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Bitcoin Pros and Cons
Many are attracted to Bitcoin due to its independence and pseudo-anonymity. But its convenience of use, speed, and fees may not be as pleasing as one would like. In this article, we outline the most common pros and cons of Bitcoin.
Bitcoin Pros and Cons
The main advantage of using Bitcoin is that it is both digital money and the payment network. Bitcoin’s blockchain cannot function without BTC, and vice versa. Such a system can operate without any middlemen, government officials, monetary economists, and other intermediaries or regulators. Essentially, Bitcoin is the first successful implementation of global peer-to-peer cash that lets everyone store and exchange value with others, no matter who or where they are.
However, Bitcoin does have regulatory oversight and the convenience of traditional financial instruments. Bitcoin price is quite volatile, and that is unlikely to change in the near-term. Besides, the network is still being developed and does not match the efficiency and ease of use offered by banks and related financial services.
Here are the most commonly brought up Bitcoin advantages:
- Bitcoin is the most open financial system to date. You can make payments with Bitcoins 24/7 all over the world, even where there’s no banking system.
- International money transfers with Bitcoins can be faster and cheaper than with traditional banking and services.
- Bitcoin is the only asset ever-created that cannot be seized from you by force (if taken proper precautions). Besides, BTC transactions are uncensorable, so no one can stop you from conducting transactions.
- Bitcoin is pseudonymous, and anyone can open its wallet via the internet without any verification or credit history. It is especially beneficial in underbanked regions and third-world countries where most people struggle to get access to money.
- You can spend Bitcoins in the same ways you spend traditional digital money – from a desktop computer, a mobile phone or a debit card.
- Unlike fiat currencies, Bitcoins are deflationary, meaning that their value is set to appreciate by design.
Bitcoin is the most portable asset ever-created and can be transferred through satellites or even radio waves.
Excited to learn #bitcoin can be transferred not only through internet but also satellite @Blockstream and radio waves ! Still experimental phase but the future is there! Amazing pace of technological advancement
The most commonly mentioned Bitcoin cons include:
- Little to none regulatory oversight when things go south.
- Despite attempts to enable offline Bitcoin payments, use of the currency still largely depends on internet availability.
- As Bitcoin is still in development, the transaction speed and fees tend to vary depending on mining efficiency and network congestion.
- Converting Bitcoins into fiat incurs fees which are often costly.
- Not every shop or service provider accepts Bitcoins. The number is growing, though.
- Bitcoin transactions are immutable, meaning that once the money leaves your wallet, there is no way to get them back. Although many reputation management tools are being developed, “buyer’s protection” is not the thing with Bitcoin yet. Conversely, it can benefit merchants since accepting BTC eliminates the opportunity of fraudulent chargebacks.
- Most people are not ready to take full responsibility for their assets and could not manage their private keys securely. Many private Bitcoin keys have been lost beyond recovery, thus contribution to Bitcoin’s deflation and appreciation in value.
- Learning all the existing ins and outs of the Bitcoin ecosystem presents a steep learning curve. The user interface in most Bitcoin apps is still not foolproof, and the network is not ready for serving everyone in the world.
- Securing Bitcoin requires basic cybersecurity knowledge and awareness. While the network is virtually unhackable, organizations and individual users are.
- The core ideology of Bitcoin goes against the most powerful institutions, governments, politics, banks, regulators, and censorship, and is likely to meet much resistance before these players can tolerate or approve it.
These are the most commonly brought up advantages and disadvantages (pros and cons) of Bitcoin. As you can see, the revolutionary technology behind Bitcoin doesn’t come without tradeoffs. For every advantage, there is a considerable disadvantage, too. Despite that, Bitcoin is an evolving system which doesn’t stand still. Its open-source developer community is actively seeking for improved solutions.
Hopefully, this article has made things clearer for you and sparked further interest in cryptocurrencies and traditional finance. Always do your due diligence when it comes to sensitive matters like money and investing.
Have any suggestions about this entry? Let us know.
The Pros and Cons of Bitcoin: a Merchant’s View
The Pros and Cons of Bitcoin: a Merchant’s View
William Coates is an entrepreneur and self-confessed ‘tech nerd’ with a background in software development. Currently based in Helsinki, he is CEO of Digital Tunes – an online music store which began accepting bitcoin early last year. Here, Coates tells of his experiences with the cryptocurrency and whether you should take your company down the same route.
We starting accepting bitcoin at digital-tunes.net at the start of 2020, and so far it has been an overwhelmingly positive experience. Bitcoin is now our third biggest payment provider by revenue, after credit cards and Paypal, and in front of ClickAndBuy and Skrill (previously MoneyBookers).
Over the last six months, 2% of our sales came via bitcoin, and on a good month the digital currency can account for as much as 4% of our total sales.
