Bitcoin has been around now for eight years and is maturing with a sizeable market capitalization, with more than 25 mln wallets in circulation. Adoption has benefited from post-Brexit activities, the U.S. elections and in the past week has been further boosted by events in China with currency exit and with India’s new currency reforms.
Things are hotting up for Bitcoin. But is terminology holding it back?
The language used by the Bitcoin and Blockchain communities is misleading and conjures up all kinds of thoughts and images in people’s mind, often creating the wrong impression.
One of the big challenges for any new technology, apart from it being mocked by the incumbents, is that people try to compare it to what they know, their reference point. The obvious is fiat currencies – the current banking system and the process of how bank accounts work.
So here are the five most confusing things about Bitcoin and the answers that decode this technology and clear up the misconceptions to make it clear for all Bitcoin enthusiasts.
1. Gold coins is what it looks like
Many mistakenly believe Bitcoin is a physical currency, Gold Coins with a letter B and two vertical bars – like a dollar. Everywhere there are pictures of coins and it is no surprise many people are convinced you can buy and own gold Bitcoins. Apparently people have tried to buy Bitcoin on eBay and other sites without understanding that Bitcoin is essentially a virtual currency, although commonly referred to as a cryptocurrency, that only exists as an entry on a ledger, held in the Bitcoin network.
2. Wallet is where you keep your Bitcoins
The image people have of a Bitcoin Wallet is similar to a leather wallet where you keep fiat currencies, in the sense that it is a physical place to keep your Bitcoins, and your other crypto-currencies. The term “wallet” is suggestive. However in the Bitcoin crypto world, a wallet is where you hold your keys – private and public – that are used to sign off transactions. They operate on a similar basis to a CVC code on the back of a credit card, the three digit key code that unlocks the payment and authorises the transaction.
3. Miners have pickaxes and dig for gold coins
The mental image of a miner digging in tunnels to find gold coins immediately springs to mind and is difficult to shift, reinforcing the image that Bitcoin is a physical currency. The role of the Bitcoin miner is to validate transactions propagated on the Bitcoin network, where they expend energy and work hard to solve an increasingly difficult game theory challenge, so they can write transactions to a ledger called the Blockchain. Their reward for doing so is Bitcoin that is written on the ledger as a positive credit to the miner’s Bitcoin address.
4. Moving Bitcoin around is free
The impression given out by the Bitcoin community is that using the Bitcoin network to make payments is free because there is no central body or physical people doing the work to validate and reconcile the transaction. The miners are nodes on the network process transactions and they charge a small amount for this. It is worth remembering that Bitcoin uses eight decimal places that allows for very small micropayments. Bitcoin transactions are much cheaper than a bank payment, credit card or other remittance services and they happen in windows of 10 minutes – but not really.
5. There is risk the other party won’t pay
When you think about making a payment in a conventional bank operation, the bank takes on the counterparty risk to ensure the sending party has the money, that it is a valid transaction and the funds are actually sent to the other party. There is a perception that using Bitcoin is not safe and you could lose your money or not receive what was sent. It is worth remembering that a Bitcoin network is not based on a system of debt like traditional banking. In a Bitcoin network the transactions are automatically validated and there is no need to reconcile. Bitcoin works on the concept of “available spend,” effectively a net Bitcoin balance. A transaction cannot be validated unless there is a positive unspent balance. The network knows where the address the Bitcoin transaction is coming from, knows the amount and the destination address. That’s it. Unless you’re using Zcash which is another story.