Bitcoin Pros and cons

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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.

Bitcoin Pros

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.

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Bitcoin Cons

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.

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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.

User Anonymity

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

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.

Block Chain

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.

Private Keys

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.

Wallets

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

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.

Finite Supply

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.

Final Word

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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What Are Bitcoins – Pros & Cons, Investment Opportunities

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Historically, exchanges of value – barter systems – were done face-to-face so that participants could instantly verify the respective physical properties being exchanged. As purchasers and sellers became geographically distant, agents or trusted third-parties acting on behalf of the participants became necessary to verify the quantity or quality of the property being transferred. For example, credit card issuers are examples of a third-party standing in for a buyer, guaranteeing to the seller that the buyer’s funds are good.

The growth of the Internet and the proliferation of digital transactions have exposed many limitations to traditional currencies and exchange systems in the borderless, electronic world. Current limitations include high expenses, time delays, and security risks. These limitations are particularly egregious when the transactions involve parties on each side of the globe, different national currencies, and complex products.

The idea of an international currency – independent of a country or central bank and designed for a globalized economy – has fascinated economists, business executives, computer experts, and anti-government advocates for years. The ideal currency would provide anonymity to its holders, protection from inflation, and security from theft and fraud. These ideals led to the concept of a digital currency, enabling the concept of cash or cash equivalent to be used over the Internet.

Bitcoins (BTC), the latest and most popular outcome of efforts to create a practical digital currency, first appeared in 2009 with an initial issue of 2,625,000. As of December 7, 2020, there were 12,091,050 BTCs, each with a value of $736.61 USD.

The website Shopify recently listed 75 specialty retailers that accept bitcoins, and Forbes announced its “Top 10 Bitcoin Merchant Sites,” including website development software developer WordPress. Even Baidu, Inc., China’s biggest search engine, accepted bitcoins until the nation’s central bank banned the use or ownership of the currency by financial institutions.

Description of Bitcoins

According to Anthony Gallippi, CEO of Bitpay payment processor, “Bitcoin is a more secure, faster, and more affordable option for transferring funds.” In technical terms, bitcoins are a math-based, finite, verifiable, open-sourced, decentralized virtual currency that relies upon cryptography for security.

Proponents of the new currency claim that:

  • Instant payment can be made to anyone, anywhere in the world
  • Transactions cannot be reversed for any reason
  • Third parties are unnecessary
  • The supply of bitcoins cannot be manipulated by any government, bank, organization, or individual

Mining

Bitcoins are created in blocks of 50 bitcoins through a process called “mining” – what amounts to a payment for services provided to the decentralized network by processing transactions. In layman’s language, a transaction – one party transferring bitcoins to a second party – occurs electronically between each party’s bitcoin “wallet” – the name for the public digital files where the respective parties, or wallet owners, keep private encryption keys to prove ownership of the wallet.

The transactions are processed by network computers (bitcoin miners) into a shared public ledger called a “block chain.” The block chain is maintained over the entire network according to specific cryptographic rules, and each transaction must be verified by other computers (nodes) in the network before it’s confirmed. Once the network computers (the “miners”) complete the increasingly complex algorithms associated with each transaction, the owners of the mining computers earn a fixed number of bitcoins.

Essentially, the bitcoin transaction is audited a minimum of six times by different computers in the network before the transfer is confirmed to the wallet owners. This ensures that:

  1. The transferring bitcoin wallet has sufficient bitcoins to complete the transaction.
  2. The appropriate number of bitcoins are transferred from one wallet to the other, thus agreeing and confirming the total number of bitcoins outstanding remains the same.
  3. The bitcoin balance in each wallet is correct following the transfer, again confirming that the total outstanding bitcoins are correct.

Each computer verifying the transaction adds its own sequence of numbers to the block chain. As transactions increase, the computing power necessary to complete each transaction also increases due to the longer block chain and the greater complexity of the algorithms required to complete each operation.

Mining – processing transactions for the bitcoin network – is the only method by which new bitcoins are created. As the number of outstanding (unissued) bitcoins decrease, and the number of bitcoin transactions increase, the bitcoin miner must expend greater computer power to complete each transaction. This is the planned consequence of fixing the number of bitcoins issued to 21,000,000 BTC, thereby establishing the rate at which future BTC blocks are issued on a declining ratio based on the number of outstanding BTCs.

For instance, once there are 17,718,750 BTC outstanding, 6.25 BTC/block will be issued relative to the 50 BTC/block initially issued. According to Virtual Mining Corp CEO Kenneth Slaughter, “In 2009, people could mine 50 coins every 10 minutes. By the end of 2020, that amount was halved to 25 coins.”

