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Common Misconceptions About Bitcoin – A Guide for Journalists

Op-ed - Common Misconceptions About Bitcoin – A Guide for Journalists

Although the problem is now considerably smaller than it was one year ago, a significant amount of misinformation about Bitcoin continues to float around the internet. Part of the problem is that the concept of Bitcoin is so unlike anything seen before; decentralized currencies that have no offline presence were not exactly a common sight before Bitcoin came along. Bitcoin is also unusual in that it is a high-tech subject which has consequences reaching far outside the technology world, leading to under-educated journalists churning out sentences like "the Bitcoin program is under licensing by MIT, the globalist-controlled think-tank college". In reality, the MIT license used by Bitcoin does nothing more than give anyone the right to freely use, modify and redistribute the software, and has as little to do with MIT itself as Arabic numerals do with Al Qaeda and the governments of Syria and Iran.Another issue is the natural desire to write an interesting story; a story about the average suit-and-tie businessman using Bitcoin to quickly and cheaply move money across international borders is far less likely to generate pageviews than an "underground website where you can buy any drug imaginable". Thus, a natural bias exists in favor of the latter over the former.Major news claims about Bitcoin spread like memes, only serving to compound the problem. For example, after the Financial Post claimed on June 8 that "Europeans were moving their money out of their banks and dumping it into ... Bitcoin", a flood of other similar articles followed. On June 11, Business Insider ran an article based almost entirely on the Financial Post article claiming the same thing, and Betabeat and variousblog sites followed. One of these sites in turn catapulted the story onto Slashdot, and ZDnet and Daily Finance ran their own articles on the subject soon after. In reality, however, the story of investors flocking from Euros to Bitcoin en masse turned out to have been grossly exaggerated - Amir Taaki reports that "the only thing that’s happened is that the euro has increased in price vs the dollar slightly."Even in the case of stories that are essentially true, the effect can still manifest itself; when Bitcoin Central announced that it was partnering with a registered banking partner in France, the erroneous claim that Bitcoin Central was itself becoming a licensed payment services provider rather than simply partnering with an existing one was so mercilessly copied throughout the internet that Bitcoin Central was forced to release a statement clarifying the facts.The following are some clarifications on the major misconceptions that have surfaced regarding Bitcoin over the past one and a half years.

