Released as an open source project in 2009, Bitcoin is the world’s first cryptocurrency. The pioneer digital currency does not have any back-up and it isn’t regulated by a central authority, nor is there a political institution that controls BTC circulation.
However, the way in which bitcoin can be used is quite simple and easy. Holders of the cryptocurrency can transfer bitcoins via a peer-to-peer network system. These transfers are tracked on the 'blockchain - ' a type of ledger that records every transaction.
Why use Bitcoin?
Using Bitcoin is considered by some to be the future of the monetary world for the following reasons:
It’s decentralized and enables its users to govern the system: Bitcoin is not too old; it was launched only a year after the 2008 global financial crisis. It has attracted a wide range of people who view the current financial system as unsustainable. It comes as no surprise that there is a huge community of idealists who are actively building, buying, and working in the cryptocurrency space.
Freedom: Traders can transfer any amount of bitcoin from one country to another; without the typical bank delay for two to three days, or due to weekend closures.
Security: Payments in bitcoin are not tied to anyone’s personal information; therefore, users are not exposed to identity thefts. It is also possible to back-up and encrypt Bitcoins to ensure the security of the users’ money.
Low Transaction Fees: Bitcoin’s transaction fees are low, unlike the banks and private companies. For instance, Paypal charges a 2.5% transaction-fee to send/receive money.
The Immutable Ledger: Bitcoin’s blockchain public ledger is objective. Users trust the protocol because it is based on pure maths; therefore, it avoids human-error and is not corrupted by the political agenda of governments.
What are the disadvantages of Bitcoin?
Despite having so many advantages, bitcoin bares some disadvantages. One major drawback is the extreme price-volatility. Apart from this, people are concerned with:
Legal Grey Area: Most major governments worldwide haven’t entirely recognized bitcoin as a fully-fledged currency, yet. This is due to their concerns that cryptos might be used to hide money from taxation, or for other illegal activities. Although price movements, as well as the adoption of Bitcoin, are guided by governmental actions, authorities worldwide are unable to stop Bitcoin due to its decentralized nature.
An exchange hack is not related to the integrity of the whole bitcoin system; however, market participants are bound to panic in such situations, as traders have lost their cryptos due to exchange hacks in the past. One way of avoiding this issue is to store your coins in a cold wallet.
Illiquidity: Bitcoin and cryptocurrency markets are known for poor illiquidity; largely owing to the concentration of the majority of coins in a relatively few big wallets. Rapid price movements cause users to be concerned that they would be unable to sell their assets if they need to exit the market for some reason.
Volatility: Bitcoin prices are subject to significant volatility - a chief reason behind the reluctance on part of many traders to choose this instrument for trading. Given that the future price of bitcoin is largely unknown, traders who had taken up the cryptocurrency as a speculative investment option, have been materially affected if the value of their investment declined significantly. As new investors enter the process and the market cap continues to grow, bitcoin prices were deemed stable, however since December 2017 that has changed.
Lack of adoption by businesses: The price fluctuations and volatility are largely seen as an obstacle to many businesses that adopt this form of payment. However, the large-scale adoption of Bitcoin for payments may eventually mitigate this disadvantage and make prices more stable.