Advantages & Disadvantages of Using Bitcoin
Now that we have covered the basics of how bitcoin works, how to make transactions with bitcoin, and how to store bitcoin securely, we need to discuss the advantages & disadvantages that come with using this new type of money. The benefits of using a cryptographic peer-to-peer system for payments far outweighs the risks posed by money laundering, cybersecurity, and uncertainty of cryptocurrency’s future. Bitcoin represents a dramatic improvement upon our current arrangement of financial payment systems which use government sponsored currency by relying on an internet protocol for the transmission of value where no humans or third parties are required.
- Trustless Payments. Bitcoin does not require a central party to facilitate transactions or confirm account balances. This, as we described earlier, is the peer-to-peer functionality of cryptographic money which makes bitcoin so useful. When a payment is made, the transaction is verified by an economy of interconnected computers very much in the same way networks of servers make up the world wide web of today. The transaction is initially broadcast, then verified by the network in a secure manner.
Eliminating the need for third party trust was one of the objectives of bitcoin in the first place, and it accomplished this unlike any financial instrument before. Typically, people trust banks to store their money, they trust central banks to retain the value of their money, and they trust governments to manage debt problems in a responsible manner. Bitcoin divorces the reliance on these institutions by putting trust in cryptographic technology rather than human judgment.
- Free and Open Payment System. The bitcoin payment system is free to use and open for anyone to use it. It does not require paying monthly fees or deny access to people who are not in a position to be serviced by a traditional banking institution. Your account is never in jeopardy of being locked because there is no central institution with the capability to block transactions given that it remains adequately decentralized.
Previously, organizations such as WikiLeaks have had payment barriers set up around their accounts which prevented them from receiving necessary funding for their operations. With bitcoin, they were able to bypass these barriers and accept donations needed to keep whistleblower journalism alive. With bitcoin technology, advocacy groups are able to accept and spend their money as they like, without requiring approval from government payment processing services.
- Personal Information Privacy. Under the current system, unless you are using cash, you are identified before you can make a purchase. With bitcoin money, this is no longer necessary, but it comes as a double edged sword. In one sense, bitcoin can be obtained and used in an anonymous manner. It does not require the personal information that traditional financial institutions would, such as government identification and contact information among a host of other data. Because the bitcoin payment system does not require these inputs, it need not put a citizen’s personal information at risk. However, just as easily as it can be used for stealth can bitcoin be used transparently, giving the entire world first-hand viewing ability into your financial standing. Being a distributed ledger, the blockchain will be making your wallet viewable but will be tied to your identification the instant you associate your real world identity to your transactions.
Every person has an inalienable right to privacy, and that includes financial privacy as well as privacy from surveillance techniques. Bitcoin may provide that financial privacy while eliminating the potential for identification fraud and theft of personal information.
Many people will argue that providing the ability to transact anonymously opens the floodgates for money laundering, illicit purchases, and all kinds of criminal activity. This may be true to a certain degree, but bitcoin technology does not aggravate this issue any more than paper cash does today. Indeed, using cash is still the most popular way to conduct money laundering and other illegal activities.
There are risks associated with an anonymous form of transaction that financial enforcement agencies are well aware of. Even more so are they aware that paper cash is still the best medium for laundering money.
- Simplicity & Security. The cryptographic technology behind bitcoin is the most advanced of its kind, making the system impractical to hacking attempts. Rather, the hacking attempts to steal funds have been successful due to poor storage practices and faults with exchanges. Security experts around the world have been attempting to attack the bitcoin network directly since its inception. None have been able to find a chink in its armor. When used correctly, the bitcoin blockchain is an elegant and airtight solution to sending money cheaply and efficiently.
- Internet Functionality. The innovation of a payment layer for the internet is one of the primary reasons people are so interested in bitcoin. Some of the payment system features include:
- Worldwide accessibility outside the grasp of centralized financial institutions
- Zero or low processing fees
- Open-source, public design (the computer source code bitcoin is built upon can be viewed and improved at any time)
- Fraud control (the network provides protection against most prevalent frauds like chargebacks or unwanted charges, and is impossible to counterfeit)
- Donation solutions (bitcoin donations could contribute to a faster international response)
- Multi-signature accounts (allow a transaction to be accepted only if a group of parties agree to sign)
- Transparent transactions (all transactions are time-stamped, verified, and attributed the withdrawal and deposit addresses making it possible for organizations to be held accountable)
- Technical Sophistication. In order to properly store and use bitcoin, it requires a certain degree of technical understanding that most of society current finds challenging. The more you understand about vulnerabilities to storing bitcoin, the safer you will be. As we discussed earlier, storing your bitcoin is one of the biggest challenges and being protected from hackers takes a considerable degree of computer competency.
- Limited Acceptance. Bitcoin is continuing to gain traction with merchants. The number of businesses accepting it is growing daily. The Federal Reserve Board of Washington reports that the number of daily users is likely to have grown exponentially in the past few years, and that the user base has doubled every 8 months for the last 3 years.Businesses that do transactions online are taking a close look at integrating bitcoin, while brick and mortar retailers are still just getting onboard with this new type of payment. Because you may find it difficult to pay your rent or buy food at the grocery store with bitcoin (for now), this limited acceptance can be a disadvantage.
- Uncertain Future. No one can say with certainty what will come of bitcoin. As it remains today, bitcoin is very speculative as it is still an experimental type of technology. There are many potential vulnerabilities which may bring about the downfall of bitcoin. However, the upside is so one-sided that the average consumer would be wise to research and understand this new type of technology, given that money factors into our lives essentially everyday.
In the long-run bitcoin technology will transform the distribution and access to information in a manner similar to internet and smartphone technology. Considering the only action a user need perform to start using bitcoin is downloading an app using the aforementioned technologies, and you may begin to see why we are on the cusp of a powerful disruption in business, economics, and daily life.
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