Even among those of us who are experienced Bitcoin users today, chances are that when we first heard of Bitcoin we did not embrace the currency wholeheartedly all at once. When people ask the average Bitcoin afficionado how it was that they first joined the Bitcoin community, a common story is that of a tech-savvy netizen who hears about Bitcoin at some point, discounts it because the system has some obvious fatal flaws that should send it crashing down within months, and sees it again weeks or months later after a bubble of media attention – and only then do they listen. Indeed, Bitcoin is a technology so different from anything we have seen before that it is hard to imagine anyone being fully comfortable with it at first. The purpose of this article will be to help Bitcoin advocates identify what some of these misconceptions are, and how Bitcoin advocates can help potential new users more quickly make the jump.
Pitfall 1: Bitcoin is Backed by Nothing
This is the most common argument against Bitcoin. The idea is this: most objects that we are used to dealing with in the physical world are things that we want because they provide some specific use value to us in and of themselves. We want apples because they are healthy and taste good, we want chairs because they are comfortable and we want computers because they help us efficiently browse pictures of cats on the internet. Even things that we get not for our own use, but to trade or sell to others, derive their value from the fact that somewhere, near or far down the chain, someone has a use for it. Bitcoin, on the other hand, is not like that. Bitcoins are nothing more than numbers in a computer network, and by themselves they have no value whatsoever. Oil is valuable because you can sell it to a company which will produce gasoline and sell it to a gas station which will sell it to a driver who will use it to get where they want faster; a bitcoin is valuable because you can sell it to someone who will sell it to someone who will sell it to someone who will sell it – the chain is unending. There is no originating place where the value is supposed to start, and the whole thing rests on an unstable social equilibrium that is liable to collapse at any time.
Bad Response: Bitcoin is Backed by the Economy
A common response to this is: bitcoins are valuable because other people accept them as payment. The argument usually follows up by citing the subjective theory of value, which essentially states that something can only be valuable if people want it, and if people want it then ipso facto it must be valuable. The response is a clever one, but the problem is that it does absolutely nothing to address the problem of infinite circular descent that makes people so worried in the first place; rather, it simply sidesteps it with a trick of linguistic sleight-of-hand. Those making this response also tend to make the claim that, according to the subjective theory of value, intrinsic value does not exist, so the questioner’s desire to see intrinsic value in things is baseless. This is also wrong, but for a slightly different reason: it conflates two different definitions of “intrinsic value”.
The first definition of intrinsic value, the one that the subjective theory of value effectively refutes, is the claim that commodities have some kind of mystical “value” embedded in them as a chemical-metaphysical property sort of like melting point and density, and we value certain things because they score highly on this property. However, there is also a second definition of intrinsic value, and one that is perfectly grounded in reality: the value that something has for the purposes of final use, and not for trade. Apples, chairs and computers are all firmly grounded in intrinsic value, and company stocks satisfy this criterion to a large extent (as owning a stock brings you dividends and eventually a payout when the company goes bankrupt). Bitcoins, however, do not, and this is a problem – while computers going down by 99 in price is a strong buying opportunity, bitcoins going down by 99 in price also makes each unit 99 less useful in trade, and there is fundamentally no floor stopping a further collapse.
Good Response 1: Go Into the Details
There are two good ways to fundamentally resolve the paradox behind the seemingly circular argument tha justifies Bitcoin’s value. The first strategy is to explain in detail how a currency maintains its value. The argument is this: suppose that each bitcoin is worth $100, and Bob voluntarily accepts a bitcoin from Alice in exchange for a toaster. Why does he do this? Because he knows that tomorrow she will be able to give that bitcoin to Charlie in exchange for a chair. How does she know that? Because she saw Charlie accepting them yesterday, and the day before, and the day before that, and realizes that the chance that tomorrow will be the day Charlie stops taking them is quite small. Why does Charlie accept the bitcoin the next day? Because he knows that Dave will accept it the day after that in exchange foor groceries – for exactly the same reason. And so on to Eve, Fred, George and all the way down to Zachary, who will then give Alice a bitcoin in exchange for a bicycle for the same reason as everybody else.