The Potential of Bitcoins

While the number of bitcoins and their value has increased since their introduction, it may be helpful to compare bitcoins to other electronic payment methods.

Transaction Volumes

In the fiscal year ending October 2020, there were $8 billion in transactions in bitcoins. By contrast, Bank of America, PayPal, Western Union, Automated Clearing House (ACH) Network, and Fedwire collectively processed 132 million transactions for a total of $599 trillion in 2020, as testified to by Jennifer Shasky Clavery of the United States Department of Treasury in November 2020.

Transaction Capacity

Gallippi, also testifying before the Senate Banking Subcommittee at the same time as Clavery, contrasted the difference between the existing capacity of processors to handle bitcoin transactions as compared to credit card processing. He noted that the Visa credit card network can handle 20,000 transactions per second worldwide, while Bitcoin has the capacity to handle seven transactions per second, and currently averages just one transaction per second. He also stated that the global money supply of bitcoins is around $5 billion today, compared to $70 trillion in the global M2 money supply.

Advantages of Bitcoins

Bitcoins have a way to go before becoming a serious alternative to existing electronic transaction systems, but they do provide real advantages to users:

1. Protection From Payment Fraud
Bitcoins are digital and cannot be counterfeited or reversed arbitrarily by the sender, as with credit card charge-backs.

2. Reduced Possibility of Identity Theft
When you give your credit card to a merchant, you give him or her access to your full credit line, even if the transaction is for a small amount. Credit cards operate on a “pull” basis, where the store initiates the payment and pulls the designated amount from your account. Bitcoins use a “push” mechanism that allows the bitcoin holder to send exactly what he or she wants to the merchant or recipient with no further information. Furthermore, bitcoins do not require names – just digital wallet IDs.

3. Direct Transfers for Immediate Settlement
Purchasing real property typically involves a number of third parties, delays, and payment of fees. In many ways, the bitcoin block chain is like a “large property rights database,” says Gallippi. Bitcoin contracts can be designed and enforced to eliminate or add third party approvals, reference external facts, or be completed at a future date or time for a fraction of the expense and time required to complete traditional asset transfers.

4. Access to Historically Inaccessible Markets
There are approximately 2.2 billion individuals with access to the Internet or mobile phones who don’t currently have access to traditional exchange systems. These individuals are primed for the bitcoin market. Kenya’s M-PESA system, a mobile phone-based money transfer and micros financing service recently announced a bitcoin device, with one in three Kenyans now owning a bitcoin wallet.

5. Lower Fees
There aren’t usually transaction fees for bitcoin exchanges because the bitcoin miner is compensated by the network with newly issued bitcoins. Even though there’s no bitcoin transaction fee, many observers expect that most users will engage a third-party service, such as Coinbase, in lieu of creating and maintaining their own bitcoin wallets. These services act like Paypal does for cash or credit card users, providing the online exchange system for bitcoin, and as such, they’re likely to charge fees. It’s interesting to note that Paypal does not accept or transfer bitcoins.

Limitations & Risks of Bitcoins

Critics of bitcoins range from noted economist and “New York Times” writer Paul Krugman, to MarketWatch’s David Weidner, who claims advocates for bitcoins are essentially gold bugs: “The most paranoid class of investors. They’re hoarding it to ward off what they believe is hyper inflation. They don’t trust the Fed. They don’t trust the government. They don’t trust central banks.”

They, and others, raise a number of concerns, some of which are substantial obstacles to the online currency, while others may resolve as the system matures.

1. Financing Illegal and Immoral Activities

Some believe the appeal of bitcoin is that it can be used anonymously for illegal or antisocial acts. According to Mercedes Kelley Tunstall of Ballard Spahr LLP, “Bitcoin has built its reputation and structured its virtual currency around being both anti-government and anti-establishment.”

On October 2, 2020, the FBI closed the notorious website Silk Road, seizing more than 144,000 BTC worth $28 million. According to Paul Smocer, president of BITS (the technology policy division of The Financial Services Roundtable), Silk Road was “an operation that was allegedly used to anonymously buy or sell drugs, offer guns or assassins for sale, and provide tutorials for hacking ATM machines. The operation was completely reliant on digital currency for transactions.” He went on to say, “Digital currencies are being used to assist a broad array of criminal activities including illegal drug sales, stolen identities, child pornography, prostitution, human trafficking, and illegal weapons sales. It is also being used as a favorite of cyber criminals to pay for services such as developing and distributing malicious software to the movement of stolen funds resulting from account takeovers.”

