Bitcoins have gained extreme popularity due to their rapid value appreciation and increased transactions. The novel COVID-19 pandemic raised questions about the absence of regulatory authorities overseeing the functions of Bitcoins and the cryptocurrency market in general.
The volatility of cryptocurrencies increased manifold as investors found it difficult to invest in a currency almost disconnected from the real economy. Keep reading to learn all about the various advantages and disadvantages of Bitcoin.
Introducing Bitcoins
Bitcoin is a digital currency that generates each unit through computing a complex mathematical problem. Its digital or virtual nature makes it an effective currency for all online transactions and can also be exchanged into cash.
Inherently, Bitcoin was introduced as a digital form of payment that works on blockchain technology with no central operation base.
Bitcoins are based on the SHA-256 algorithm, encrypted in keys of enormous lengths (up to 2256 units), making them very difficult to copy or steal.
Blockchain Technology and Bitcoins
A blockchain is a distributed space that stores data in a shared database. With every transaction, the new block copies the previous block with new data in an encrypted form.
Miners validate the transaction and open another block they receive as a reward for mining. These blocks can be stored, sold or used for the transaction.
Bitcoin mining introduces new coins into the market through blocks extracted from cryptographic calculations that are hard to generate but easy to verify.
With the growing network of blockchain nodes, a potential attacker's attempt to control over half of all nodes and embed the consensus information becomes difficult and impractical.
Advantages of Bitcoins
Any financial instrument whose value fluctuates in response to changes in demand or external shocks is a high-risk investment. Despite the risk-bearing characteristic and investment objective, approximately 14% of the US population deals in cryptocurrencies.
Some advantages of investing and dealing in Bitcoins include the following:
- Ease of transactions
The original Bitcoin whitepaper defines it as a digital peer-to-peer currency which makes instantaneous transactions. Unlike payment networks like PayPal and Visa, Bitcoins incur very low transaction surcharges. The absence of an intermediary reduces waiting periods and makes Bitcoin transactions hassle-free. Bitcoin can be used for everyday transactions devoid of double-spending.
- Anonymity and decentralisation
Alphanumeric cloaks hide Bitcoin users' identities and prevent illegitimate access. Although transactions are visible through connecting data points, Bitcoins enable a pseudonymous account that can safeguard user information. Unlike physical money, bitcoins do not have regulatory authority, implying that financial records are encrypted.
- Value appreciation
Owing to the limited supply of Bitcoins since its beginning and its increasing usage, Bitcoins have appreciated. Unlike fiat money, the value of Bitcoins fluctuates with every transaction. However, the cryptocurrency bubble of 2021-2022 saw an enormous rise in Bitcoin's value.
- Security and free from market forces
Unlike fiat money transactions prone to cyber-attacks and fraudulent activities, Bitcoins are encrypted and immune to seizure. Every Bitcoin transaction is visible on an openly distributed ledger, making unauthorised changes difficult. Additionally, the non-reversibility and inability to change the owner's address make duplicating or stealing Bitcoins almost impossible.
- Tax-free and zero transaction costs
Most countries do not levy taxes on Bitcoin returns. Since third-party applications cannot intercept such transactions, it isn't easy to implement a stable taxation policy. Every Bitcoin transaction implies a contribution to the network and sharing the burden of authorisation, which makes transaction costs negligible.
Disadvantages of Bitcoins
Despite the positive quirks and features that make Bitcoin a highly coveted transaction mode, its questionable acceptance and absence of regulations restrict its usage. Please consider the following pointers before analysing whether it's worth investing in Bitcoins.
Some disadvantages of investing in Bitcoins include the following:
- Volatility
The volatile nature of cryptocurrencies depends on factors like limited supply, increasing market demand, investor sentiment, etc. The limited supply and growing demand make its value very susceptible to fluctuations. Uncertainty and possible security breaches make Bitcoin investment a risky one.
- Absence of regulations
Although potential investors consider the absence of government regulations a determining factor, its decentralisation makes it devoid of legal protection. The decentralised nature of Bitcoins can also affect owners of multiple units if a portion of the investors chooses to opt-out.
- Irreversibility and limited usage
The irreversibility of Bitcoins adds to their unregulated and anonymous nature. Any accidental payment cannot be traced and therefore is risky. While investors generally store cryptocurrency units in crypto wallets, losing access to such wallets can mean incredible losses. Hence, Bitcoin does not find application in most secured networks as a means of transaction. Bitcoin payments require a third party, unlike cash, debit, or credit card payments.
- Uncertain future
While several nations like El Salvador have accepted Bitcoin as a regular payment mode, many countries have barred its usage. The economic shock posed by the Covid-19 pandemic has forced countries like Qatar, China, Turkey, North Macedonia, Egypt, Iraq, and Bangladesh to get into Bitcoins. Despite Bitcoin being legal in Russia, transactions involving Bitcoins are banned.
- Technical flaws and a deflationary effect
Since Bitcoins is a relatively newer concept, the blockchain network has innumerable flaws and loopholes. It further explains its acceptance in general transactions. The limitation in the total number of Bitcoins available strains the existing Bitcoins and raises their value. A future surge in spending on Bitcoins may arise, potentially destabilising the economy.
Who Should Invest in Bitcoins?
Unlike an investment in stable stocks and shares, investment in Bitcoins is risky but profitable.Experts define Bitcoin as a single stock that may pose potential risks when invested in a sizeable chunk of the portfolio.
While Bitcoins have a greater potential for generating huge returns, their volatility and lack of government regulations make them unsuitable, especially for budding investors. Potential investors willing to invest in Bitcoins should understand the functioning of cryptocurrencies and research well.
Final word
Cryptocurrencies like Bitcoins are digital mediums of exchange with a decentralised system that verifies transactions and lets owners mine them. Their unregulated nature makes them susceptible to double spending, which requires immense computational power to generate enough hash for verification.