At first, this seems like a circular argument: Alice accepts bitcoins because Bob accepts bitcoins, and so on, because Zachary accepts bitcoins because Alice accepts bitcoins. However, this misses the key insight that the argument makes: the fundamental role of time. It is not that everyone accepts bitcoins because everyone accepts bitcoins today; rather, everyone accepts bitcoins because everyone accepted bitcoins yesterday. Thus, as long as bitcoins manage to be valuable once, they can remain valuable potentially forever on simply through this self-reinforcing chain. Altogether, this argument provides a compelling reason why bitcoins are valuable, and so resolves the conflict.
Good Response 2: So Is Any Other Currency
The other, simpler, approach to defending Bitcoin from this accusation is to not bother defending it at all; instead, you show that other currencies are just as bad as Bitcoin is. For dollars, this is easy; they too are intrinsically valueless. Some argue that dollars have intrinsic value because the government will always accept only dollars for tax payment; however, this argument has a fatal flaw: the government forcing the use of dollars for tax payment does not constitute any kind of hard floor on their value. To see why, suppose the price of dollars went down by 99 (ie. 100x price inflation across the economy). What would happen to your income taxes? Well, your income measured in dollars would go up by a factor of 100, so you would owe a hundred times more dollars in taxes as well. That is to say, if each dollar becomes a hundred times less useful in buying goods and services, it will also become a hundred times less useful in paying off your tax liability. Government is in fact not a master of its own currency’s price; in fact, it is a slave to it just like everybody else in society.
Gold is harder, as it does have some intrinsic value in electronics and jewellery, but the argument here is that its intrinsic value is so small as to be insignificant; as recently as 2001, gold was worth less than $300 per ounce. If gold’s intrinsic value has any power whatsoever, the rise up to $1900 in the decade that followed would imply that industry and jewellers suddenly found six times more valuable uses for it, and now that gold is down to $1300 the electronics and jewellery companies would all be buying it up on the cheap for its intrinsic use value. However, this is not the case; in fact, some argue that without the additional value heaped on by its function as a store of value gold would be worth as little as $100 today.
Pitfall 2: Bitcoin is An Aristocracy of Geeks
This argument is often made by those who are interested in alternative currency as a means of securing greater geofinancial equality. The claim is that Bitcoin is really no better than the fiat currency that came before it because, while fiat currency gives great power to governments and banks with at least some elected officials regulating them, Bitcoin simply takes that power and hands it to unaccountable computer programmers living in their mothers’ basements instead. A parallel argument is that Bitcoin can potentially oppress the common people through an aristocracy of the super-intelligent, as ordinary people stand no chance of understanding how the complex algorithms behind Bitcoin work. When viewed from a programmer’s point of view, this argument seems silly, but from the perspective of someone who is only just beginning to hear the language of “SHA256″, elliptic curve cryptography and proof of work, one can see how some people could be worried.
Medium Response: Actually Explain How It Works
Many people think that Bitcoin is complex, but in reality compared to some of the othercryptogaphic protocols of the past few years Bitcoin is downright trivial by comparison. Here’s a full explanation of why Bitcoin is secure in two paragraphs:
The Bitcoin network maintains a database of all transactions that have taken place, and from these transactions it is possible to calculate how much money someone has. To prevent people from making transactions spending from other people’s accounts, public key cryptography is used. Public key cryptography lets you create a “key pair”, consisting of a public key and a private key, that lets you create “digital signatures” with your private key that anyone with the public key can verify, ensuring that the message was sent by the owner of the private key and was not tampered with. Bitcoin holders use their private keys to sign transactions spending money from their wallet, and publish their public keys so that the network can verify that these transactions are legitimate.
