A lot has been written about bitcoin, the first cryptocurrency created on the Blockchain. It has been around since 2009 but was only made available on a large scale in 2011. It then spearheaded the surge in popularity of altcoins and digital tokens, giving rise to an entirely new industry with an almost cult-like following.
But why? What is Bitcoin, and why are so many people into it? If you’re looking to invest in bitcoin or any altcoin, you may want to learn about the pros and cons of the world’s most valuable cryptocurrency.
Brief History of Bitcoin Cryptocurrency
Bitcoin emerged from the rubble of the 2008 financial crisis and then rose to prominence during the financial debacle caused by the 2020 pandemic. It broke charts following the short economic recovery in 2021 when the price per BTC hit nearly $64,000 All-Time-High (ATH).
The idea for Bitcoin came from Wei Dai, then a cypherpunk and author of the publication, “B-Money, an anonymous, distributed electronic cash system.” Dai proposed using a proof-of-work system to control the creation of money. His proposal became the basis for Bitcoin’s original design; a digital currency (BTC) running on a blockchain, launched in 2009 by an unknown person or group of people under the pseudonym Satoshi Nakamoto.
Bitcoin’s proof-of-work (PoW) system created the first blockchain database, which records all transactions that have ever occurred on the network. The database is shared across all nodes participating in a peer-to-peer network and protected from data modification by a central authority.
The first block was mined on January 3rd, 2009, with Hal Finney, another cypherpunk, being the first person to receive 10 Bitcoins as a reward for his efforts. The first actual transaction using Bitcoin was made in 2010 when Laszlo Hanyecz bought two pizzas valued at $25 for 10,000 bitcoins. This transaction established the initial value of a Bitcoin at about 4 bitcoins per penny or $0.01/4BTC. But it wasn’t until 2013 that bitcoin really kicked off.
Once Bitcoin became available on exchanges in 2010, it became easier to buy, sell, trade and store. This also made it possible for BTC to be priced against the U.S. dollar. It steadily gained traction and was increasingly used in transactions over time.
By 2022, there were over 19 million BTC in circulation averaging $20,000+ per BTC, with a market cap well above $400 billion. Bitcoin continues to be the largest-capped crypto in the digital assets market.
What is Bitcoin?
Bitcoin is an open-source, peer-to-peer, and decentralized digital payment system based on cryptographic proof instead of trusting a 3rd-party intermediary. It uses PoW consensus protocol to verify transactions, which is energy and time-intensive.
Bitcoin was created as a way for people to send money over the internet. The purpose of the digital asset is to bring forth an alternative payment system that operates like traditional currencies but is devoid of a central point of control.
The inspiration behind Bitcoin’s use of peer-to-peer networks and cryptography is to operate autonomously and privately. If you own bitcoins, you can spend your money over the Internet without needing to trust anyone else with it (like you would with a bank).
The total supply of BTC is hardcoded, set at a limit of 21 million coins. While over 19 million of those have been mined in 13 years, it would take about 120 years to mine the remaining 2.3 million BTC left.
How Bitcoin Works
Bitcoin is created by interconnected computers all over the world that are constantly solving complex math problems. Every 10 minutes, on average, a new block of bitcoins is added to the blockchain, holding a record of all bitcoin transactions that have ever occurred.
This process is called “mining”, and it ensures that no one can spend the same Bitcoin twice. It requires extremely fast computers, sophisticated software, and a good supply of electricity. As of 2022, over 900 bitcoins are mined per day.
Users can exchange their bitcoin for other currencies, goods, and services over an exchange or merchant accepting bitcoin payments. To access their bitcoins, users utilize a software wallet or hardware wallet alongside two encrypted keys (public key and private key) that protect their personal data from the network when making transactions.
Why is Bitcoin Valuable?
It would be absurd to imagine that bitcoin suddenly attached value to itself overnight. The laws of demand and supply, alongside faith in bitcoin and its exchange power give a monetary value to bitcoin.
Bitcoin contains all the qualities of money — portable, divisible, durable, fungible, verifiable, and scarce. It can do a number of things that traditional money systems like fiat, gold, credit cards, and checks can do.
However, it does so in a way that is very difficult or impossible to trace, forge, or control by a central authority. These characteristics drive the adoption of bitcoin. The price is then set by the financial markets and market forces driven by people who hold bitcoin as a primary medium of exchange, as a hedge for inflation, or because they think other people will pay more for it in the future.
But let’s go beyond the hype and look at arguments supporting or opposing the use of, or investment in bitcoin.
