The Advantages of Using Bitcoin
Bitcoin is a unique currency. It’s completely virtual. Bitcoin is unsupported by any central bank or other authority. It’s not the official currency of any country. Yet all of these are both advantages and disadvantages. Whether or not bitcoin is an advantage for you is dependent on your situation.
Bitcoins have several advantages over conventional currency:
- Bitcoins can’t be physically stolen. There is nothing physical to steal. In theory, however, someone could force you at gunpoint to send your bitcoins to someone else.
- It’s possible to avoid taxes. The onus is on the taxpayer to be honest about bitcoin transactions. There are many disagreements regarding the government’s ability to track bitcoins through the system. Most of the investigative activity regarding bitcoins is centered on major crimes, such as drug trafficking.
- Bitcoins are extremely flexible. You can pay anyone in the world at any time. Holidays, exchange rates, borders, and the time of day are irrelevant. Bitcoins have far greater flexibility than any other type of currency system.
- There are no transactional costs. As there is no central authority, transactional costs are unnecessary. All of the computers on the system, including your own, are doing the heavy lifting. There’s no one else to pay. You could send your child a million dollars’ worth of bitcoins without it costing a single penny. Try doing that with your local bank or PayPal.
- However, providing a small transactional fee will guarantee that payments are processed more quickly.
- Privacy is maintained. Your personal information isn’t required as part of the transaction. There’s no risk of identity theft. The entire process is encrypted. Keep in mind that it’s not entirely anonymous. All transactions are recorded and posted for anyone to view. However, your name isn’t publicly associated with your transactions.
- Transactions cannot be reversed. This is good news for merchants, but may be a disadvantage for consumers.
- The bitcoin code is open source. There are no secrets, other than the identities of the parties involved in the transactions.
It’s easy to see why bitcoins are useful in certain situations. You have a greater degree of privacy and a lack of transactional costs. Bitcoins can be used at any time and on any day. You can still make or accept a payment on Christmas day at 2:00 AM.
Disadvantages of Bitcoins
There’s a little bad news, too. Bitcoins have certain disadvantages. The lack of governmental regulation and the limited supply of bitcoins creates challenges. In addition, considering the total number of retail establishments, only a small percentage of them accept bitcoins.
Consider these disadvantages:
- The value of bitcoins is very volatile. The number of bitcoins is limited, and demand can vary from one day to the next. So the value of a bitcoin can change very quickly. It’s possible to earn or lose a tremendous amount of value very quickly.
- Bitcoins are not widely accepted at this time. While the number of merchants and individual users is increasing, bitcoins still are an uncommon form of currency. Bitcoins are becoming more mainstream all the time, though. The Federal Reserve Board reports that the number of bitcoin users is doubling every 8 months.
- It’s possible to lose your bitcoin wallet and all of your bitcoins. It’s crucial to keep a backup of your wallet file. A hard drive crash, virus, or corrupted file will cause your bitcoins to become permanently orphaned. You can never get them back. No one else can ever possess them, either.
- There’s a lack of buyer protection. If you pay for a product prior to receiving it, there’s no recourse if the product isn’t delivered. However, there are third-party escrow services that can protect buyers. If you’re paying in advance with bitcoin, you may want to use one of these services.
- Bitcoins make it easier to commit crimes, including fraud. The anonymity of bitcoin makes it attractive to those engaged in illegal activity. However, cash is still more widely used in illegal activities than bitcoins.
It’s important to consider how the disadvantages of bitcoins dovetail with your situation. It’s easy to lose all of your bitcoins if you’re careless. You can also lose a lot of money quickly if the demand for bitcoins drops sharply.
Liquidity of Bitcoins
The bitcoin system is capped at 21 million bitcoins. Currently, there are roughly 14,800,000 bitcoins in circulation. There is a lot of speculation about what will happen to the value when the 21 million-bitcoin limit is reached.
In general, the US stock market is very liquid. You can quickly sell most stocks, bonds, or mutual fund shares at the going rate without concern. There’s always someone willing to buy from you or sell to you, provided the price is right.
Given the limited number of bitcoins and users, it’s not as easy to sell your bitcoins if you wish to cash out. Even if you can find a buyer, even relatively modest transactions can create volatility in the price for a bitcoin.