Prevalent Bitcoin Misconceptions

Bitcoin is the world’s largest cryptocurrency by market capitalization and has been around since 2009. Yet there still exists plenty of conjecture, disbelief, and downright myths floating around financial circles.

Some of those misconceptions may be standing in the way of broader institutional adoption of Bitcoin and other digital assets. One common issue is that many asset allocators and so-called experts are establishing dismissive bitcoin postures based on old or inaccurate data. For example, the chorus of critics saying Bitcoin isn’t a legitimate store of value seem to base that thesis largely on the cryptocurrency’s reputation for volatility.

“In our view, these critics do not understand why bitcoin is volatile and why its volatility is likely to diminish,” writes ARK analyst Yassine Elmandjra. “While distracting naysayers from assessing its role as a store of value, bitcoin’s volatility actually highlights the credibility of its monetary policy.”

Based on that argument, a case can be made that store of value critics are ignoring that Bitcoin is a decentralized asset, meaning it’s not backstopped by a central bank that can interfere with or force the stability of exchange rates.

More Bitcoin Misnomers

One of the most frequently levied critiques of Bitcoin is that it’s a bubble. The “tulip mania” comparisons are enforced by those asserting Bitcoin has no intrinsic value and those pointing out that the digital asset lacks the traditional valuation metrics of bonds and equities. There are, however, effective counterpoints to those arguments.

“A monetary asset like bitcoin, however, is nonproductive, its appreciation based on how effectively it preserves or enhances value over time. In a way, the value proposition is circular: a monetary asset will appreciate as more people demand it, and more people will demand it if it is an effective monetary asset,” notes Elmandjra.

More tech-savvy critics are apt to point out that Bitcoin could be vulnerable to value destruction by way of digital forks and software-driven imitators. Those in this camp point to the open-source software underlying bitcoin, suggesting that anyone can access the software and potentially create competing digital currencies. Still, it appears forking and software concerns are overstated.

“While existing bitcoin holders have rights to the new coins, the forked network operates under an independent set of rules supported by unique stakeholders,” continues Elmandjra. “Instead of diluting the money supply of the original network, open source software encourages not only inexpensive experimentation and new networks, but also new coins and a competitive market.”

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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.