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To be honest this is much, much more revenue than we thought we would see with the cryptocurrency. At the start of 2020, and still to some extent today, the common perception is that people only use bitcoins to buy drugs online.
We’ve found that this is clearly far from the truth – there is a growing and vibrant community of users from all across the world who want to trade their bitcoins for all kind of things.
Over the last year, we have discovered some important pros and cons with accepting bitcoin payments and have now made them the basis of this article. If your business is considering accepting bitcoin for the first time, we hope you can learn from our experiences.
The good things
Fraud is currently a massive headache when accepting payments online. Chargebacks not only cause loss of revenue, but also an incredible amount of extra administrative work.
This is immensely frustrating for us: when we get chargebacks from non-European credit cards, we end up footing the bill – our credit-card processor doesn’t cover us.
The beauty of bitcoin is that fraud has been rendered an impossibility: due to the nature of the bitcoin protocol, all transaction are irreversible. Once you get paid, you get paid. This isn’t some short-term special offer or sleight of hand, this is baked into the code at the heart of the digital currency.
This is wonderful, as it means the responsibility for combatting fraud is not shouldered by the merchant, but instead lies with the bitcoin wallets – the ‘banks’, if you will, of digital currencies.
Low transaction fees
Transaction fees are fairly horrible with traditional payment providers, especially when it comes to smaller transactions, as there is often a minimum fee.
Let us, for example, consider the purchase of a music track costing 1.49 euro from our store. Paypal charges us 3.4%, plus a 35-cent fee for each transaction. So, in this case, Paypal would get 40 cents from this transaction: a 27% fee.
Now charges that high aren’t going to be sustainable for any low-margin business (they are probably fine if you are selling Bolivian marching powder, though!). To get round the problem, we at digital-tunes.net charge our customers a 35-cent surcharge on Paypal payments, to help us offset the exorbitant fees.
With bitcoin, transaction fees are entirely optional. The currency’s protocol allows you to set the transaction fee to zero if you so wish, however this might mean it takes a bit longer to process.
The idea behind bitcoin transaction fees is that the computers running the network (in an entirely distributed manner) get to keep the transaction fees associated with the transactions they have successfully processed.
It’s quite likely that, in the future, we will see the fees be determined by the market, and if you want your transaction processed as fast as possible, you will have to pay a premium. Currently, transaction fees are not the primary motivation for people to run the network, but that’s an entirely other topic. A useful graph showing the fees charged by the entire network over time can be viewed here.
In practise, most merchants would be wise to use an existing bitcoin payment processor because, due to the irreversible nature of the transactions, you need to make sure your security is rock solid. With bitcoin, the thieves can enter your store, steal every single bitcoin, and even if you know who did it and where the money went, you probably will never get it back (at least you won’t have been physically attacked, though – one of the joys of running an online-only store).
To process our bitcoin payments, we use BitPay, who take a flat 1% transaction fee (or 0%, if you opt for their $30/month fee option). Even a 1% fee is a huge improvement over the traditional payment providers today and, in addition, opens the door to micropayments, as there are no minimum fees.
If you use a bitcoin payment processor like Blockchain or BitPay, the actual implementation of payments is child’s play, and for us, took just one day. There are even services such as Shopify who have bitcoin integration built in, it’s just a matter of signing up for the service.
The bad things
Volatility, part 1.
Probably the biggest problem with bitcoin is the volatile nature of its value relative to fiat currencies such as dollars or euros.
We price the tracks on our store in euros, and the bitcoin value is calculated from the current exchange rate. This means that, if someone spends the equivalent of 100 euros in bitcoin on our store, then the value of bitcoin halves before we get a chance to convert it to euros, we lose 50 euros. Ouch.
However, BitPay provides a simple solution to this issue. If you choose to receive all payments in the fiat currency of your choice, such as euros, BitPay will instantly convert the payment to euros at the time of the transaction.
As a result, you will always receive the exact euro amount (minus fees) that your product was priced at. In this manner, it is possible to completely remove the volatility risk for merchants accepting bitcoin.
Volatility, part 2.
Although it’s easy enough to eliminate the volatility risk for merchants, we also have to think about how volatility could affect our customers’ buying behaviour.
One hypothetical problem is that, when the value of bitcoin is rising, people will be more likely to hold on to their coins rather than spend them. This ‘hoarding’ could obviously affect sales, at least in the short term.
On the flip-side, if the value of bitcoin crashes, you would also expect to see sales affected: a customer who converted 100 euros to buy tunes on our store will only have 75 euros to spend if the exchange rate has dropped 25% in the meantime.
Looking at our sales data for bitcoin, it’s quite clear that volatility does have an affect on customer behaviour.
