FINTECH BLOG

Bitcoin – musings about some pros and cons

It’s not easy to weigh the pros and cons of investing in bitcoin. As a cryptocurrency, bitcoin may not have the heft of a gold bar, but its value has continued to climb.

If only I’d bought bitcoin back in 2011 when the price of one bitcoin was on par with the US dollar. This month the bitcoin price has at some points come close to CDN$10,000. Hindsight being 20/20, I could have made a pretty good return on my investment.

There has been a lot in the news lately about bitcoin, and with good reason. The price at the beginning of 2017 was around US$960. As of November 13, it was upwards of US$6680. There are a number of potential reasons for the huge price increase – a growing interest in cryptocurrencies generally, perhaps in part fuelled by political turmoil, a massive increase in media coverage, an ICO frenzy, a much-discussed potential solution to ongoing transaction capacity issues etc.

Pondering what could have been has given me pause to consider the pros and cons of bitcoin generally. If I had been more technologically-minded a few years ago, would the pros have sufficiently outweighed the cons so as to convince my somewhat risk-adverse 2011 lawyer self to invest a sizeable chunk of change into bitcoin?

What are some Bitcoin pros?

It’s Decentralized

The bitcoin network is decentralized, so there is no single point of failure. No one entity is in charge. Further, the network is an immutable, irreversible record of all transactions. Contrast this with traditional financial systems, where there is a central point of failure and the potential for a fraudulent actor to make changes to records.

It’s Irreversible

With bitcoin, once you send funds to a wallet address, the send cannot be reversed. This is beneficial for merchants who accept bitcoin. Once payment by bitcoin is confirmed, they can send the goods to the buyer without concern about potential chargebacks.

Notably, irreversibility is also a potential con. Best be sure that you send your bitcoins to the correct address or you will lose them. There is also a risk of transaction fraud, as there is no way to get a refund or arbitrate a dispute (as with PayPal) if someone doesn’t deliver goods you have purchased with bitcoin.

It’s Transparent

The bitcoin network (i.e. the blockchain) is essentially a public ledger of every transaction on the network. Thus, no person or organization can control or manipulate the network.

It’s Borderless

There is no difference between a bitcoin transaction that happens within a single country as compared to one that crosses international borders. If the current scalability issues can be resolved, then the time to move money internationally should take seconds rather than days and cost much less than traditional international money transfer services, such as international wire transfers.

What are some Bitcoin cons?

It’s Volatile

Bitcoin has seen wild price swings, even in very short periods of time. This makes it less suitable as a medium of exchange, which is arguably its intended purpose. As a store of value, it is highly speculative, so people buying bitcoin could make a lot of money, or lose a lot of money.

It’s Experiencing Scalability Issues

More and more people are participating in the network and using bitcoin. This has caused the network to become congested, resulting in in longer confirmation times for transactions and increased transaction fees. Small-scale payments in bitcoin (like paying for a cup of coffee) have thus become somewhat impractical. Different proposals have been put forward for changes to the network to meet current demand, but at this time the issue has not been resolved.

It has a Reputation

Many people think of bitcoin as the currency of choice for criminals and black markets, as there have been instances where bitcoin has been used for criminal activity.

As well, there have been a number of high profile scams and attacks that have lost people a lot of bitcoin. Some bitcoin exchanges have been hacked, resulting in theft of large amounts of bitcoin. Bitcoin has been used as the choice of ransom currency to be demanded during ransomware attacks on corporate networks.

I should have bet on Bitcoin

There are many more bitcoin pros and cons than mentioned here.

The big question in my mind is whether bitcoin will become widely adopted as a medium of exchange. Only time will tell, but on the balance, my money is on bitcoin (even without the massive gains I would have made had I bought bitcoin six years ago and held it). Many of the cons can be addressed, and likely will be over time. Bitcoin is still somewhat in its infancy, but I suggest we have passed the point of no return. The times ahead should be interesting indeed.

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