Advantages and Disadvantages of Using Bitcoins

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Bitcoin has been in the news a lot recently for good and bad reasons. There have been stories like the one of the man who bought $27 worth of Bitcoin in 2009 which are now worth almost $900,000. How about the shutdown of the infamous Silk Road website which was an online black market where people sold and bought illegal drugs and weapons and even paid to have people killed using Bitcoins as currency? Even most recently, a company started installing physical ATMs for Bitcoin transactions.

Having had my interest in Bitcoin piqued high enough, I decided I wanted to own Bitcoins. However, I had to know what advantages and disadvantages using Bitcoin presented. I carried out a bit of research and this is what I found.

What is Bitcoin?

Bitcoin, according to Bitcoin.org is a new kind of money which uses peer-to-peer technology to conduct transactions. It is an open source, decentralized payment system which means that it has no central regulating authority and does not involve banks in transactions. Transactions are carried out directly between the involved parties. It is also called a cryptocurrency because it utilizes military-grade cryptography to protect against fraud.

You can obtain Bitcoins by purchasing them from someone else using regular currency or by earning them through a system called Bitcoin Mining. Bitcoins are stored in Bitcoin wallets which also manage addresses from which you can send and receive payments. New and different addresses can be generated for different transactions and can be done as many times as required.

Advantages of Bitcoin

Easy and Fast Payments: Bitcoin payments can be conducted easily using an app on a smartphone, using software on a computer or online on the web. There is no need for a credit card or a PIN or for any documents to be signed. All that is usually required is to know the address to which you are transferring funds.

Payments and transfers are very fast and can be concluded in a matter of seconds to minutes. This is because it is a decentralized payment system that bypasses banks which typically take days to weeks to complete transfers especially international transfers.

Secure: The use of military grade cryptography ensures that transactions remain secure. No person except the owner of a wallet can make transfers or payments from a wallet. However, the security of using Bitcoins depends on the users who have to take steps to protect their Bitcoin wallets.

Offers Some Degree of Anonymity: The identities behind Bitcoin wallets are private. Wallets use addresses in transactions and these are also created privately. Using an address once for a single transaction ensures privacy and anonymity. However, Bitcoin transactions are public, traceable and are permanently stored on the Bitcoin network. IP addresses of users on the Bitcoin network can also be logged. Therefore, if a user employs a single address for multiple transactions, it is possible to initiate a trace and if the IP address of the user has been logged his or her identity may be uncovered. This can be prevented by using a different address for every different transaction and hiding a computer's IP address using a service like Tor.

Low or No Transaction Fees: Banks and payment processing companies typically charge fees to conduct payments and fund transfers on customers behalf. With Bitcoin these charges are eliminated. To transfer money to family or friends requires zero fees. In cases where there are transaction fees, they are very low compared to bank charges. Bitcoin transaction fees are usually a voluntary fee to enable faster confirmation of your transaction.

Disadvantages of Bitcoin

Payments are Irreversible: Bitcoin payments are irreversible because there is no central authority or processing agency that can effect a reversal. The only way to get a payment back is if the person who received the funds sends them back. There is no way to reverse a payment if you have been cheated by a dishonest person during a transaction.

Not Widely Accepted: Owing to the fact that it is a new currency there are not many places where a person can make use of Bitcoins for payment. None of the major online retailers currently accepts Bitcoin as a form of payment. It also does not have a physical form and so cannot be used in physical stores.

Losing Your Wallet: If a person ever lost access to his or her wallet permanently, then whatever Bitcoins contained in there would be lost to that person. There would be no way to get them back. A person could lose his or her wallet if his/her phone or computer is stolen or if it crashes.

Some ways to prevent this would be to carry out regular backups of your wallet and store your wallet in multiple different locations such as your phone, computer, online and on removable media likeUSB drives and discs.

Has a Learning Curve: Using Bitcoins for payments requires a user to acquire certain knowledge about using Bitcoin and especially about keeping the Bitcoin wallet secure. This includes knowing how to create a wallet, keeping the wallet secure, keeping the identity of the owner of the wallet private and secure, using different addresses for different transactions, and so on.

Experimental Currency: As an experimental currency that is still under development no one can be sure about the future of Bitcoins. Currently, many governments do not apply a tax to Bitcoin transactions but that may change. As a payment system that is heavily reliant on technology, it may have some as yet undocumented technical flaws which could be exploited in the future.

Illegal Use: The relative anonymity provided by Bitcoin transactions has allowed it to be used in illegal activities such as the purchase of drugs and weapons online.

Its Price is Volatile: The valuation of Bitcoins fluctuates wildly and unpredictably and is not regulated by any authority. It is possible to buy Bitcoin at a high rate only to have its value crash.

Having found out the above advantages and disadvantages, one thing stood out clearly: In using Bitcoin, users were responsible for themselves and the security of their funds. Some of the disadvantages mentioned above such as losing your wallet and the issue of irreversible payments can be avoided if people employ proper security measures when using Bitcoin. My advice is that anyone interested in Bitcoin first learn how to use it properly and how to stay safe and secure.

In other words, you are on your own.

For more info visit Bitcoin.org.