While Bitcoin has a lot of strengths, there are some weaknesses for the cryptocurrency as well. We’re going to take a look at both the pros and cons of Bitcoin so that you can get a better understanding of where this virtual currency is going to head in the years ahead.
The fact that it’s already growing in popularity so rapidly is a good sign, but there are hurdles that Bitcoin is going to have to get over if it’s to survive and thrive in the future.
First, let’s go over some of the main strengths of cryptocurrency in general and Bitcoin specifically.
Anonymity and Privacy
One of the big strengths of Bitcoin currently is that it offers virtual anonymity and a lot more privacy than is found in current financial systems. Bitcoin uses hash addresses to send and receive money, and these hashes or addresses can be changed from transaction to transaction. Because of that, it’s entirely possible for two parties to be completely anonymous when conducting their transactions.
Because addresses (hashes) can be created for each transaction, it makes it really difficult to track and trace financial activity of any single person in the network. And, unlike cash which is also private to an extent, you can use Bitcoin online to do virtual transactions. Add to that the fact that there’s no central authority keeping tabs on all transactions, people can feel safer about their privacy.
No transaction fees
When you use a credit or debit card, the processor charges a transaction fee. The charge is given to the merchant which can cut down on their profit margin considerably. However, Bitcoin doesn’t have transaction fees – at this time. When 21 million bitcoins are produced and released into the world this may change, but for now Bitcoin doesn’t charge a transaction fee.
When Bitcoin mining goes away, there’s going to be no financial incentive for people to verify transactions by solving a block and adding it to the block chain. At that time, there’s a good chance that a low BTC transaction fee may be instituted in order to make sure others still verify transactions. Giving them a cut of the transaction fee will enable the system to continue.
No central governing authority
When you purchase something around the world, you’re typically taxed by the government for the transaction. Currently, Bitcoin is not recognized as money by any government so it is not taxed. Most Bitcoin transactions could be thought of as trades – which are generally exempt from taxation by governments.
This is likely to change if and when Bitcoin begins to be recognized as legitimate currency around the world. This is actually an incentive for governments to legally recognize Bitcoin as proper money. No one is sure when or if this will happen, but it’s something to think about as Bitcoin continues to experience a lot of growth around the world.
Next, let’s take a look at some of the weaknesses of Bitcoin. There’s a good chance a lot of these problems are going to be solved going forward, but for now they’re weaknesses.
While this hasn’t happened a lot – yet – there are many signs pointing to governments around the world interfering with the growth of Bitcoin. Whether it’s stopping bitcoins from being transferred to bank accounts or something else, one of the biggest weaknesses of Bitcoin currently is the chance of even more government interference as the virtual currency becomes more popular around the world. This is also a good thing on some levels, however. For example, no one wants money laundering or other illegal activities to be condoned or made possible due to Bitcoin. So, in some ways, the fact that governments are starting to get involved is a good thing that will help Bitcoin grow even more in the years ahead.
No Monetary Sovereignty
Another weakness of Bitcoin is that it has no monetary sovereignty. Basically, this means that Bitcoin is not yet accepted as “real money” around the world. Bitcoin is not backed by any government currently. Some may consider this a strength, but it also poses some problems for people (especially corporations) that want to make money with Bitcoin.
Bitcoin is, at its core, another fiat currency that isn’t backed by precious metals or other items of value. The exact value of a single BTC is that which is given to it by people. This makes Bitcoin extremely vulnerable to destabilization. For example, if a large number of people who have bitcoins suddenly decide to sell, this may cause a panic that devalues bitcoins considerably.
Deflationary by design
As mentioned above in a previous section of this ebook, Bitcoin is subject to deflation and may end up in what’s known as a deflationary spiral that’s hard to escape once it starts going. Because there’s going to be a finite amount of bitcoins – 21 million – there’s a chance that they’ll just keep increasing in value. While that may sound good at first, you have to look at the big picture. If Bitcoin deflation happens too quickly, investors are not going to want to invest large amounts of BTC because their efforts won’t be rewarded as BTC becomes more valuable during the time it takes them to create a product and take it to market.
There’s also the real possibility of a recession if a large number of people who purchase BTC for investment reasons hold onto their bitcoins. If they can control large amounts of the 21 million bitcoins that will be in circulation, there’s a good chance that others won’t be able to conduct transactions because they don’t have enough bitcoins in their possession. At this point, a recession or even a depression become a real possibility.
Accidental Loss and Theft
Another problem is the loss or theft of bitcoins. Because Bitcoin has no protection mechanism built into the currency, it’s possible for someone to lose their wallet file. If this happens, the bitcoins they had in the wallet will be taken out of the system – theoretically forever. This could help spur the problems with deflation mentioned above.
Additionally, if someone manages to steal bitcoins from another person, there’s no way to rollback the transaction, even if there’s proof that a theft occurred. The Bitcoin system is built so that once a transaction happens it’s there permanently. If not, it would destroy the integrity of the block chain. With most current financial transactions – like with a credit card – you can contest a transaction and get your money back. This isn’t possible – currently – with Bitcoin. It’s definitely something that needs to be considered moving forward.
Black market appeal
Because of the decentralization of Bitcoin as well as the anonymity that it can provide, there’s a good chance that many are going to try to abuse the system for financial gain. Because of the way it’s set up, there’s no way to deny any person or corporation from participating in the Bitcoin network. And this may make it favorable for black markets – like Silk Road – to use Bitcoin as a means to commit crimes online without being caught.
It is complicated to use
While the Bitcoin software is relatively easy to use, it’s not as easy as whipping out your credit card and making a transaction. Because it’s somewhat complicated to use, there’s a chance that a lot of the world’s population may not use it, which will affect whether Bitcoin continues to grow or not.
This is changing gradually as Bitcoin software becomes easier to use, but a lot more work needs to be done before Bitcoin really takes off. Luckily, there’s a lot of financial gain to be had by those who can come up with easier ways to use Bitcoin. This means there’s going to be a lot of people working on the problem of Bitcoin being difficult for some people to understand and use.
It is a poor use of computing power
Last but not least, you have to consider that Bitcoin mining takes quite a bit of processing power. This computational power could be used for other more productive reasons. Some say that the Bitcoin network is already the world’s largest peer-to-peer network – at least when it comes to processing and number crunching. This may not seem like a big thing, but you have to consider all the electricity that’s needed to keep all the computers on the network going.