Common Misconceptions About Bitcoin

 

Every person learning about Bitcoin comes across the same questions. I myself asked these questions a few years ago when I was starting to learn about it. Here are the answers to a few commonly asked questions.

Is Bitcoin used by criminals?

Yes.

But criminals also use the internet. And cars, computers, encrypted communication methods, and even US dollars. It’s not possible for a thing to exist without someone using it for some illicit activity.

As opposed to the US dollar system, every single transaction on the Bitcoin network is publicly viewable. It’s possible, via analysis of the blockchain, to estimate the amount of illicit activity conducted as a percentage of all the transactions on the network. According to Chainalysis, only 0.15% of all cryptocurrency activity was related to illegal activities, whereas total money laundered per year is approximately 2 – 5% of global GDP, with 90% of that going undetected according to Renolon.


So, while any technology or monetary system will be used by criminals, with Bitcoin it’s possible to pinpoint how much criminal activity is being performed. Additionally—for better or for worse—it’s apparent that illicit activity on the Bitcoin blockchain is less frequent than illicit activity using the US dollar system.

How secure is Bitcoin? Can it be hacked?

Bitcoin’s security is provided via three methods: mining, nodes, and cryptography. Each of these protects the network from a different form of attack, making it the most secure digital network in existence today.

Mining provides security against external attacks from actors trying to reverse transactions. In total, the Bitcoin mining computers use an immense amount of electricity by running a very large number of transactions (150,000,000,000,000,000,000 per second as of June 2022). If an attacker wanted to reverse a transaction, they would have to use enough computing power to rival that of the network, which would require billions of dollars in physical equipment and electrical cost.

Nodes ensure all transactions and users adhere to the rules of the Bitcoin network, protecting it from internal malicious actors. If someone were to try to spend bitcoins that they don’t own, any node that sees the transaction will immediately identify it as fraudulent and drop it from the network.

Cryptography is the method of scrambling digital data so that it cannot be accessed or read by the wrong person. Cryptography is also used to prove ownership. Bitcoin’s cryptography uses key pairs, where one key is public, and the other is kept private.

The public key is used to receive bitcoins, and the private key is required to spend them. You can think of it as if the public key allows anyone to drop a letter into your mailbox, but only your private key allows you to open the mailbox to read and respond to your mail.

The private keys are so secure it would take an attacker trillions and trillions of years to guess only half the private keys that are out there. All of this is to say, it is not computationally possible to hack anyone’s private key. Bitcoin is many, many orders of magnitude more secure than any regular website, such as online banking, Amazon, or any other secure portal.

Note: You may have heard of Bitcoin companies being hacked, such as what occurred in 2016 with Bitfinex. This is different from the Bitcoin network being hacked. If someone broke into a bank and stole the cash from the vault, nobody would blame the US Dollar system; they’d blame the bank! Similarly, if a company is hacked, it is because of a fault in the company’s security protocols and not a fault in the Bitcoin network.

Why is Bitcoin so slow?

Bitcoin transactions are bundled into blocks and settled on the network every 10 minutes. Your transaction may take a few blocks to be added to a block, which means it could take half an hour or more for your transaction to be fully settled. For some types of transactions—like buying groceries or paying for a carwash—this delay is unacceptable.

Bitcoin’s 10-minute blocks are a compromise between network security and efficiency. If blocks of transactions were settled faster, transactions would be confirmed sooner but there would be a greater chance of the network getting confused about which recent transactions have been settled. If the blocks were found more slowly, then the network would be more in sync all the time but there would be potential for greater frustration around settlement times. 10 minutes is the happy medium.

Additional systems and protocols are being built on top of Bitcoin to solve the issue of transaction speed. The Lightning Network is actively in development—and is even functional for daily use—right now, and it allows Bitcoin transactions that are instantaneous and nearly fee-free.

What about other cryptocurrencies?

There are many cryptocurrencies, known as altcoins, other than Bitcoin. As of June 2022, there are over 10,000 different cryptocurrencies according to coinmarketcap.com. Many of these cryptocurrencies are outright scams and can be ignored completely. Some purport to be building decentralized systems—computers, contracts, and the like—that can run with no central point of operation or enforcement.

According to the SEC Chair, Gary Gensler, on August 3, 2021 (LINK HERE), many of these altcoins could be considered unregistered securities based on the way they were brought to the market and how they continue to operate.

From the perspective of Frontier Bank, promoting to our customers a cryptocurrency that might end up being ruled an unregistered security is an unwise decision. We will wait until we have greater regulatory clarity from the SEC and other regulatory bodies before we consider promoting the use or ownership of altcoins.

Why does Bitcoin use so much energy?

As was mentioned briefly above, mining is a computer process that uses an immense amount of energy. Contrary to popular belief, energy consumption is a feature of the network and not a useless waste. It is precisely because Bitcoin uses so much energy that it is very difficult to attack, and the network is always in agreement on transaction status.

The Bitcoin miners (which are just highly specialized computers) process bundles of transactions and every 10 minutes one miner randomly wins and settles a block of the transactions onto the blockchain. This miner is awarded some number of Bitcoins that previously hadn’t existed as well as any transaction fees, which together are known as the block reward. Miners then sell this Bitcoin to pay off their electrical bills and any other operational expenses.

To put context on Bitcoin’s electrical usage, Bitcoin consumes 0.12% of global energy generated. Additionally, it consumes less energy than gold mining, video games, or Christmas lights. (All data taken from Bitcoin Mining Council report).

Please pass this article on to your family or friends who ask you about Bitcoin, and let us know if you have additional questions we can answer! Read more about Bitcoin in our other recent blogs, What Is Bitcoin? and Is Bitcoin Safe?

 Andy Ott

Andy Ott
Digital Bank Manager
andyo@frontierbank.com
(605) 331-2889

 

 

 

 

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