Order of transactions is also important: if Alice sends 10 BTC to Bob and then tries to send those same 10 BTC to Charlie, you want the network to reject the second transaction; otherwise, Alice can buy a product for 10 BTC from Bob, then buy a product with those same 10 BTC from Charlie and let the network throw out the transaction to Bob, effectively defrauding Bob of 10 BTC. To solve this, Bitcoin uses a construction called a “blockchain”, where some users (called “miners”) run a computer program to pool together transactions into packages called “blocks”. A valid block is hard to produce – so hard, in fact, that on average the entire network only makes one every ten minutes, and difficulty is calibrated so that it stays that way. Each block also includes a pointer to the last block, creating the “blockchain”; if there are two competing blockchains the longest is taken to be correct. It is impossible to change the content of any block without making the block invalid; the reason is that the mathematical properties that make a block valid are so convoluted that changing even one bit in the block would require redoing nearly all of the work in creating the block to make it valid again. Redoing all of the work would also make the block considerably different, so the pointer in the next block pointing back to that block would need to be changed, so the next block would also need to be redone, and so on. Thus, if Alice wants to double spend her 10 BTC, she would need to create a new block from before she sent her 10 BTC to Bob, and then catch up with the rest of the network from there faster than the network adds new blocks itself – a task almost impossible for any single individual.
This is certainly quite complicated to take in all at once, and Satoshi’s whitepaper explains the concepts in more detail, but surprisingly enough the explanation has very little mathematical content; understanding the properties of public key cryptography is all it takes. Most other truly novel cryptographic algorithms developed today, on the other hand, require the equivalent of a university degree just to understand the algorithm’s steps. With Bitcoin, you do need to trust academic mathematicians that the underlying cryptosystems (elliptic curve cryptography for public and private keys and SHA256 to provide the highly “convoluted” block validation properties) are secure, but this has been independently researched by hundreds of university departments around the world, and all agree that the underlying technologies are secure. At this step, the security of SHA256 and ECC itself, the “here’s how it works” argument does break down slightly, which is why the next response I will present is somewhat better (although you should certainly never shy away from an opportunity to educate people about Bitcoin’s inner workings or the mathemagical wonders of cryptography).
Good Response 1: Mathematicians Are Not A Cartel
If one makes the comparison between the coercive power of governments and social status of banks and the mathematical and computer science expertise of any possible “masters” of the Bitcoin system, the comparison breaks down at one particular place: math and comp-sci geeks are not on the same team, or indeed necessarily on any kind of team at all. Whereas the governments of the world meet up at specialized forums, the banks have industry conferences and exclusive events targeted toward the super-wealthy, and both heavily interact with each other through central banks and regulatory systems, mathematicians are pretty close to the opposite of an organized class. The wizards of numbers and Greek letters are distributed across various universities in the world, and the masters of the digital universe can be found anywhere from open-source development groups to corporations to your local teenage whiz kid. Saying that these groups are threatening to seize control of society is as absurd as claiming that blacksmiths and sword makers were on the verge of taking control of armies during the Middle Ages.
Furthermore, the clique of mathematicians and computer programmers is an open one; while joining the political and banking system requires a high degree of existing wealth, luck and social connections, anyone can start learning math and CS simply by taking some of hundreds of freeopenonline courses. From there, Youtube videos, digital and paper textbooks and libraries can provide further support, and if you or your parents have anything close to a middle-class income (and are outside of the United States) universities are also there to help. Good luck finding a “how to become an elite banker” lecture series on Coursera.
Good Response 2: Fiat Currency is Technically Complicated Too
The other strategy is, once again, not to defend Bitcoin but to attack fiat currency. Among many people, there is this false conception that fiat currency is easy, because you just pass dollars around and enter numbers to make credit card payments, but Bitcoin is hard, because it involves computer programming and cryptography and SHA256. The fallacy here is obvious: there are in fact two levels of understanding, and arguably Bitcoin holds up well in both. The lower level of understanding is to simply understand the currency enough to be able to use it. Bitcoin is simple: you click “send” to send and copy and paste your Bitcoin address to receive. Credit cards are arguably more complicated; you need to fill in large amounts of personal information, understand how “chargebacks” work, pay off your balance every month and pay interest if you do not, and, for some reason, offline credit card transactions require you to sign a piece of paper (or a computer screen) with a pen. Cash requires you to do arithmetic with various denominations to calculate change.
