Lesson

Bitcoin Strengths and Weakness’

Bitcoin is fundamentally different from all forms of money that came before it and it’s very young, having only appeared in 2009, with very few people knowing about it before around 2012. As time passes and more people use it, we all come to understand better just how it works well and how it sometimes falls on its face. Let’s take a moment to summarize bitcoin’s strengths and weaknesses, and to see how they developed over time. To do so, I’m going to look at what makes bitcoin special.

The first unusual thing about bitcoin is that it has no physical existence. That makes it really good for online applications. It’s really designed for online use. That also means there’s no physical thing to lose or steal, but that’s a disadvantage as well because problems with information, like a hard drive failure or forgetting your password, could mean that you lose all your money. Further, being online means bitcoin is especially at risk to automated attacks from the entire internet.

The second unusual thing about bitcoin is that there’s no central authority. That means that there’s no bitcoin bank to fail, no bitcoin government to get overthrown, and nobody can stop you from sending and receiving bitcoin because there is no gate keeper. But on the downside, there’s no official mediator or police either. If your bitcoins get lost or stolen, nobody can step in to get them back. There’s also no informational authority, no help desk, no source of official advice.

It’s hard to know whom to trust. Another thing that distinguishes bitcoin is its use of the blockchain. That is a universal ledger that’s protected by miners. On the plus side, this fundamental technology is amazing and at this point, it’s pretty well proven. It’s also completely open. Everybody can see what everybody is doing, and everybody can examine the programming code that makes it all work. On the other hand, the main bitcoin network was never designed to handle more than a few transactions per second, far too few for world-wide use and the complicated economics of mining bitcoin are weird and unstable.

They’ve also led to occasionally high transaction fees and long waits to get transactions confirmed. Bitcoin is the newest kid on the block, so its value is not yet well-proven, either in terms of price or social good. On one hand, it’s unusual status as a digital native might enable all kinds of new uses that aren’t possible with other kinds of money. If that happens, it’s price could go way, way up. Even if there aren’t such new uses, bitcoin’s volatility has made quite a few people rich already and nobody knows whether it could go up sharply again.

But this is all speculation. We really don’t know whether bitcoin will ever find its killer app and prices could just as easily go sharply down. Finally, bitcoin is unusual in that it’s truly international. Bitcoin works the same all over the world and distance doesn’t matter. By the same token, bitcoin doesn’t care who has it. You can be denied a credit card, but you can’t be denied a bitcoin account. Having said that, bitcoin has really failed in its original promise to enable micropayments or international payments.

Sporadically high transaction fees and slow network times mean that it’s often not economic to send just a few dollars, and because of government regulations, you might not ever be able to convert your bitcoin into your country’s money. Of course, all of these strengths and weaknesses are subject to change. Bitcoin’s place in the market has already changed a lot since its creation and I expect it’ll continue to change for years to come.