During periods when bitcoin is quickly rising in value, no-one wants to spend their coins. This makes sense: why would you shop today, if tomorrow you can get a 10% discount? However, after these surges, we often see a spurt of bitcoin transactions: presumably since people suddenly have some spare cash to play with.
It’s worth noting, though, that even after crashes we do still see transactions occurring. So it’s clear there is an underlying level of demand that is not entirely correlated with the current exchange rate value of bitcoin.
Is it worth the plunge?
At digital-tunes.net, we are really happy with our experiences with taking bitcoin for payments. It can be super simple to set up, and the low transaction fees and zero fraud risk make the digital currency an attractive option.
Volatility is definitely the biggest issue at the moment, but I’m sure that as bitcoin grows, the volatility will taper off. It feels like we are witnessing bitcoin’s growing pains right now.
Even with the volatility as it is, there is a real opportunity awaiting merchants who accept bitcoin, and we were positively surprised with how many payments we’ve received in the cryptocurrency.
The truth is, bitcoiners aren’t just a bunch of nerds wanting to buy drugs online – out there is a vibrant international community of consumers who have realised the advantages of this new kind of money, and it’s growing day by day.
Disclaimer: CoinDesk founder Shakil Khan is an investor in BitPay.
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The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.
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What Is Bitcoin – History, How It Works, Pros & Cons
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Bitcoin is a virtual currency, or cryptocurrency, that’s controlled by a decentralized network of users and isn’t directly subject to the whims of central banking authorities or national governments. Although there are hundreds of cryptocurrencies in active use today, Bitcoin is by far the most popular and widely used – the closest cryptocurrency equivalent to traditional, state-minted currencies.
Like traditional currencies, such as the U.S. dollar, Bitcoin has value relative to other currencies and physical goods. Whole Bitcoin units can be subdivided into decimals representing smaller units of value. Currently, the smallest Bitcoin unit is the satoshi, or 0.00000001 Bitcoin. The satoshi can’t be broken into smaller units. However, Bitcoin’s source code is structured to allow for future subdivisions beyond this level, should the currency’s value appreciate to the point that it’s deemed necessary.
Bitcoin is the most versatile cryptocurrency around. It can be used to purchase goods from an ever-growing roster of merchants (including recognizable companies like Expedia and Overstock.com) that accept Bitcoin payments. It can be exchanged with other private users as consideration for services performed or to settle outstanding debts. It can be swapped for other currencies, both traditional and virtual, on electronic exchanges that function similar to forex exchanges. And, unfortunately, it can be used to facilitate illicit activity, such as the purchase of illegal drugs on dark web marketplaces like the infamous (and now-shuttered) Silk Road.
For all its promise, Bitcoin remains a niche currency that’s subject to wild value fluctuations. Despite the wild-eyed pronouncements of hardcore proponents, it’s certainly not a legitimate investment or trading vehicle, as is the case with stable national currencies, such as the U.S. dollar and Japanese yen.
How Bitcoin Works
Bitcoin is a cryptocurrency, meaning it’s supported by a source code that uses highly complex algorithms to prevent unauthorized duplication or creation of Bitcoin units. The code’s underlying principles, known as cryptography, are based on advanced mathematical and computer engineering principles. It’s virtually impossible to break Bitcoin’s source code and manipulate the currency’s supply.
Although it was preceded by other virtual currencies, Bitcoin is known as the first modern cryptocurrency. That’s because Bitcoin is the first to blend certain key features shared by most subsequently created cryptocurrencies.
Intense privacy protections are baked into Bitcoin’s source code. The system is designed to publicly record Bitcoin transactions and other relevant data without revealing the identity of the individuals or groups involved. Instead, Bitcoin users are identified by public keys, or numerical codes that identify them to other users, and sometimes pseudonymous handles or usernames.
Additional protections allow users to further conceal the source and flow of Bitcoin. For instance, special computer programs available to all Bitcoin users, called mixing services, privately swap a specific Bitcoin unit for another Bitcoin unit of identical value, and thereby obscure the source of the owner’s holdings.
Bitcoin exchanges allow users to exchange Bitcoin units for fiat currencies, such as the U.S. dollar and euro, at variable exchange rates. Many Bitcoin exchanges also exchange Bitcoin units for other cryptocurrencies, including less popular alternatives that can’t directly be exchanged for fiat currencies. Most Bitcoin exchanges take a cut, typically less than 1%, of each transaction’s value.
Bitcoin exchanges ensure that the Bitcoin market remains liquid, setting their value relative to traditional currencies – and allowing holders to profit from speculation on fluctuations in that value. That said, Bitcoin users must understand that Bitcoin’s value is subject to wild swings – weekly moves of 50% in either direction have occurred before. Such swings are unheard of among stable fiat currencies.
