12 December 2012

Advantages and Disadvantages of Bitcoin

This is a response to the Disadvantages of Bitcoin post on the Stanford CS Faculty blog . Please read that post before reading my response. To get an idea of the advantages of Bitcoin there is an Advantages section on the same blog. I also recommend having a look at the We Use Coins site.


Bitcoins Are Not Widely Accepted

Adoption is a major hurdle for any new technology, this is addressed in Bitcoin by limiting the total amount of Bitcoins in existence. This creates a deflationary currency which rewards early adopters but can be a disadvantage of it's own which i'll address further down.

Wallets Can Be Lost

This is of course a disadvantage of any currency not just Bitcoin but unlike physical wallets, Bitcoin wallets can be backed up. When physical money is lost someone is likely to find it and use it, therefore recirculating the money. When Bitcoins are lost they are gone forever thereby contributing to the deflation of Bitcoin.

Bitcoin Valuation Fluctuates

This is a side-effect of an emerging currency and the same thing happens to "emerging markets". However, because of the fluidity and decentralisation of the currency, Bitcoin (or some other decentralised cryptocurrency) will eventually become the most stable currency in existence but it may take many years for that to happen. This fluctuation is also an advantage for currency traders which is another selling point for early adoption.

No Buyer Protection

Not being able to reverse transactions means the seller is safer than the buyer. The point of decentralised cryptocurrency is to cut out the banksters so this can be a major disadvantage when considering Bitcoin. However, as it was pointed out; escrow services can be used but then you'd be bringing third parties into the equation again, raising transaction costs and placing trust in financial institutions. Bitcoins will still be decentralised though which is a major advantage over classic currencies.

Risk of Unknown Technical Flaws

Bitcoin's foundation is cryptography, it's rock solid but it's not flawless. Think of heist movies Ocean's Eleven, the security is the best their is but that doesn't mean it's impregnable. However Bitcoin is built in such a way that the costs of cracking the security outweigh the rewards. I trust Bitcoin more than i trust classic banking security systems.

Built-in Deflation

Deflationary by design means the value of Bitcoin continuously goes up, however the currency is highly divisible meaning you can pay with fractions of a coin. When 0.00000001 Bitcoins is worth more than can be used on a daily basis then Bitcoin will effectively expire. It will be thousands of years before that happens though and by then we would have abolished money altogether.

No Physical Form

Since Bitcoin is an open standard it will not be long before a convenient NFC type payment mechanism arises. I predict some sort of Bitcoin consortium will arise to oversee these standards requirements. This is a non-issue in my opinion, just an area for improvement.

No Valuation Guarantee

Centralised currencies have more serious destabilisation risks than those of decentralised currencies. For example corrupt governments, wars and financial meltdowns have thrown entire nations into poverty due to collapsed centralised currencies. Decentralised currencies are resilient to those kinds of realistic threats. The serious risks of centralised currencies are exchanged for the negligible risks of decentralised currencies.

Conclusion

I think overall the advantages of Bitcoin outweigh the disadvantages and we should be able to address those disadvantages with realistic solutions.