report indicated is that they’re now in the camp that believes in Bitcoin’s core value proposition of being “digital gold.”
If you’re wondering why such as staunch critic has flipped the script in such a significant way, it’s actually quite simple. In the latter half of this year, investments into Bitcoin by Square, MicroStrategy, Paypal, and well-known hedge fund types like Paul Tudor Jones have led to a colossal shift in institutional sentiment. Following the lead of these individuals and companies, JP Morgan are beginning to see the writings on the wall. The name of the game for everyone now is to adopt Bitcoin or die out just like those who don’t prioritize innovation and adaptability die out.
If there’s one quote that brings all of the above together, it’s this, from Michael Saylor, the CEO of MicroStrategy: “The same logic that compels engineers to prefer steel, aluminum, & oxygen for building, flying, & breathing leads me to prefer Bitcoin for saving.” Bitcoin’s fixed supply and proven long-term ROI, together with its decreasing correlations to traditional assets have led to and will continue to lead to it being the world’s best savings technology.
The math is there. It’s up to each and every player in the global financial system to decide if they want to take on Bitcoin and persist or avoid it and fail.
Just like the first myth, this one’s particularly easy to dispel. Bitcoin’s not ideal for criminals. It’s only pseudo-anonymous, which refers to the fact that you don’t have to provide a national identity document or even a phone number to make a Bitcoin wallet, but your wallet’s address is traceable on the blockchain forever. This traceability is facilitated by tools such as block explorers which function as search engines for particular blockchains with the help of analytics platforms provided by companies like Chainalysis and Elliptic.
What these companies do is fairly easy to grasp. As Tom Robinson, Elliptic’s founder, pointed out to The Next Web(TNW), his firm and others like it focus on preventing money laundering by providing tools that make it easy to recognize illicit activity on the blockchain. They accomplish this through the large-scale data collection of all sorts of activity on the blockchains they support. This data is then cleaned and analyzed to generate insights related to which wallets have been or are likely to be tied to all sorts of illicit activities.
All in all, the accuracy of these insights largely depends on a single factor. Social media sites and cryptocurrency exchanges as well as just about every other popular online service that people interact with, outside of the dark web, require some form of KYC.
If you’re not familiar with the term KYC, consider this reframing of it. Every time someone signs up for Twitter, they have to provide either an email address or a phone number. These pieces of information are typically used across multiple platforms and services and analytics tools can follow such a chain backward until they find the identity of the person they’re tied to. Cryptocurrency exchange users are even easier to track in this respect since they’re required to submit their passports or some form of national identity to have their accounts approved. Considering all of this, it’s sufficient to say that blockchain analytics firms like Elliptic simply use what’s already out there on the internet and the blockchain and sort the data they find into profiles they believe need to be monitored.
If there’s one quote that ties up the absurdness of the idea that Bitcoin is ideal for criminal ideas, it’s this, from Jon Walsh, the Senior Vice-President of Strategy for Europe at EMX Digital. “Hopefully more criminals will use Bitcoin as a payment method, as due to the public nature of the ledger, the tracking and tracing of money movements is fairly simple. At some point, the criminals will want to convert their illicit Bitcoin back into fiat which means that they will have to interact with KYC and AML procedures at exchanges and banks — not a great thing to do if you want to get away with your ill-gotten gains.” As Walsh points out here, the moment that criminals cash out, they’re doomed to fail. Whether it happens at a cryptocurrency exchange, a bank, or somewhere else entirely, the odds are that their activities won’t stay anonymous. With all of this, it’s also important to remember that analytics providers and law enforcement don’t just track everyone for no reason. The point of such tools as we’ve described here is to decrease criminal activity in the crypto space and consequently, bring even more legitimacy to it.
In the end, if there’s anything that’s an ideal vehicle for criminal activity, it’s cash, since cash transactions are done hand-to-hand and can be kept largely anonymous.