On the higher level, while Bitcoin does have its mining pools and blockchain forks and client software patches, fiat currency has a large amount of complexity on its own. In Bitcoin, having 100 bitcoins means that you have 100 bitcoins. But what does it actually mean when you have $100 in your bank account? The technical answer is, there is a liability of $100 owed by the bank to you, backed by government deposit insurance up to a maximum of something like $250,000 if the bank goes bankrupt, and the bank itself partially backs its deposits by a combination of a very small quantity of cash and a specialized, bank-only form of money called “central bank reserves”. However, most of your money the bank lends out, and then the loaners probably spend that money, leading to the merchant depositing that money at a different bank, so the same underlying cash ends up being responsible for many different bank deposits at the same time, and it gets even more complicated from there – and, to be fully fair to the Bitcoin explanation given above, that’s not even getting into how the credit card system, bank ATMs and SWIFT are cryptographically secured (answer: quite a lot of the time, instead of actual cryptography security is achieved through machine-learning algorithms based on linear algebra and differential calculus). All things taken together, Bitcoin and fiat currency seem to be roughly equivalent in complexity on this front.
Pitfall 3: Bitcoins Are Finite And Will Run Out
The problem here is this: there will only ever be a limited number of bitcoins in existence – specifically, 21 million, and eventually, the argument goes, over time people will lose their bitcoins until none are left, making the system worthless. There are serious concerns with a limited currency supply, and the accompanying price deflation, as a model for an economy, and this article will not address those; instead, I will focus on the first concern.
One correct response is this: if half of all bitcoins are lost, then due to supply and demand the rest of the bitcoins will become twice as valuable. Thus, everyone will on average have and transact half as many bitcoins, and so after roughly the same amount of time, the number of bitcoins still in circulation will be down to a quarter of the original total. After three halvings, it will be an eighth, then a sixteenth and so on. However, and this is key, this progression will never reach zero. The Bitcoin protocol can always be changed to add more decimal places, and that is likely what will happen in that circumstance. Another response is to state that it is highly unlikely that we will see anything close to that much loss; if loss becomes a serious problem, we will see security systems develop to help guard against that. Ultimately, if nothing else, we can start another currency with unlimited linear growth to solve the problem; this will actually lead to a roughly constant final money supply assuming a fixed loss rate (eg. at 1 million coins per year and a 1 per year loss rate, the cap will be 100 million coins). Altogether, there are simply too many ways to get around this problem for it to be worth bothering about.
Pitfall 4: Bitcoin Is a Ponzi Scheme
Many people when first introduced to Bitcoin immediately come to this conclusion. The argument is this: Bitcoins are sold as an investment that will go up in value, but in order for them to keep rising there must constantly be more and more people participating – and once Bitcoin runs out of new people to bring in the whole system will collapse.
The most common rebuttal made is in fact the correct response, although it has some elements of an archetypal “bad response” in it. The argument is that Bitcoin is not a Ponzi scheme, as Ponzi schemes have a centralized authority, individual users are rewarded specifically for bringing in people under them, and the schemes themselves rely on misinformation and fraud – Ponzis do not advertise as Ponzis. Bitcoin, on the other hand, is decentralized, open source and individual Bitcoin holders only benefit very slightly from every new person that they recruit. The “bad response” side comes out when the argument focuses on the pedantic differences between Bitcoin and Ponzi schemes; to this, critics reply that centralization does not really matter and the sheer complexity of the Bitcoin scheme is a substitute for deception. As explained above, the latter claim is quite false, but even still this only reduces Bitcoin from “Ponzi scheme” to “pump-and-dump” on the level of dishonesty.
The “good response” side of the argument comes out when the response points out that, unlike both Ponzi schemes and pump-and-dumps, Bitcoin has legitimately revolutionary properties, and most Bitcoin users are into it for much more than just the money. Bitcoin allows users to transfer money instantly around the world essentially for free, semi-anonymously and without restrictions; that alone is a very compelling promise even without the decentralization aspects. It is more accurate to say that Bitcoin is a startup, and its twenty one million units are sort of like shares – although not quite, as they also have the hugely important function of being a form of money that can be transferred instantly around the world essentially for free, semi-anonymously and without restrictions. Simply being part of the Bitcoin community is another way to “buy in”; even if you own zero bitcoins yourself, if the Bitcoin economy does well, existing Bitcoin businesses will do well and you will derive a benefit in some form indirectly. If the startup pitch is compelling to you, come on in; if not, then okay, we’ll keep doing our best to make our decentralized little startup great without you.