The Pros and Cons of Bitcoin
Yesterday I gave a very basic description of what bitcoins are and how they can be sent from one person to another. The obvious question is, “I have a credit card or paypal account, why would I need or want to use bitcoin?”
Bitcoin supporters argue it has several advantages over fiat currencies:
1) Since there is no intermediary between 2 parties, a transaction done in bitcoins has almost 0 in transaction fees. This is a big advantage for merchants, since credit cards generally charge fees of up to 2-3%.
2) There is no central bank or government controlling the supply of bitcoins. In the current economic environment with many central banks greatly increasing the supply of their currencies, some worry that eventually the purchasing power of their currrncy will be eroded by future inflation. Bitcoin creation is slow and gradual and the supply is ultimately fixed. No one can devalue bitcoin by vastly increasing the supply.
3) Bitcoins can be sent to anyone over the internet anywhere in the world virtually instantly.
4) Bitcoin transactions are virtually anonymous. What shows up on the ledger is simply the wallet ids of the parties and any one person can have multiple wallets.
What about the disadvantages of bitcoin? Detractors point to the following?
1) Because of the anonymity of transactions, bitcoins can easily be used for various nefarious activities such as money laundering, or drug dealing.
2) The value of bitcoins versus fiat currencies can fluctuate dramaticly over short periods of time. As a merchant, do you want to accept something as payment when its value is subject to high volatility? When I wrote yesterday’s article, 1 bitcoin was trading for $106-107. A little over 24 hours later 1 bitcoin fetches $111.
3) Since bitcoins exist in the digital world, they can be lost just like any data. Bitcoins are stored in digital wallets. If you have yours on your home computer and your hard disk crashes, without a backup, the coins are loss. If your spouse has a significant amount of the family’s saving in bitcoins and has never shown you the location of the wallet(s) and or passwords, the coins are lost. Of course, a bit of precaution and planning can eliminate these hazards.
After thinking about the above, if you decide to take the plunge, how can you obtain some bitcoins? Other than mining them, which at this point is quite difficult without specialized moning gear, they can be bought on an online exchange, the largest of which is Mt Gox.
You will also need a wallet to store your coins. Here you have 3 choices, an online wallet, a wallet that resides on your computer or a wallet on your android based smartphone (Sorry Iphone users, apple has decided not to allow any wallet app). A good guide to obtaining a wallet can be found here.
What does the future hold for bitcoin? At 4 years old, bitcoin is going strong. The current size of the bitcoin economy is estimated at over 1 billion USD and growing. However as the currency has grown in size and acceptance, so has government scrutiny, especially in the US. From the SEC, the IRS, the FBI to Homeland Security, many government agencies are looking for more regulation of bitcoin. I believe the coming year will see greater regulation of bitcoin. It will be interesting to see how the bitcoin community reacts and evolves under greater government regulation.