Three Common Misconceptions About Bitcoin

Published on Monday, July 31, 2017 at 11:55 PM EST

This post covers three misconceptions that I’ve noticed people, especially beginners, often have about Bitcoin. This is meant to serve as an easy to understand overview, and more can certainly be said on each of these points. They’re listed in no particular order.

Hoarding vs. Spending Bitcoins

It’s not uncommon to hear people say that they don’t want to spend their bitcoins or that other people only want to hoard their bitcoins and that that’s what the system is designed to encourage. This represents a frequent confusion that people have about using bitcoin as a store of value and using bitcoin as a transactional currency or payment network. Implicit in the idea that people would only want to hoard their bitcoins is the assumption that you can only do one or the other, but that couldn’t be further from the truth.

It’s easy to be holding bitcoins for speculation purposes and still be able to spend what you have and then immediately replace what you spent, or to first obtain more bitcoins for spending purposes and spend those. It actually gets easier over time as more bitcoin brokers and exchanges open up, more merchants begin accepting bitcoin, more employers begin offering bitcoin as a payment option to employees, and the Bitcoin ecosystem expands in general. This flawed idea that you have to do one or the other is obviously incorrect when you stop and think about it, but you’ll come across it over and over again.

Transaction Fees

It’s common for newcomers to Bitcoin to ask why transaction fees can’t be free on the Bitcoin network, or to say that current transaction fees are just too expensive. In reality, Bitcoin fees are a market, and can’t ever be too expensive, the same way the price of any other asset or commodity can’t ever be objectively too expensive. It can be too expensive for your business model, or your own personal use, but Bitcoin doesn’t owe your specific use case any favors, and fees will be more or less what they should be at any given moment.

Transaction fees are required to prevent a tragedy of the commons situation from occurring, since demand for a highly replicated, permanent data store like what Bitcoin offers is essentially unlimited. If transaction fees were zero, or kept artificially low, you can be sure enterprising individuals would find new and exciting uses for what Bitcoin offers, and that increased usage would consequently drive up transaction fees. Even if there was no ability to include transaction fees internally on the network, increasing usage would ultimately lead to externally assessed fees being typical, such as directly paying a miner for transaction space.

Governance in Bitcoin

Many people talk about the need to introduce “better” governance structures into Bitcoin. They enjoy listing off all of the traditional forms of governance that have been seen in the world, and argue that we can implement one, or more, of them into Bitcoin. They point to issues that Bitcoin has had and is continuing to have throughout its fast paced growth, and cite those as reasons to modify the governance structure in Bitcoin. They never seem to outline how such changes would be a benefit, and seem to simply assume that it would be an improvement over what we have. All the while, Bitcoin has been operational for nearly nine years with no major problems, and I would argue that’s the direct result of Bitcoin’s solid governance structure.

Bitcoin is a multi-sided network, or a multi-sided platform, much like the internet and web are. It creates value by having a strong network effect, and it gains a sufficiently strong network effect by enabling direct interaction and participation among multiple, distinct types of parties. Currently, there are six primary types of parties that can be identified as operating in the Bitcoin ecosystem. They can be broadly classified as users, merchants and merchant services, miners, exchanges, software developers, and existing software infrastructure like wallets. Each of these different types of parties operates with their own goals and interests in mind, and changes to Bitcoin or related systems requires approval from a majority of multiple of these groups.

As changes become more contentious and greater in effect, the need to have more of these groups in agreement increases. For example, software developers can make any type of change they’d like to, but it would be a futile effort if no one uses their newly created software. Likewise, a contingent of users, miners, and software developers can all agree to make a significant change to Bitcoin, but they’ll find it difficult to gain traction if exchanges don’t support their effort. It’s this built-in requirement for a high level of agreement that makes Bitcoin useful. Bitcoin gains value by being difficult to change, and the more you want to change it, the more agreement you’ll need in order to do so. It’s this network effect dynamic that forms the basis for governance in Bitcoin. This is a feature, not a bug.