  1. Bitcoin does not have a central organization or authority. This feature of Bitcoin is among the least understood among people who are new to the currency, and perhaps the hardest to wrap one's head around. A recent article by Occupy Corporatism stumbled around this difficulty considerably, making claims like "Bitcoin has been given that status of a 'payment service provider'" and "Bitcoin now has an International Bank ID number". Although the Bitcoin community does include organizations with names like the Bitcoin Foundation and Bitcoin Central, none of these are anything close to central authorities for Bitcoin with inherent power over Bitcoin as a whole. Bitcoin Central is only one Bitcoin exchange among many - and not even the biggest one. The Bitcoin Foundation is simply an organization consisting of highly respected members in the Bitcoin community and developers of a particularly popular piece of Bitcoin client software. Anyone could potentially create their own exchange and their own foundation and displace either of these outright. Rather than thinking of Bitcoin as a product released by a traditional corporation, it is more appropriate to think of it as a self-sustaining digital commodity, similar to gold. It has a healthy satellite industry that provides products and services based around it, and it has its own business and advocacy organizations, but there is no central Gold Corporation. The databases that show Bitcoin addresses with a given bitcoin balance are all collectively managed by the network using a peer-to-peer network, similarly to the peer-to-peer networks used by file sharing services.
  2. The Bitcoin price did NOT fall to $0.01 in June 2011. The backstory behind this myth is an event in June where an administrator account at MtGox, a Bitcoin exchange which had over 80% market share at the time, was hacked, and the attacker managed to manipulate MtGox's database tables to create a balance of 2 million bitcoins within his account and immediately sold them, consuming all of the buy orders that had been placed on the site in the months before going from $17.50 all the way down to $0.01. However, what sank to $0.01 was not the actual Bitcoin price, but rather a MtGox representation of the price. A price is, by definition, a value in exchange for which something is being bought and sold at a given time. In this case, however, MtGox later rolled back all of the trades that had happened during the event, so no lasting purchase or sale was actually made at anything less than $10. MtGox's price charts show no transactions happening on the day. Aside from the attacker, no human being was, at any point, willing to sell bitcoins at anything close to $0.01 - the orders that were processed were all made weeks and months before the event, and at exchanges other than MtGox, the price generally remained at a healthy $13-$18. And, most importantly of all, the 2 million BTC that were sold were not even real bitcoins - they were simply fraudulent entries in MtGox's database. Although it is understandable how some can interpret the event as the price dropping to $0.01, pointing to this incident as a sign of Bitcoin's price instability is highly disingenuous - the root cause was a security mishap at a third party service, not a sudden loss of confidence in the currency. Incidentally, if the MtGox hack does count as the Bitcoin price dropping to $0.01, then another, less known, MtGox glitch deserves to count as the Bitcoin price reaching $1 billion.
  3. Bitcoin itself has never been significantly counterfeited or hacked. A number of articles over the past one and a half years have come out with headlines triumphantly proclaiming "Bitcoin hacked", or something similar in the introductory paragraph, and recently an article on the Washington Post claimed that in the future we would be smuggling "counterfeit digital currencies." Unfortunately, Bitcoin's security reputation has been negatively affected as a result. In reality, however, stories about Bitcoin being hacked are simply instances of the central authority misconception manifesting itself once again. The Bitcoin protocol itself and the various services that have been built up by the Bitcoin economy are two completely different things; saying that the former was hacked when the real victim was one of the latter is like saying the US dollar was hacked when criminals manage to steal $10 million by breaking into point of sale terminals. Incidentally, the US dollar itself has been "hacked"; a large part of North Korea's revenue comes from counterfeiting hundred dollar bills; the Bitcoin protocol, on the other hand, has not had any significant security breaches. There have been a few minor incidents involving special methods of accepting Bitcoin that are known to be unsafe, but the scope of these attacks is well understood and very limited, and the average user and business is not vulnerable at all. Because all clients enforce the 21 million bitcoin supply limit, "counterfeiting" new bitcoins into existence is impossible outright. On the whole, the cryptographic and game-theoretical foundations behind the Bitcoin system have proven to be rock solid, and the fact that no one has yet claimed the $140 million reward for breaking these foundations is a testament to this. To the average user, there are only two ways to lose one's bitcoins to malicious activity: entrust the bitcoins a third party service that turns out to itself be insecure or fraudulent, or have your own computer get hacked by a computer virus - both of which are problems in the traditional financial system as well, costing the US economy $50 billion per year.
  4. Bitcoin is NOT (yet) seeing massive growth in usage to evade trade sanctions in Iran. Much like the Bitcoin Euro story, this is another meme that has spread around the internet all too quickly for its own good. After Business Week came out with its article on November 29, Reason, Infowars, various financialblogs and much later CNN all picked up on the story, often simply copying paragraphs while offering little or no original research of their own. In reality, the Iran story does have some grain of truth, as there have been signs of increasing activity from Iran in the past few months, but on the grand scale, Bitcoin is far from making significant inroads - on Google Trends, Bitcoin is not even on the charts for Iran. What happened here was a common journalistic fallacy: the media took a single story of an Iranian earning bitcoins by selling music on CoinDL and wrongly extrapolated to a story about Iranians switching to Bitcoin en masse. There is nothing wrong with writing an article expressing the potential for Bitcoin to be used to bypass trade sanctions on a larger scale, but one must be careful not to assert that such a thing is already happening.
  5. Bitcoin IS being used to sell illegal drugs on sites like Silk Road. However, illegal goods other than drugs - including assassinations, child pornography and even guns, are NOT gaining significant traction. The black market website Silk Road made considerable news a few months ago when a paper by Nicolas Cristin was released, claiming that the site had a monthly trade volume of over $2 million. Focusing on the black market aspect of Bitcoin is a popular habit of journalists, as shown by US senator Charles Schumer in June 2011 when he accused Bitcoin of being "an online form of money laundering used to disguise the source of money" when buying and selling drugs. Even now, articles are using Schumer's words as part of a two-sentence introduction to what Bitcoin is. Other articles, however, go even further; one blog piece claims that "the fact that you can buy drugs, guns, and assassinations with Bitcoins is indisputable," and another video portrays bitcoins as the go-to currency for purchasing prostitution, guns, stolen art and more. These claims, however, are exaggerated. The video claims that "at one point the Silk Road drew the line at selling products harmful to others like firearms, stolen credit card numbers and more, but as the site grew things turned for the worse," but this statement is factually wrong - in fact, as time went on, things turned for the better. Stolen credit card numbers, child pornography and assassinations were never allowed on Silk Road, and even the much more lax Black Market Reloaded has slowly begun clamping down on immoral activity - assassinations and child pornography can no longer be found on the site. After growing controversy among the site's users, Silk Road's mastermind Dread Pirate Roberts banned firearms from Silk Road in January 2012, moving firearms sales to a dedicated site. However, the site failed to gain traction, and Roberts closed the Armory down only six months later due to inactivity. Guns were not allowed back on Silk Road. The assassination threat is similarly overblown. If one casually scrolls through black market sites on the Tor network, there are indeed a number of sellers offering assassinations at a price anywhere from $5,000 to $20,000 USD, typically asking for Bitcoin as the payment method. However, a more detailed analysis shows a different picture. These sellers' accounts invariably have no reputation or feedback of any kind, and they never offer to use an escrow service. This can only point to one conclusion: they are all scams. It costs nothing to put such an advertisement online, and scammers can simply wait until a customer contacts them, and then extract as much upfront payment as they possibly can. Some of these scams may even be vigilantes and police, deliberately undermining any semblance of trust in markets for such services in an attempt to protect potential victims.

It is easy to understand why so many writers have made these kinds of mistakes. It is easy to fall victim to the desire to come up with an interesting story that will generate pageviews, especially when there is often so little incentive to dig through to the more boring truth. To combat these myths, therefore, we must all be vigilant. Whether a given story is unfairly biased against Bitcoin, or even unfairly biased in its favor, it is important to work together to make sure that the truth always comes out - in the first case, not to needlessly scare potential Bitcoin adopters away, and in the second case, not to disappoint. Hopefully, as public understanding of what Bitcoin is continues to develop, we will be seeing far fewer outdated or inaccurate claims in 2013, and with luck, Bitcoin will be free to rise or fall - but hopefully rise - on its own merits.