Bitcoin’s block chain is vital to its function. The block chain is a public, distributed ledger of all prior Bitcoin transactions, which are stored in groups known as blocks. Every node of Bitcoin’s software network – the server farms and terminals, run by individuals or groups known as miners, whose efforts to produce new Bitcoin units result in the recording and authentication of Bitcoin transactions, and the periodic creation of new blocks – contains an identical record of Bitcoin’s block chain.
Because new Bitcoin transactions constantly occur, the Bitcoin block chain, though finite, grows over time. As long as miners continue their work and record recent transactions, the Bitcoin block chain will always be a work in progress. In other words, there’s no predetermined length at which the block chain will stop growing.
On average, miners create a new block chain, which includes all prior transactions and a new transaction block, every 10 minutes. Every two weeks, Bitcoin’s source code is designed to adjust to the amount of mining power devoted to creating new block chains, preserving the 10-minute average creation interval. If mining power increased during the most recent two-week span, new block chains become more difficult to create during the subsequent two-week span. If mining power decreases, new chains become easier to create. For most of Bitcoin’s history, the trend has been toward greater mining power.
Bitcoin’s block chain is the sole arbiter of Bitcoin ownership. No complete record exists anywhere else. The block chain also serves as a payment processing system, like Visa or PayPal, with the miners functioning as the system’s employees.
A Bitcoin transaction hasn’t technically occurred until it’s added to the block chain, at which point it becomes irreversible – unlike traditional payment processors, Bitcoin doesn’t have any standardized facility for chargebacks or refunds. During the window between the transaction itself and the moment it’s added to the block chain, the relevant Bitcoin units are essentially held in escrow – they can’t be used by either party to the transaction. This prevents duplicate transactions, known as double-spending, and protects the system’s integrity.
Every Bitcoin user has at least one private key (basically, a password), which is a whole number between 1 and 78 digits in length. Individual users can have multiple anonymous handles, each with its own private key. Private keys confirm their owners’ identities and allow them to spend or receive Bitcoin. Without them, users can’t complete transactions – meaning they can’t access their holdings until they recover the corresponding key. When a key is lost for good, the corresponding holdings move into a sort of permanent limbo and can’t be recovered.
Users either manually create their own private keys or use a random number generator to do the same. Keys can be stored online (either in private cloud storage or on public Bitcoin exchanges), on physical storage media (such as thumb drives), or on paper, and only entered online during transactions.
Since private keys essentially give Bitcoin holdings value, security experts advise against storing private keys in easily accessible online locations or keeping only one private key copy. Savvy users store identical key copies on paper printouts and physical media not connected to the Internet.
Actual Bitcoin units are stored in “wallets” – secure cloud storage locations with special information confirming their owners (Bitcoin users) as the guardians of the Bitcoin units contained within. Though wallets like Coinbase theoretically protect against the theft of Bitcoin units that aren’t currently being used, they’re vulnerable to hacking – particularly public wallets used by Bitcoin exchanges, online marketplaces, and specialized websites that exist solely to store Bitcoin wallets known as “wallet services.”
The largest and most notorious Bitcoin hack involved wallets held by Mt. Gox, a Japanese Bitcoin exchange that shut down after hackers stole hundreds of millions of dollars in Bitcoin (in contemporary valuations) from its supposedly secure servers. Hackers often target public wallets that store users’ private keys, enabling them to spend the stolen Bitcoin. Ars Technica has a nice rundown of Bitcoin hacks large and small, current to late 2020.
Like keys, copies of wallets can be stored on the cloud, an internal hard drive, or an external storage device. Unlike keys, they can’t be stored on paper. As with keys, it’s strongly advised that users have at least one wallet backup. Backing up a wallet doesn’t duplicate the stored Bitcoin units, only their ownership record and transaction history.
Miners play a vital role in the Bitcoin ecosystem. As keepers of the block chain, they keep the entire Bitcoin community honest and indirectly support the currency’s value.
Miners are individuals or cooperative organizations with access to powerful computers, often stored at remote, privately owned “farms.” They perform incredibly complex mathematical tasks in an effort to mint new Bitcoin, which they then keep or exchange for fiat currency.
In an elegant twist, Bitcoin’s source code harnesses this computing power to collect, record, and organize previously unverified transactions, adding a new block to the block chain about every 10 minutes. This work also verifies the accuracy and completeness of all previously existing blocks, preventing double-spending and ensuring that the Bitcoin system remains accurate and complete.
Each time a new block chain is created, a predetermined number of fresh Bitcoin are minted. Miners are “rewarded” these Bitcoin for their effort and often also receive transaction fees paid by buyers. Sellers have an incentive to charge transaction fees, which usually amount to less than 1% of the transaction amount, because miners are permitted to prioritize the recording of fee-loaded transactions irrespective of transaction order. In other words, sellers who charge transaction fees usually get paid faster. Unsurprisingly, Bitcoin transaction fees are quite common.