Why You Should Use Bitcoin
Anonymity and Users’ Privacy
One of the biggest drivers of bitcoin’s adoption is its privacy of use. Executing digital transactions such as wire transfers, credit cards, wallet transactions, or even holding fiat currencies in online bank accounts doesn’t protect your privacy. You’re just as exposed as physically handing cash or a credit card across the counter.
This means users’ financial data are prone to hacks and opened to private companies and public authorities to monitor how you spend and receive your e-money.
Bitcoin gives users the freedom to separate their bitcoin accounts from their public personas if they choose to, using their public and private keys. Bitcoin transactions can be tracked to a user’s digital address, but it’s difficult to tell who owns such an address in real-life.
Freedom from Central Authority
Unlike fiat currencies, bitcoin isn’t created or controlled by any government or state-owned central bank. It, therefore, exists outside the financial system influenced by politics or regulations, making it hard for governments to trace, freeze or seize bitcoins.
Also, bitcoin is completely decentralized in nature. It is unattached to the creators and there are rarely huge concentrations of units in a few accounts, as is with many less popular cryptocurrencies. This makes it difficult for a handful of people to manipulate the supply or price of the coin to the detriment of other holders.
Ease of International Transactions
Since bitcoin is not tied to any national borders, international transactions are relatively simpler compared to transactions with other forms of payments. There aren’t any international transaction fees or a notice to navigate suspicious transactions, as is often the case with credit card payments, ATM cash withdrawals, and international money transfers.
While most other cryptocurrencies also lack cross-border restrictions, users prefer bitcoin for international transactions simply because it’s more popular around the world.
Lower Transaction Fees
Transaction fees are lower for bitcoin compared to other digital payment methods, such as credit cards and PayPal. For example, international credit card and ATM fees can range up to 3% of transaction value, while money transfer fees can be as high as 15%. Meanwhile, it’s rare for a Bitcoin transaction to cost more than 1% of its value.
Greater Liquidity Compared to Other Cryptocurrencies
Bitcoin remains the most popular crypto by a significant margin and has far greater liquidity than other cryptocurrencies.
Such liquidity makes it easy for users to retain most of bitcoin’s inherent value when converting to fiat currencies, like the U.S. dollar and euro.
By contrast, many cryptocurrencies either can’t be exchanged directly for fiat currencies, or they lose substantial value during such exchanges owing to their lower liquidities.
Scarcity is one of the qualities of good money. If a currency appears in abundance, it reduces the purchasing power of the said currency.
Bitcoin is intentionally capped to only 21 million to induce the scarcity likely to support its long-term value against traditional currencies. The scarcity gives bitcoin some intrinsic value — similar to gold and other precious metals.
Hedge Against Inflation
Like other cryptos, bitcoin isn’t tied to a single currency or economy, so its price reflects global demand rather than, say, national inflation. Cryptocurrencies do witness their own inflation, but this is hardly influenced by the economic turn of any country.
The continuous minting of new money contributes to a country’s inflation. Like gold, bitcoin’s supply is scarce, capped at 21 million coins. This prevents the supply from spiraling out of control, thereby causing an overly adverse bitcoin inflation. The evidence of this is shown in how bitcoin has increased purchasing power since 2009 compared to how fiat currencies have diminished in value.
Increasingly Wide Acceptance
Thousands of merchants accept bitcoin payments, especially in El Salvador, which recently made bitcoin a legal tender. Heavyweights like Telsa, Microsoft, and Overstock contribute to the accelerating bitcoin adoption by accepting bitcoin payments at some point.
The trend will not slow anytime soon. In fact, bitcoin adoption is expected to grow at an unprecedented rate in the next 8 years, according to Blockware Intelligence. By 2023 bitcoin could break the 10% adoption rate benchmark to nearly 20%.
Now, let’s see some of the downsides of bitcoin.
Disadvantages Of Using Bitcoin
For all the positive sides of bitcoin cryptocurrency, there are some inherent weaknesses and risks that make it unsuitable for many investors and consumers.
Bitcoin prices are extremely volatile, constantly rising and falling at a rapid rate. From BTC’s ATH of $64,000 to its current price of around $23,000 (as of mid-2022), the price has fallen by a massive 64%. Cryptocurrencies are relatively young assets and haven’t pulled enough investment interest or trust to stabilize prices.
To speculators, the wide price swings can generate quick profits. Genuine investors see it as too dangerous, so only a tiny percent of the populace invests in bitcoins. The fact is, as more institutions adopt bitcoin, this volatility will decline.