Proponents of bitcoins, with the agreement of federal currency regulators and enforcement officials, respond that any financial institution, payment system, or medium of exchange has the potential to be used for money laundering and other illicit activities.

2. High Risk of Loss

Timothy B. Lee, adjunct scholar at the Cato Institute and regular contributor to Forbes.com, identifies four reasons to be cautious about bitcoins:

  • Lack of Security. There is no safety net or perfect way to protect your bitcoins from human error (passwords), technical glitches (hard drive failures, malware), or fiduciary fraud. According to an article in the UK edition of Wired, 18 of 40 web-based businesses offering to exchange bitcoins into other fiat currencies have gone out of business, with only six exchanges reimbursing their customers. The authors of the study estimate that the median lifespan of any bitcoin exchange is 381 days, with a 29.9% chance that a new exchange will close within a year of opening.
  • Increased Regulation. While relatively benign guidelines are currently in place, law enforcement agencies could decide that bitcoins are a “giant money laundering scheme,” and enact more stringent regulations that would diminish the currency’s value.
  • Limited Scaling. The design of the system limits the speed and number of transactions processed, making it unlikely that bitcoins will replace conventional credit card transactions.
  • Lack of Applications. While acknowledging bitcoins’ popular use for illegal transactions, Lee questions how useful bitcoins really are. To be truly disruptive to existing fiat currencies or electronic payment systems, Bitcoin would need applications for low-cost international money transfers, the creation of complex electronic contracts, or use in Kickstarter-style fundraising campaigns or micropayment transfers.

James J. Angel, associate professor of finance at the McDonough School of Business at Georgetown University, noted in an article on CNN that one of the largest Bitcoin exchanges is a former online site to trade cards used in the popular card game MAGIC: “An exchange based on trading kiddy cards does not seem like a sound foundation for a monetary system.”

Many financial experts would concur that the issues inherent in currency and monetary exchange systems are considerably more complex than the artificial limits established in game software. Angel also predicted that Bitcoin mining software would become a magnet for computer viruses since there is no government regulating the participants within the system.

On December 8, 2020, the Financial Times reported that “Bitcoin has fueled a surge in the number of cyber-attacks,” with more than 300,000 known incidents occurring in the preceding quarter. According to the article, cyber-attackers demand ransoms paid in bitcoins from owners of the computers that have been attacked, steal bitcoins by deciphering the long codes, and hack the coining computers used to maintain the public ledger of bitcoin ownership.

Furthermore, Mr. Smocer, testifying before the Senate Subcommittee, noted that bitcoins are not broadly accepted by the established financial services industry, limiting their overall application and use.

3. Excessive Volatility

According to an analysis published in The Wall Street Journal by Campbell Harvey, a finance professor at Duke University, bitcoins have been 7.5 times as volatile as gold, and more than eight times as volatile as the S&P 500 over the last three years. This coincides with the analysis of Marie Brière, associate professor of Universiteé Paris Dauphine in France, who calculated an annualized return of 370% for bitcoins with 175% volatility. Such violent price movements within short time periods are not consistent with an ideal exchange medium for buyers or sellers, limiting bitcoins as a significant vehicle for businesses.

Many believe that bitcoins are speculative bubbles, similar to the Dutch tulip bulb mania of the 1600s. The evidence to date definitely suggests that the current market is mainly speculation, with three-quarters of mined bitcoins being hoarded, waiting for prices to rise.

Bitcoins as an Investment

Raoul Pal, head of Global Macro Investors, recommended “Buy Bitcoins” on November 1, 2020 when a BTC was at $210, saying, “It’s either zero or it’s worth a truly outstanding amount of money.” He likened the purchase to a lottery ticket.

SecondMarket CEO Barry Silbert, whose company offers the Bitcoin Investment Trust to accredited investors, agrees with Pal’s assessment, saying, “There will either be a total loss of principal or a very, very high return.”

Cameron and Tyler Winklevoss, who came to fame in their legal controversy with Facebook founder Mark Zuckerberg, filed a proposal in June 2020 that would allow investors to acquire an exchange traded fund to track the performance of bitcoins. This has yet to be approved.

On the other hand, many financial advisors are staying clear of the investment. Phil Christenson, an advisor of Philip James Financial, stated, “If Bitcoin was a stock, I’d seriously consider selling some of it. I wouldn’t be buying it.” The governments of China and France have issued public advisories to warn against potential risks in bitcoins, and the government of India is expected to make a similar warning.