Did You Know: As Bitcoin grows more valuable (albeit amid gut-wrenching market volatility) and more commonly accepted, so too does the business of mining Bitcoin. But it comes at a notable cost: the consumption of vast amounts of electricity, often powered by non-renewable sources. According to the Bitcoin Energy Consumption Index, Bitcoin mining consumed approximately 51 trillion terawatts of electricity per year as of February 2020. That figure has risen steadily and inexorably over time, irrespective of day-to-day market movements, prompting policymakers to take a closer look at Bitcoin’s carbon footprint.
Bitcoin’s own source code places a strict limit on the number of Bitcoin units that can ever exist: 21 million. This is achieved by slowing, over time, the rate at which the creation of new block chain copies produces new Bitcoin. Every four years or so, this rate halves. The last Bitcoin is projected to spring into being sometime around 2140 – that is, if the currency still exists and people still care enough to mine it. After that, miners’ sole compensation will be Bitcoin transaction fees.
This enforced scarcity is a key point of distinction between Bitcoin and traditional fiat currencies, which central banks produce by decree, and supply of which is theoretically unlimited. In this regard, Bitcoin has more in common with gold than the U.S. dollar.
Security Issues & Risk of Theft
Taken together, the security risks around Bitcoin are the currency’s single greatest drawback, and are worthy of special consideration for anyone considering converting U.S. dollars into Bitcoin.
The fact that Bitcoin units are virtually impossible to duplicate does not mean that Bitcoin users are immune to theft or fraud. The Bitcoin system has some imperfections and weak points that can be exploited by sophisticated hackers looking to steal Bitcoin for their own use. The Mt. Gox incident, as well as a host of smaller, less publicized incidents, underscore that Bitcoin exchanges are particularly vulnerable to theft by hacking.
Two of Bitcoin’s perceived strengths – its political independence and strong anonymity protections – actually make it more attractive to thieves and fraudsters.
In many jurisdictions, Bitcoin occupies a legal gray area, meaning local law enforcement authorities view theft prevention as a relatively low priority. Moreover, it’s often difficult for the authorities to prosecute those responsible for Bitcoin heists, many of which originate in politically unstable or unfriendly nations and affect a global population of Bitcoin holders.
Those who use Bitcoin for illicit purposes face additional risks. Dark web marketplaces – online, international black markets whose users buy and sell illicit substances, stolen goods, and prohibited services – are frequent heist targets. Bitcoin users who participate in the dark web are likely already breaking the law, and thus have limited recourse in the event of a hack or theft. After all, they can’t very well contact local authorities and say that the funds they received for selling illegal drugs were stolen.
Common Modes of Bitcoin Theft
It usually takes more technical skill to steal Bitcoin than physical cash. Most Bitcoin heists involve sophisticated hack attacks by highly accomplished outsiders or rogue exchange employees.
Common modes of Bitcoin theft include the following:
- Stealing Private Keys. Private keys stored in publicly accessible digital repositories, such as Bitcoin exchanges or personal cloud storage drives, are vulnerable to theft by hacking. The thieves use these private keys to access and transfer the corresponding Bitcoin holdings, relieving their rightful owners of their funds.
- Exploiting Wallet Vulnerabilities. Some Bitcoin wallets have security flaws that render them vulnerable to attack. As a convenience, some service providers store private keys in the same virtual wallets as Bitcoin funds themselves, allowing hackers to steal the funds and keys in one fell swoop.
- Operating Fraudulent Exchanges and Investment Funds. Some seemingly legitimate companies dealing in Bitcoin are actually fronts for financial crimes. For instance, a boutique “Bitcoin investment fund” called Bitcoin Savings & Trust made a name for itself in the early 2020s by providing outsize returns to early investors. However, Bitcoin Savings & Trust was actually a run-of-the-mill Ponzi scheme. When it went belly-up, it wiped out about $4.5 million (at then-current exchange rates) in investor value.
- Attacking Legitimate Exchanges Directly. Since they attract thousands of users and store millions of dollars in Bitcoin, exchanges are attractive targets. Bitcoin can be stolen from exchanges’ own Bitcoin wallets (which they use to store Bitcoin units taken as exchange fees), from users’ wallets (as many users store Bitcoin balances with exchanges for convenience, similar to a brokerage account’s cash balance), or during exchanges and transactions themselves.
- Attacking Dark Web Marketplaces. The vulnerabilities of dark web marketplaces are similar to those of Bitcoin exchanges. Another huge Bitcoin heist, not as well publicized as the Mt. Gox hack, affected a dark web marketplace called Sheep Marketplace. Losses approached $100 million at then-current exchange rates.