To stay secure, the Bitcoin network depends on cryptography, which means that all of the information that passes between its nodes(users) and is stored on its blockchain, is fully encrypted. To visualize how this looks in practice, think of a Bitcoin transaction. What info does it include? Generally, each transaction identifies the wallet that the funds originated from, the amount it involves, and the time as well as the date that it took place. Now imagine that before passing to the Bitcoin blockchain itself and on to its destination, that same transaction flows through an algorithm that spits it out as a randomized string of letters and numbers. That’s the essence of most of Bitcoin’s encryption. Its’ data is kept secure through multiple layers of such randomization.
Through zooming out to a big picture view of Bitcoin’s security, it’s easy to understand the argument that quantum computers will break it as well as how that argument is flawed. Out of everyone who has offered opinions on this issue, Andreas Antonopoulos explains the truth of the matter best. In a public appearance in Denver in 2018, he fielded questions related to quantum computing and just how much it threatens Bitcoin and from that talk, two quotes stand out.
When asked how Bitcoin can safeguard against quantum computing when organizations like the NSA reportedly already have powerful quantum computers, he responded: “I’m not worried about the NSA having a quantum computer because one of the things that’s a very basic concept in security is that when you have a very powerful secret weapon, you don’t use it. You wait until you have a very good reason to use it.” He then went on to compare the possible existence of a quantum computer with enough processing power to crack Bitcoin to the cracking of the Enigma machine during World War II. From this comparison, Antonopoulos concluded that just like the British were reluctant to divulge that they had broken the Germans’ codes until there was an absolute need to do so, the NSA and anyone else who might possess a quantum computer that’s powerful enough to solve for Bitcoin’s encryption won’t use it do so. Divulging the cracking of Enigma’s code too early would have given the Germans time to change their codes. Using what would likely be the world’s most powerful quantum computer to solve for Bitcoin would, in turn, be similarly inadvisable from a security perspective. After it was used, the world would know of the existence of such a powerful weapon before it could be pointed towards a much more globally impactful purpose. The rivals’ of said country or organization would update all of their security systems to account for its’ existence and the computer would then be effectively worthless.
Now, reading this, you might find yourself saying: sure, that was true in the past, but now Bitcoin’s become more of a household name. Isn’t it, therefore, now more likely, that someone will turn the hash power (aggregated computing power) of a quantum computer on Bitcoin and try to take control of it?
Before we answer that question, consider this. Presently, most, if not all of the world’s quantum computers are owned by organizations and governments with extremely deep-pockets. This is because they require a considerable investment in both capital and space to properly function, just like traditional computers before the spread of the microprocessor in the 1970s. So, quantum computers is far from widespread and in fact, very much of a rarity.
Furthermore, both within and outside of the crypto space, the consensus is that for the next decade or close to it, Bitcoin’s mining-based (proof-of-work) security will stay secure. At the same time, most experts, including Antonopoulos also agree that there is an element of Bitcoin that will be more immediately at risk from the rise of quantum computing. “The widespread commercial availability of quantum computing would basically mean that the Elliptic Curve Digital Signature Algorithm would be vulnerable.” Fundamentally, the ECDSA is the set of rules that makes sure that bitcoins “can only be spent by their rightful owners.” How it does so is through using public and private keys as well as signatures. You can think of the first as equivalent to both an identity as well as an account number for a specific cryptocurrency wallet, while the second is like a password that allows you to spend that wallet’s funds. The third element, signatures, are what ties a wallet’s private key to its public key without revealing the former, which would allow anyone to steal the wallet involved.
If enough qubits (quantum computing-generated hash power) were pointed at the Bitcoin network to break through the ECDSA, then all Bitcoin wallets that ever spent any funds would be vulnerable to having their remaining funds stolen. This is because cracking the ECDSA essentially means revealing the private keys of all of these wallets. At the time that such an exploit were discovered as a real threat, everyone who falls into this situation would need to move their bitcoins to new wallets that support quantum-resistant signature algorithms. Such algorithms are being researched but haven’t been introduced yet.
The idea of it being a threat to Bitcoin isn’t really a myth. It poses a significant risk, just not an immediate one. Eventually, quantum computing will have to be accounted for through improvements to Bitcoin but research indicates that those working on the issue have around a decade to do so.
This text is intended to inform and is not an investment recommendation.