Final Word

In a short time, Bitcoins have captured the attention of financial speculators, con-men, and cyber punks alike. Are bitcoins a real solution to the need for a transaction system suited to the Internet Age, or just another way for unwitting sheep to be sheared of their assets as they’re led to slaughter? The concept is intriguing. The demand for a suitable virtual currency is real; however, it’s simply too soon to project whether bitcoins are the answer, or just another speculative boom.

If you decide to buy bitcoins or take them in exchange for your goods or services, limit your risks. Remember that the risks of engaging in virtual currency transactions are entirely your own.

What do you think about bitcoins? Do you own any? Will you buy them as an investment or speculation?

The Pros and Cons of Bitcoin

There’s no denying that bitcoin has a lot of growth potential, but the cryptocurrency is also plagued by concerns about its safety and security

While bitcoin has been at the forefront of the news cycle over the past year, a lack of understanding about how the cryptocurrency actually works and its extreme volatility has kept many traders from considering the industry to be investment-worthy. However, there could still be money to be made. But investors need to be willing to stomach a little risk and wait out the bumps. Here’s a look at the pros and cons of bitcoin.

Pro: Growth Potential

Perhaps the most appealing thing about bitcoin is that the technology is so new that the growth prospects look compelling. Bitcoins offer a new way for people to exchange funds instantly without going through a third party intermediary.

Bitcoin functions on a technology called blockchain, which allows people to transfer assets for just a fraction of the time and money it would take to make the same transaction through traditional financial institutions. For that reason, many have pointed to blockchain as one of the most important technological advances of this decade. Blockchain is useful not just for cryptocurrency transfers, but as a ledger-like technology. And it is applicable to several other industries as well. Everything from the way stocks are traded to how contracts are negotiated could be changed via blockchain.

Bitcoin itself also has a large growth runway as people get more comfortable using it. We’ve already seen everything from Bitcoin ATMs to big-name retailers accepting the cryptocurrency as a valid payment. That’s good news for bitcoin investors. The coins will only become more valuable as the currency catches on and grows in popularity.

Con: Misunderstood

Perhaps the biggest con for Bitcoin is the general public’s lack of understanding surrounding the cryptocurrency. Several studies have shown that people — including bitcoin users — don’t really understand how the cryptocurrency works and whether or not it’s secure.

That’s a problem. In order for more people to adopt and become comfortable with bitcoin, they will almost certainly need to understand it. Additionally, the digital currency already has a poor reputation regarding safety, so understanding how to protect and use bitcoins wisely is paramount to it’s expansion.

Pro: Safety

Another big reason Bitcoin is considered transformative is that the blockchain protects against things like identity theft and payment fraud more thoroughly than a credit-card transaction ever could. As the coins are digital, they can’t be counterfeited. This takes a way some of the risk that traditional transactions carry.

Not only that, but payments via bitcoin are more secure for buyers than credit card charges. Paying via bitcoin allows a buyer to send exactly the amount required — giving the merchant no access to the rest of their funds.

Credit card payments give merchants access to an entire line of credit for any amount. This leaves the door open for hackers and dishonest merchants to pull as much as they want from a buyer’s account.

Con: Safety

When discussing the pros and cons of bitcoin, safety falls in both categories.

Bitcoin transactions require just the buyer’s coin wallet ID — rather than their name and contact details. Thus, they offer a degree of anonymity that traditional transactions don’t. While some tout this as a pro for bitcoin, it’s also why some investors view cryptocurrencies negatively.

Many worry that cryptocurrencies are becoming a sort of ‘underworld’ where seedy dealings can take place because this anonymity. That has contributed to consumers’ hesitation to adopt the currency. And it’s given regulators reason to warn against getting involved in bitcoin without fully understanding it.

Investing In Light of the Pros and Cons of Bitcoin

In theory, bitcoin looks like a great opportunity to jump on a new technology before it gains momentum — but in practice things are much murkier. Bitcoin prices have proven to be extremely volatile. And as they don’t offer any of the kind of valuation metrics that stocks do, it’s difficult to estimate where prices are going. Analysts are all over the shop with bitcoin 2020 predictions, making it difficult to gauge where the cryptocurrency is heading.

There are plenty of other ways to add cryptocurrencies to your portfolio without owning them outright though. The closest you can get without buying them would be through an investment like the Bitcoin Investment Trust (OTCMKTS: GBTC ). The trust behaves similarly to an ETF by buying and holding on to bitcoins. That means investors who buy shares will benefit should bitcoin prices rise. Investors can also purchase futures contracts to bet on bitcoin prices.

However, perhaps the safest way to add bitcoin to your investment strategy is to choose a publicly traded company that has been making bets in the cryptocurrency space.