Strategies for Reducing Security Risks
The cybersecurity industry is locked in a constant arms race with hackers and other cyber-criminals, whose sophistication and operational scope increase by the week. In this environment, there’s no such thing as a complete guarantee of security – particularly when money is involved.
However, prudent Bitcoin users employ these common-sense strategies to reduce their exposure to theft and general security breaches:
- Securing Private Keys. Savvy Bitcoin users store copies of their private keys offline, either in physical storage media or even on paper printouts, rather than in online locations that can easily be accessed by hackers. Since you have to provide your private key during a Bitcoin transaction, storing your key offline isn’t completely foolproof – but it’s preferable to leaving it in a static online location all the time.
- Using Highly Secure Bitcoin Wallets. Even if you’re not an advanced computer programmer capable of evaluating wallet code or technical security protocols directly, do your best to research a particular wallet service’s track record. Speak with current users or read online reviews, if possible. Think twice about using services that have been hacked in the past and have yet to publicly state that they’ve made security enhancements.
- Researching Bitcoin Exchanges and Other Services. To avoid getting caught up in a Ponzi scheme or simply being robbed blind by a seemingly legitimate Bitcoin exchange, do your own due diligence before transferring or storing Bitcoin units with a new platform. Treat any promises that sound too good to be true (such as rapid or outsize returns on your funds) as red flags – and avoid working with platforms that make them.
- Avoiding the Dark Web. Like real-world black markets, the dark web is an unsavory and sometimes dangerous place. Avoiding marketplaces like the now-defunct Silk Road and its successors is an easy way to avoid needless exposure to security risks. Additionally, avoid using Bitcoin for “gray market” activity that, while possibly legal in your jurisdiction, might be illegal or frowned upon in others – such as sports betting. It may be impossible to recover your funds after a heist that targets a gray market platform found to be operating illegally, even if you’re not criminally liable.
Origins & History of Bitcoin
Bitcoin’s origins date back to the early 1980s, when the algorithms that support modern cryptocurrency were first developed. Its closest predecessor was Bit Gold, a proto-cryptocurrency developed in the late 1990s by Nick Szabo. Though Bit Gold never gained widespread traction, it shared many features in common with Bitcoin, including ironclad protections against duplication, the block chain as the ultimate transaction ledger, public keys identifying individual users, and built-in scarcity.
Note that Bit Gold isn’t to be confused with BitGold, an existing Canadian company that “helps people securely acquire, store, and spend gold with unprecedented simplicity.”
Bitcoin’s Birth and Early Development
The first public record of Bitcoin dates to October 2008, when a pseudonymous person or organization known as Satoshi Nakamoto published a white paper with the technical outlines for a new, decentralized cryptocurrency. Nakamoto’s identity remains unknown, though speculation centers on a handful of U.S.-based individuals (or various groupings thereof) who were active in the cryptocurrency movement of the 1990s and 2000s. Nakamoto released Bitcoin’s open-source code in January 2009, marking the beginning of public mining and trading, and ceased public communication shortly thereafter.
Bitcoin was built on the theoretical and technical foundations of Bit Gold and b-money, a contemporaneous cryptocurrency model that was never developed. Aside from being the first cryptocurrency to gain widespread traction outside the cloistered ultra-libertarian movement, its biggest claim to fame is as the first cryptocurrency marked by totally decentralized control – in other words, no user is more influential than any other.
Bitcoin experienced some growing pains in its first few years of life. In 2020, a coding flaw resulted in the creation of huge numbers of un-mined Bitcoin, temporarily crashing the currency’s value. A subsequent fix repaired the block chain and erased the unauthorized Bitcoin. Something similar occurred in 2020, though the effects were less drastic. Bitcoin’s open source code has been modified to make such systemic flaws less likely in the future.
Acceptance as a Mainstream Currency
For the first three years of its life, Bitcoin was mainly used as a means of private exchange. Toward the end of 2020, WordPress, an online publishing platform, became the first major company to accept Bitcoin payments. Others, including OkCupid, Baidu, Expedia, and Overstock.com, followed in 2020 and 2020. Baidu later stopped accepting Bitcoin under pressure from the Chinese government, which viewed Bitcoin as a threat to its own fiat currency.
In 2020, Bitcoin’s market value exceeded $10 billion for the first time. That year, the first Bitcoin-dispensing “ATM” (more accurately, an automated currency exchange machine) appeared in Vancouver, British Columbia, and their number exploded in the subsequent years. Genesis, the leading Bitcoin ATM manufacturer, makes two types of machines: a one-way device that allows users to insert paper fiat money for conversion to Bitcoin units, which are then deposited into their digital wallets; and a two-way device that permits Bitcoin-fiat conversions as well.
