In 2020, Bitcoin turned 11 years old. Since the release of the genesis block in 2009, the first cryptocurrency has gone from an unknown coin to a major digital asset with a capitalization of hundreds of millions of dollars. “Digital gold” has a lot of advantages, and due to this, its popularity is growing every year. But when investing in BTC, it is worth considering that this asset has a significant number of disadvantages.
Bitcoin Strengths
1. Decentralization
One of the fundamental characteristics of cryptocurrencies is decentralization. In January 2018, a record maximum of the number of nodes (these are computers connected to the blockchain network) of bitcoin was recorded – then it reached 200 thousand. Since then, the value has been decreasing, and in May of this year a three-year minimum of 47 thousand nodes was recorded. This means that fewer users participate in the validation (confirmation) of transactions and store copies of the blockchain of the first cryptocurrency on their devices.
However, so far, according to Bitcoin developer Matt Corallo, reducing the number of nodes does not present any particular problems for the network. It is important that validators continue to verify transactions and that there are enough nodes to download the blockchain by other nodes.
Bitcoin is not controlled by a private company or the government of a large state. In mid-2010, even the creator of the first cryptocurrency under the pseudonym Satoshi Nakamoto stopped participating in the project. After that, his fate was given to independent developers. Their work is supported by donations and with the help of the Bitcoin Foundation, which also lives on grants from commercial organizations.
2. Cheap transfers worldwide
The fees for transactions in the Bitcoin network and the speed of their conduct does not depend on the distance over which the transfer needs to be made. If when using the services of companies such as Western Union, for example, sending funds may take several days, then bitcoin will cope with this task on average in an hour. In this case, the commission will not be commensurate with the amount sent.
For example, in February of this year, the Bittrex exchange sent 49,922 BTC ($ 460 million at the exchange rate at that time) in one transaction with a commission of $ 0.60. And in January, an operation worth 124,946 BTC (about $ 1 billion) took place, $ 83 had to be paid for this. At the same time, BTC is considered an obsolete cryptocurrency in terms of technology, and to solve its shortcomings, there are a lot of altcoins that will perform such tasks much faster and better.
For example, the XRP token was developed by Ripple to solve banking problems. Blockchain project products, such as xRapid, allow you to instantly transfer large amounts to any distance instantly and almost for free.
3. Network uptime
The main danger for any cryptocurrency is a 51% attack, when a group of miners controls at least 51% of the network, due to which it can affect transactions and the blockchain as a whole. According to the crypto51 service, now the cost of 1 hour of such an attack on the main digital coin network costs about $ 433 thousand. This amount depends on the hash of the asset.
Now most of the computing power of bitcoin is in China. It can be assumed that the authorities of the country, if they wish, will be able to combine mining companies in order to seize control of the first cryptocurrency blockchain. However, experts are confident that this will never happen.
Mining companies will not destroy their source of income, explained Sergey Arestov, co-founder of BitCluster. Even if someone decides to attack the network of the first cryptocurrency, this will not destroy it, but the maximum will lead to failures that can be fixed by releasing an emergency update. The cryptocurrency network has been working without errors for many years. And while there are no prerequisites for the fact that this situation may change.
4. Deflationary nature
Everyone was talking about the deflationary nature of Bitcoin in 2020, when the Fed and the central banks of large countries began to use extraordinary measures to support the economy. Since the beginning of the year, the total balance of the USA, Europe and Japan has grown by $ 5 trillion. At the same time, the issue of cryptocurrency cannot be increased, it will not exceed 21 million coins under any circumstances.
This means that, unlike, for example, the US dollar, which is issued on an unlimited scale, bitcoin is not subject to inflation. On the contrary, over time, the cryptocurrency supply on the market will decline, which means that even if demand remains, its price will rise. The coin is programmed to rise in price, due to this it looks much more valuable than fiat money.
5. Digital gold
Bitcoin can replace gold as a means of preserving capital, analysts at Grayscale investment company believe. They explained that the precious metal has large reserves, it cannot be easily divided and transported. Therefore, the first cryptocurrency perfectly suits the role of “digital gold”. At the moment, the convenience of using a traditional asset is significantly lower than that of its modern counterpart. EOS creator Brendan Blumer is confident that BTC will replace gold and become the main asset for storing value in the next twenty years.