Overstock.com Inc (NASDAQ: OSTK ) is the most notable example, the company has been shedding its traditional e-commerce business to become completely reliant on the cryptocurrency industry. If you’re looking for something even safer, consider a company like IBM (NYSE: IBM ) which has been working to develop new uses for blockchain or NVIDIA Corporation (NASDAQ: NVDA ) which makes chips used by bitcoin miners.

As of this writing Laura Hoy did not hold a position in any of the aforementioned securities.

What Are the Advantages of Paying With Bitcoin?

Due to the unique nature of virtual currencies, there are some inherent advantages to transacting through bitcoin over fiat currencies. Although over a decade old, the digital currency landscape is constantly changing, with most tokens being untested as a medium of exchange, and users should be careful to weigh their benefits and risks. That said, bitcoin is designed to offer users a unique set of advantages over other payment methods. We’ll take a closer look at those below, but before we do, it will be useful to explore what bitcoin is. By better understanding how bitcoin was designed, it will be easier to see what the advantages of using bitcoin for payments are.

What Is Bitcoin?

Bitcoin is a decentralized, peer-to-peer cryptocurrency system designed to allow online users to process transactions through digital units of exchange called bitcoins (BTC). Started in 2009 by a mysterious entity named Satoshi Nakamoto, the Bitcoin network has come to dominate and even define the cryptocurrency space, spawning a legion of altcoin followers and representing for many users an alternative to government flat currencies like the U.S. dollar or the euro or pure commodity currencies like gold or silver coins.

Why the need for bitcoin in the first place, if there are already so many traditional means of making payments? A key element of bitcoin is its decentralized status, meaning that it is not controlled or regulated by any central authority. This immediately distinguishes it from fiat currencies. Bitcoin payments are processed through a private network of computers linked through a shared ledger. Each transaction is simultaneously recorded in a “blockchain” on each computer that updates and informs all accounts. The blockchain serves as a distributed ledger and obviates the need for any central authority to maintain such records.

Bitcoins are not issued by a central bank or government system like fiat currencies. Rather, bitcoins are either “mined” by a computer through a process of solving increasingly complex mathematical algorithms in order to verify transaction blocks to be added to the blockchain, or they purchased with standard national money currencies and placed into a “bitcoin wallet” that is accessed most commonly through a smartphone or computer.

Benefits of Bitcoin

Now that we have seen a brief overview of what bitcoin is, we can better understand how this leading cryptocurrency provides potential benefits to its users.

1. User Autonomy

The primary draw of bitcoin for many users, and indeed one of the central tenets of cryptocurrencies more generally, is autonomy. Digital currencies allow users more autonomy over their own money than fiat currencies do, at least in theory. Users are able to control how they spend their money without dealing with an intermediary authority like a bank or government.

2. Discretion

Bitcoin purchases are discrete. Unless a user voluntarily publishes his Bitcoin transactions, his purchases are never associated with his personal identity, much like cash-only purchases, and cannot easily be traced back to him. In fact, the anonymous bitcoin address that is generated for user purchases changes with each transaction. This is not to say that bitcoin transactions are truly anonymous or entirely untraceable, but they are much less readily linked to personal identity than some traditional forms of payment.

3. Peer-to-Peer Focus

The bitcoin payment system is purely peer-to-peer, meaning that users are able to send and receive payments to or from anyone on the network around the world without requiring approval from any external source or authority.

4. Elimination of Banking Fees

While it is considered standard among cryptocurrency exchanges to charge so-called “maker” and “taker” fees, as well as occasional deposit and withdrawal fees, bitcoin users are not subject to the litany of traditional banking fees associated with fiat currencies. This means no account maintenance or minimum balance fees, no overdraft charges and no returned deposit fees, among many others.

5. Very Low Transaction Fees for International Payments

Standard wire transfers and foreign purchases typically involve fees and exchange costs. Since bitcoin transactions have no intermediary institutions or government involvement, the costs of transacting are kept very low. This can be a major advantage for travelers. Additionally, any transfer in bitcoins happens very quickly, eliminating the inconvenience of typical authorization requirements and wait periods.

6. Mobile Payments

Like with many online payment systems, bitcoin users can pay for their coins anywhere they have Internet access. This means that purchasers never have to travel to a bank or a store to buy a product. However, unlike online payments made with U.S. bank accounts or credit cards, personal information is not necessary to complete any transaction.

7. Accessibility

Because users are able to send and receive bitcoins with only a smartphone or computer, bitcoin is theoretically available to populations of users without access to traditional banking systems, credit cards and other methods of payment.

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