2020 saw the first major Bitcoin crime scandals. In January, prominent U.S. Bitcoin proponent Charlie Shrem was arrested after a money laundering investigation found he’d illegally procured Bitcoin for use in black market transactions. In February, Mt. Gox filed for bankruptcy after the extent of its breach became clear. In 2020, Barclays became the first major bank to process Bitcoin transactions, though its embrace was initially limited to charitable contributions.
The “mainstreaming” of Bitcoin continued through 2020. Day traders, hedge funds, and even professional money managers piled into the space, spurring a wave of speculation. Bitcoin’s value increased tenfold in 2020, skyrocketing from about $1,000 at the start of the year to around $10,000 at the close.
Advantages of Using Bitcoin
1. Greater Liquidity Relative to Other Cryptocurrencies
As the most popular cryptocurrency by a significant margin, Bitcoin has far greater liquidity than its peers. This allows users to retain most of its inherent value when converting to fiat currencies, such as the U.S. dollar and euro. By contrast, most other cryptocurrencies either can’t be exchanged directly for fiat currencies or lose substantial value during such exchanges.
In this regard, Bitcoin is more like fiat currencies than most other cryptocurrencies – though it’s not yet possible to buy and sell Bitcoin in virtually any quantity at any time, as is the case with the U.S. dollar and other major world currencies.
2. Increasingly Wide Acceptance as a Payment Method
Hundreds of merchants accept Bitcoin payments. Thanks to heavyweights like Overstock.com jumping on board, it’s possible to buy virtually any physical item using Bitcoin units. If you’re serious about reducing your exposure to fiat currencies, Bitcoin’s growing mainstream acceptance is likely to be a big help.
3. International Transactions Easier Than Regular Currencies
Bitcoin transactions that cross international borders are no different from Bitcoin transactions that stay in-country. There aren’t any international transaction fees or red tape to navigate, as is often the case with credit card payments, ATM cash withdrawals, and international money transfers. International credit card and ATM fees can range up to 3% of transaction value, and sometimes higher, while money transfer fees can be as high as 15%.
While most other cryptocurrencies lack international red tape, cross-border Bitcoin transactions are easier simply because Bitcoin is more popular around the world.
4. Generally Lower Transaction Fees
Compared to other digital payment methods, such as credit cards and PayPal, Bitcoin comes with lower transaction fees. Though such fees are variable, it’s rare for a Bitcoin transaction to cost more than 1% of its value. Compare that to 2% to 3% for most other digital payments.
5. Anonymity and Privacy Relative to Traditional Currencies
Holding U.S. dollars or other fiat currencies in an online bank account, or executing online credit card and PayPal transactions, doesn’t protect your privacy any more than physically handing cash or a credit card across the shop counter. Though your online accounts are hopefully protected from all but the most sophisticated hack attacks, they’re clearly associated with you – meaning private merchants and public authorities can track how you spend and receive your electronic funds.
By contrast, Bitcoin’s built-in privacy protections allow users to completely separate their Bitcoin accounts from their public personas, if they so choose. While it’s possible to track Bitcoin flows between users, it’s very difficult to figure out who those users really are.
6. Independence From Political Agents and Creators
Since Bitcoin isn’t created or controlled by any state entity, such as a central bank, it’s not beholden to political influence. Since it exists outside any political system, it’s also much harder for governments to freeze or seize Bitcoin units, whether in the course of legitimate criminal investigations or as retribution for political acts, as is often the case in repressive states like Russia and China.
Due to its completely decentralized nature, popularity, and liquidity, Bitcoin is also unbeholden to its creators. Many less popular cryptocurrencies are characterized by concentrated holdings – the majority of existing units are held in a handful of accounts. This allows the currencies’ creators to manipulate supply and, to an extent, value relative to other cryptocurrencies, negatively impacting other holders.
7. Built-In Scarcity
Bitcoin’s built-in scarcity feature – only 21 million will ever exist – is likely to support its long-term value against traditional currencies, as well as non-scarce cryptocurrencies (such as Dogecoin, a popular Bitcoin alternative). In a way, Bitcoin’s scarcity imbues the currency with intrinsic value – similar to gold and other precious metals.
Most traditional (fiat) currencies controlled by national governments are non-scarce. Central banks can create new units of currency at will, and often do – for example, the U.S. Federal Reserve began a program of quantitative easing that created trillions of dollars in the aftermath of the late-2000s global financial crisis. Though the long-term effects of such policies are unclear, they make many economists uneasy.
Disadvantages of Using Bitcoin
1. Exposure to Bitcoin-Specific Scams and Fraud
As the world’s most popular cryptocurrency, Bitcoin has seen more than its fair share of medium-specific scams, fraud, and attacks. These range from small-time Ponzi schemes, such as Bitcoin Savings & Trust, to massive hack attacks, such as the breaches that felled Sheep Marketplace and Mt. Gox.
