As a new asset category, bitcoin must be fully understood by investors and risk assessment should be made before deciding to buy.

Here are seven misunderstandings about bitcoin:

1: bitcoin is only used for speculation

It's not accurate. Bitcoin networks settle transactions worth about $10billion a day. Bitcoin's average daily volume is 305000 transactions, not far from the number of 550000 per day in Fedwire, the Federal Reserve's wire transfer settlement system.

Some of these transactions represent investment purchases, some of which may be speculative, but many others are used on a regular basis, such as remittances, especially in developing countries. For example, according to the world economic forum, 32 per cent of Nigeria has bitcoin for point-to-point payments. Bitcoin is sometimes the only way to finance anti-corruption efforts and protests in regimes such as Russia and Belarus. It's very useful.

2: bitcoin waste energy

Bitcoin miners use powerful computing power to protect bitcoin networks. These computers consume a lot of energy: it's estimated to use as much as Chile. This leads to a waste of energy.

Bitcoin networks ensure value of $1trillion and serve millions of people, including many who cannot use traditional payment networks. Miners often live in places where electricity is abundant and free, which usually means renewable hydropower or geothermal energy.

Today, at least 39 per cent of bitcoin mining is powered by renewable energy, and that share is growing rapidly. The carbon footprint of bitcoin is undoubtedly a problem to be solved. But that doesn't mean bitcoin is a bad idea. Instead, carbon footprint is a challenge to overcome, just like all useful entities.

3: bitcoin fluctuates too much to store value

To be sure, bitcoin is more volatile than government bonds, but in essence it's not a bad thing. In the 1970s, with the formal disengagement of gold from the monetary system, its price was extremely volatile, rising tenfold in a decade, then falling by 60%, and leveling off decades later. The value of gold is rising and it is the most volatile. Sometimes the most volatile assets get the best returns, sometimes they don't. Today's bitcoin is in the "price discovery" stage, similar to gold in the 1970s, where ups and downs are common. Nevertheless, bitcoin may not be suitable for all investors because of its volatility.

4: the government will kill bitcoin

Indeed, in Nigeria, Russia and Belarus, bitcoin has been treated with indifference by the government. But in the United States, Canada and most western countries, the situation is different. For example, the top U.S. securities regulator taught courses on cryptocurrency at MIT; the Commodity Futures Trading Commission, which regulates commodity markets, is a global innovator in regulating bitcoin derivatives; and the U.S. monetary Audit Office recently approved banks to provide custody services for bitcoin. The central bank is most concerned about financial stability. Nothing can destroy the $1 trillion bitcoin market more than some arbitrary, unfounded crackdown.

5: other cryptocurrency dilutes bitcoin

Since the launch of bitcoin in 2009, the market has launched thousands of new cryptocurrencies, but the price of bitcoin has no obvious impact. It makes sense. When we extract more tin from the earth, will it affect the supply of gold? No, because they are unrelated assets. A related criticism is that the total supply of bitcoin is not fixed, because bitcoin can be broken down into small increments. To understand why this is wrong, replace bitcoin with pizzas: if we cut a pizza into a billion pieces, do we have more pizzas, fewer pizzas, or the same number of pizzas? Of course we are the same.

6: the central bank's digital currency (CBDC) and corporate currency will crush bitcoin

To be sure, many central banks have announced CBDC plans, but they are hardly beyond the proof of concept phase. The only exception is in China, where the government is keen to launch its own digital currency to better monitor the country's spending and extend its coverage beyond its borders.

Corporate digital currency (also known as stable currency) will not threaten bitcoin. In fact, they may do the opposite. Since 2017, the value of all stable currencies in circulation has soared 40 times, but as more and more users gradually adapt to digital assets, bitcoin continues to flourish.

7: "easy money" is pushing bitcoin into the bubble area.

Indeed, all risky assets have benefited from the easy interest rate policies of the Bank of Canada, the Federal Reserve and elsewhere. With the increase of bond yields and the transfer of funds to banks, energy companies and other stocks that are more sensitive to the economy, some beneficiaries of low interest rates (including high-tech earners in high-tech industries such as Shopify, zoom and peloton) fluctuated by more than 30%.

Bitcoin may follow suit at some point, and it is wise, of course, for investors to be cautious about any investment whose value has grown by more than 500% in less than a year like bitcoin. In other words, it is worth noting that bitcoin may benefit from tightening policy if it indicates that inflation is accelerating, as many investors see bitcoin as a hedge against rising consumer prices.

(2021-3-20)