Slow Transaction Rate
Bitcoin’s main net is too slow for mass payment processing. It is designed this way to maintain a high level of security, not for speed. Only 7 transactions per second occur on the main net.
In contrast, traditional payment networks such as Visa and Mastercard or newer cryptocurrencies such as Solana enable thousands of transactions per second.
There are second-layer technologies, however, such as the Lightning Network. It enables up to a million transactions per second while maintaining the security of the Bitcoin network. This is the technology used in El Salvador, where bitcoin transactions are relatively high by volume.
Scams, Hacks and Theft
Bitcoin has seen more than its fair share of scams, fraud, and attacks. These can be elaborate Ponzi schemes — like the 2010’s Bitcoin Savings & Trust scam, which wiped out about $4.5 million in holders’ assets — or hack attacks, online scams, and more.
Chainalysis, a blockchain analysis firm, concludes that in 2020, 0.34% of all crypto transactions were associated with illegal activity. In 2021, this number came up to 0.6%.
Bitcoin Users are vulnerable to smaller-scale theft, like gambits targeting individual users. They are also likely to lose their bitcoins if thefts hack the internet-connected exchanges or cloud storage drives where users store their assets get hacked. The best way to prevent this is to store bitcoins in a hardware wallet, although it comes with the extra responsibility of looking after one’s bitcoin.
A Haven for Shady Activities
Despite famous prosecutions of shady criminals for crimes involving cryptocurrencies, bitcoin remains attractive to bad actors and gray market participants. Due to how difficult it is to be traced or linked back to users, bitcoin has oiled shady transactions on the dark web since its wider adoption.
Even some upstanding bitcoin users have been involved in nefarious activities — as is with the case of Charlie Shrem. These threaten to corrode Bitcoin’s reputation, and international legal systems are not properly equipped to tackle the problem. The entire system faces marginalization if shady uses of bitcoin outweigh its legitimate use.
No Chargebacks or Refunds
Transactions made using bitcoins cannot be withdrawn or charged back. Credit card companies and traditional online payment processors have these systems in place and can refund you for wrongly purchasing something or being affected by transaction fraud.
Bitcoin’s decentralized structure makes it impossible for any single party to arbitrate disputes between users. Therefore, once you send bitcoin, you cannot get it back. You cannot request a refund through bitcoin if you purchase an item in bitcoin. Cryptocurrencies like Ripple (XRP) have some chargeback and refund functions, but this feature has yet to be built into Bitcoin.
Most countries lack a comprehensive regulatory framework for cryptocurrencies and other digital assets. This result means bitcoin is largely unprotected by the law, something that unsettles investors.
In some other countries, bitcoin is banned either to favor the banning country’s digital currency or to mask a government’s fear of bitcoin in the guise of ‘protecting their financial system. While investors dread national bitcoin bans, a global ban on bitcoin is highly unlikely as it would require all governments to agree and collaborate to enforce this.
As long as the internet exists and free people continue to use bitcoin, it is technically impossible to stop the bitcoin network. Governments could, however, impose very strict regulations on exchanges and crypto taxation to scare investors off bitcoin.
High Energy Consumption
Bitcoin has been criticized for consuming a vast amount of electricity for mining. Currently, bitcoin mining utilizes an estimated 150 terawatt-hours of electricity annually — more than what the entire country of Argentina and its 45 million people consume. Producing that energy emits some 65 megatons of carbon dioxide into the atmosphere annually.
Source: Statista | Bitcoin energy consumption Feb. 2017 to Oct. 2021
Some of the biggest Bitcoin mining companies are based in China, where miners source electricity from dirty coal plants due to the Chinese government’s crackdown on bitcoin.
The tides are turning, however, and bitcoin miners are currently turning to low or no-emission energy alternatives. Game theory explains that because mining the remaining 2.3 million bitcoin will take a lot more computing power than it took to mine already circulating coins, bitcoin mining cannot help but become increasingly renewable over the years.
Bitcoin Might be Replaced by Another Superior Cryptocurrency
Today, there are more than 19,000 cryptocurrencies. Some of these have a lower energy consumption, faster transaction speed, and other features (like smart contracts) that make them better alternatives to bitcoin.
Ethereum, Ripple, and Solana are considered the top challengers to the bitcoin network. These challengers could usurp Bitcoin as the world’s dominant cryptocurrency, negatively impacting Bitcoin’s value and leaving committed, long-term holders with lesser valued coins.