Other cryptocurrencies don’t have the critical mass of users necessary to make such malfeasance profitable to criminals, and such activity is more likely to be prosecuted by law enforcement agencies when traditional currencies and payment platforms are involved.
2. Black Market Activity May Damage Reputation and Usefulness
Despite high-visibility prosecutions of the most egregious offenders, Bitcoin remains attractive to criminals and gray market participants. Obviously, dark web marketplaces like Silk Road and Sheep expose rank-and-file users to fraud and the threat of criminal prosecution.
More disturbingly, the pursuit of nefarious activity by seemingly upstanding Bitcoin users – such as Charlie Shrem – threaten to corrode Bitcoin’s reputation. And it’s unclear that the international legal system is properly equipped to tackle the problem. If shady uses for Bitcoin outweigh legitimate ones over time, and the authorities can’t effectively put a stop to the shenanigans, the entire system faces marginalization.
3. Susceptible to High Price Volatility
Although Bitcoin is the most liquid and easily exchanged cryptocurrency, it remains susceptible to wild price swings over short periods of time. In the wake of the Mt. Gox collapse, Bitcoin’s value fell by more than 50%. Following the FBI’s announcement that it would treat Bitcoin and other virtual currencies as “legitimate financial services,” Bitcoin’s value spiked by a similar amount. In late 2020, Bitcoin’s value doubled several times, only to halve in the first weeks of 2020 – wiping out billions in market value almost overnight.
While Bitcoin’s volatility sometimes offers short-term benefits for speculative traders, it renders the currency unsuitable for more conservative investors with longer time horizons. And since Bitcoin’s purchasing power varies so widely from week to week, it’s difficult for consumers to use as a legitimate means of exchange.
4. No Chargebacks or Refunds
One of Bitcoin’s biggest drawbacks is a lack of standardized policy for chargebacks or refunds, as all credit card companies and traditional online payment processors have. Users affected by transaction fraud – for instance, they purchase goods that the seller never delivers – can’t request a refund through Bitcoin. In fact, Bitcoin’s decentralized structure makes it impossible for any single party to arbitrate disputes between users. While miners take responsibility for recording transactions, they’re not qualified to assess their legitimacy.
Some newer cryptocurrencies, such as Ripple, have rudimentary chargeback and refund functions, but this feature has yet to be built into Bitcoin.
5. Potential to Be Replaced by Superior Cryptocurrency
Bitcoin spawned a host of successor cryptocurrencies. Though many are structurally quite similar to Bitcoin, others make notable improvements.
Some newer cryptocurrencies make it even harder to track money flows or identify users. Others use “smart contract” systems that hold service providers accountable for their promises. Some even have in-house exchanges that let users exchange cryptocurrency units directly for fiat currency units, eliminating third-party exchanges and reducing associated fraud risks.
Over time, one or more of these alternatives could usurp Bitcoin as the world’s dominant cryptocurrency. That could negatively impact Bitcoin’s value, leaving committed, long-term users holding the bag.
6. Environmental Ills of Bitcoin Mining
Bitcoin mining consumes vast amounts of electricity. According to Business Insider, some of the biggest Bitcoin mining companies are based in China, where most power comes from dirty coal plants and horrific smog routinely makes even low-key outdoor activity unsafe for healthy adults.
In the long run, widespread adoption of low- or no-emissions energy production will hopefully mitigate the environmental ills of Bitcoin mining. In the meantime, however, it’s a growing threat to an already fragile planet.
The list of merchants that accept Bitcoin is steadily lengthening. You can now buy plane tickets (Expedia), furniture (Overstock.com), and web publishing services (WordPress) with Bitcoin.
However, before you rush out and cash in your dollars for Bitcoin, remember that Bitcoin has a long way to go before it’s a legitimate currency on par with the U.S. dollar, euro, or pound. And despite the seductiveness of cryptocurrency as a means of exchange, there’s no guarantee that Bitcoin – or any other decentralized, virtual currency not controlled by a national bank – will ever be a viable alternative to fiat currencies.
Some experts believe that, in the coming decades, national governments will rework their currencies with state-sanctioned means of exchange that have some cryptocurrency features, like built-in scarcity and virtually impenetrable counterfeiting protections. Others believe that fiat currency and cryptocurrency will continue to exist in parallel, but that cryptocurrencies will fail to expand beyond the niche currently occupied by gold and other precious metals – that of an alternative investment whose primary purpose is to hedge against inflation.
For the time being, treat Bitcoin as you would any speculative asset: Move cautiously, or not at all, and never invest money that you can’t afford to lose.
Do you use Bitcoin as an alternative currency? Have you ever mined Bitcoin?
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