6. A simple way to invest
In order to start trading bitcoin, you do not need to have special licenses or knowledge. It is enough to go through the registration procedure on the crypto-exchange or download an electronic wallet. However, this is fraught with the fact that many people, far from the world of finance, lose money on literally blind investments. For example, those who invested in the XRP token in January 2018, when it was trading at a level of $ 3.4, are now unlikely to ever get their money back (now the price of the coin is 94% lower, about $ 0.191).
7. Protective asset
During local economic crises, often the bitcoin exchange rate at local sites rises above the average market value. For example, cryptocurrency is overpopular in Argentina and Venezuela.
When people lose confidence in their national currencies, they try to find an alternative to save their money. Bitcoin, despite the insane volatility, is not subject to inflation and, especially, hyperinflation. Therefore, it looks like a great investment option.
Bitcoin weaknesses
1. Volatility
Bitcoin is often called a protective asset. However, it is difficult to be sure that the savings in cryptocurrency will retain their value. The price of BTC at any time can fall sharply more than twice. For example, on March 12-13, it fell by more than 50% during the day, to a minimum of $ 3800.
In addition to this, bitcoin can sharply rise in price or become cheaper due to any news, even indirectly related to the coin itself. This happened in November, a year passed. Chinese President Xi Jinping said blockchain (not Bitcoin or cryptocurrency) is one of the key technologies for the country’s development. Within a day after that, the price of the main digital coin increased from $ 7,000 to $ 10,000.
2. High withdrawal fees
One of the advantages of bitcoin is the ability to transfer large amounts at a low commission. But this applies to transactions within the system. If the investor wants to cash out, he will have to pay a commission for the withdrawal of assets to counterparties, for example, exchanges or exchangers. On this, you can lose from 2-5% or more of the transaction amount. The more capital that the user is going to exchange for traditional money, the higher the likelihood that the exchanger simply will not have such amounts of funds.
Some analysts predict a multiple rise in price of bitcoin in the future and offer to invest in it with long-term goals. However, such a contribution in the future may turn out to be illegal, for example, if the government prohibits the ownership of cryptocurrency and transactions with it. In this case, the user runs the risk of losing all of the capital or part of it on the fact that it will become much more expensive and more difficult to cash digital coins.
4. Criminals
Bitcoin is not only used for investing or cheap transfers. The user can also use cryptocurrency to purchase illegal substances or launder criminal proceeds. But even if an ordinary user does not use cryptocurrencies for criminal purposes, he can still suffer.
For example, if you buy a “dirty cryptocurrency” from an exchanger or “from hand” from another person. In this case, the funds may be frozen. But this can be avoided by checking transactions using special services.
5. Difficult to use system
Bitcoin is a decentralized system that does not have a single management link. Because of this, BTC owners are not protected from errors. For example, if an investor forgets the password from his digital wallet or loses access to it, it will not work to return the cryptocurrency, it is simply impossible. An irrevocable loss of funds will occur if the user sends them to the wrong address: the transaction cannot be canceled in the blockchain. In this case, one can only hope that the recipient will return them at their own request.
One of the drivers of the growth in the value of Bitcoin is its recognition in society: the more demand, the higher the price. However, the spread of digital money is slowing due to a controversial reputation. Often, BTC and other cryptocurrencies are used in criminal schemes, for example, for money laundering, the purchase of illegal substances or in the construction of financial pyramids. This causes negative associations and forces the government to take prohibitive measures.
7. Lack of protection
We already wrote that decentralization is a plus. But also a minus, because, in connection with this, Bitcoin and other coins do not have a clear legislative regulation. This limits the possibilities of users in the matter of judicial protection, for example, if they have suffered at the hands of fraudsters. Now there is no exact understanding of how the value of digital assets is determined, their legal status is missing. Also, instructions are not spelled out how law enforcement agencies can track the stolen cryptocurrency, seize and so on.