Experts have, however, argued that bitcoin’s far superior security protocol, vast network, and decentralization make it arduous for any challenger to replace it.
Key Takeaways, Pros, and Cons
For clarity’s sake, here’s a summary of the pros and cons of bitcoin:
Pros of Bitcoin
- Bitcoin remains the most secured cryptocurrency
- It ensures your privacy over your use of money as transactions are difficult to trace
- Freedom from central authorities like government or private institutions who have access to your financial data when you use other payment methods
- Making international transactions is easy and cheaper with bitcoin compared to credit cards or wires
- Bitcoin has far greater liquidity compared to other cryptocurrencies
- It is intentionally designed to be scarcity, further upping its value
- It can be used to hedge against inflation simply by saving money in bitcoin at favorable times
- Increasing wide adoption of bitcoin
Cons of Bitcoin
- Bitcoin, like every cryptocurrency, is highly volatile
- Transaction rate is slower compared to card, wire, or even other types of crypto payments
- Bitcoin isn’t immune to scams, hacks, and theft
- Regulatory uncertainty makes investors uneasy
- There are no chargebacks or refunds with bitcoin transactions
- It is widely used to finance shady activities online because it is nearly untraceable
- It requires high electricity to create or maintain
- Bitcoin is constantly threatened by other challenging cryptocurrencies and might be replaced
Bitcoin vs Altcoins
Altcoins are alternative cryptocurrencies to bitcoin that sprouted after bitcoin came into existence. They form the bulk of the crypto market in volume even though bitcoin dominates by market cap.
Altcoins are usually benchmarked against bitcoin since it’s the first and dominant crypto. The earliest altcoins come about to improve aspects of bitcoins.
That soon changed after Ethereum – the most popular altcoin – introduced the idea of ‘smart contracts’ and opened floodgates for developers to build thousands of altcoins tackling many problems within and outside finance.
Compared to altcoins, bitcoins’ capabilities and use cases are limited to only serving as a medium of exchange and store of value.
Bitcoin cannot compete with altcoins in terms of the problems they solve, speed, features, or functionalities.
However, bitcoin remains the benchmark for altcoin, serves as a store of value, and is the cryptocurrency best entwined with global financial systems.
How to Buy Bitcoin
If you missed the opportunity to buy bitcoin at $0.04 in 2009 or at $1 in 2011, surely there is a compulsion to get in now. Should you still invest after seeing the upside and downside of this digital asset?
The answer is up to you and your financial goals. Ultimately, you need to do your research and decide if this asset is for you. If you, however, choose to invest in bitcoin, we’ve broken down the steps to buying bitcoin below:
Step 1: Select a crypto trading service to buy from
The first step in buying bitcoin is deciding where to buy from. Cryptocurrency exchanges are the most suitable option because they offer a range of features and more cryptocurrencies for trading.
Signing up for a cryptocurrency exchange will enable you to buy, sell, and hold cryptocurrency. It’s important to choose an exchange that allows you to withdraw your bitcoin to a personal online wallet is important.
There are many types of cryptocurrency exchanges – both centralized and decentralized. Centralized exchanges are the most popular, with Binance and Coinbase leading the pack.
Step 2: Connect your payment option to the exchange
Once you’ve signed up for an exchange, you are to verify your identity with documents like a driver’s license, Social Security card, and more. The information you may provide depends on the region you live in and its laws.
Next, connect your bank account or debit or credit card to the exchange. Exchanges also charge fees per transaction, either as a flat fee or as a percentage of the trading amount.
Step 3: Place an order
After connecting your payment option, go ahead and place an order to buy bitcoin. Every exchange offers you a wallet within the exchange to store your bitcoins. But you can always transfer them to another software wallet outside the exchange or store them in a hardware wallet.
Where is Bitcoin going?
When El Salvador made bitcoin a legal tender, bitcoin enthusiasts dreamt again of a time when it would replace all fiat currencies. Actually, we’re decades away from making that reality or that may never happen. What would happen is the increasing adoption of bitcoin by more merchants and fortune 500 firms, which would further stabilize the price of bitcoin.
Emerging technologies would cater for some of the disadvantages of bitcoin, like its speed of transaction and high energy usage.
Further adoption would force regulators worldwide to integrate bitcoin into economies. The result might be a co-existence of bitcoin and fiat currencies until economic forces decide the dominant form of money.
What do you think about Bitcoin? Do you see it replacing fiat currencies or being overtaken by other cryptocurrencies? Let’s discuss this in the comments!