3 misconceptions about Bitcoin and cryptocurrencies
It’s amazing how people today invest in Bitcoin and other cryptocurrencies without having a clear understanding of what it is and how it works. In this post I will list 3 misconceptions about Bitcoin that I have heard from people who invested or were considering investing in it.
Transactions in Bitcoin are untraceable
It is actually completely the opposite. Apart from specific cryptocurrencies such as Monero, all transactions happening on the blockchain of Bitcoin, Ethereum, Litecoin and the others can be seen by everyone. This is intended and by design as the blockchain is actually a public ledger distributed accross a huge amount of computers and that can be accessed by anyone to verify a transaction. For example you can use:
- Etherscan to track Ethereum wallets and transactions
- BlockExplorer to track Bitcoin and transactions
Someone even created a Twitter bots to track transactions done on white supremacist bitcoin wallets. So don’t expect to escape the IRS if you own Bitcoin (you will be taxed on capital gains), as the day you will need to cash out it will be fairly easy to track down the source of funds, unless you sell your coins for cash and carry the cash with you.
Nobody can steal the coins stored on my hardware wallet
When you buy a hardware wallet to store your crypto, it will basically help you secure transactions you do on a computer, adding extra security for you. But if you keep your hardware wallet in a locked safe, it is still possible for to steal your coins if someone finds out your private wallet address.
During setup, your hardware wallet gives you a list of words to write down, which is the private address to your wallet. This is basically the unencrypted address to your bitcoin wallet which can be used to steal all your coins. For example “medal stumble stove foil secret country famous swing enter dismiss hedgehog rose” is a private bitcoin wallet address I have just generated using tihs Bip39 generator.
You should never trust a hardware wallet that has been initialized by someone else as you should assume that this person knows your wallet address and can steal your coins at anytime. On the other hand, if you lose your hardware wallet, and still have this list of words, you can restore your wallet on another device without any issue. The good practice is to keep this list of 12 words very safe (typically not on your laptop but on a physical piece of paper).
Bitcoin is the best cryptocurrency
Bitcoin is the most famous cryptocurrency, that is a reason why it is so expensive today: many people even confuse cryptocurrencies with Bitcoin. But Bitcoin today is far from being the most powerful cryptocurrency.
- First, because Bitcoin is slow: it takes a few hours to confirm a transaction as the entire network is limited to 3-7 transactions per second (TPS), which is ridiculously slow compared with Visa, processing close to 50k TPS. This is a problem that all cryptocurrencies are working on with various different approaches and it is too early to know which one will become mainstream.
- Second, it is an expensive network: currently, it costs 28$ to perform 1 Bitcoin transaction on the blockchain. It makes it unfit for processing small payments that are what people do everyday, the risk being that it remains a store value backed by no use case (hence questioning its actual value).
- Third, it is too volatile: the value of 1 Bitcoin changes too fast over a period of 1 hour to make it a convenient form of payment: to accept a payment, the recipient will have to take a dangerous bet on the Bitcoin exchange rate evolution by the time he is able to exchange the coin.