Bitcoin and its alternative coin system brothers are back on front-page news screens again, but not in a good way. Prices have fallen over 20% in the past week, and investors and the uninformed public are beginning to ask what are the pros and cons of cryptocurrencies in the first place. Despite falling prices, Bitcoin is still the uncontested leader of the pack, commanding some 53% of the market capitalization of all virtual coin ventures.
The reputation of Bitcoin spread rapidly across the planet in 2017 and 2018, as prices skyrocketed and created instant millionaires in every jurisdiction across the globe. The price levels achieved by this period of “irrational exuberance” were clearly not sustainable. The asset bubble burst in early 2018, but investors did not exit the space forever. Yes, there has been a general decline in price levels, but BTC, short for Bitcoin, soon found support and had been range bound at the $6,500 price point for several months. Volatility, generally off the charts for cryptos, had remained unusually calm. While stocks took a beating in October, Bitcoin behaved much like a “safe haven” for distraught investors, as they jumped ship from the equities arena.
All changed last week, and the carnage has continued into this week, as well. Perhaps, a quick briefing on the Pros and Cons of Bitcoin is in order.
First, the Pros:
- Decentralization: There is no central trading floor or controlling entity for any cryptocurrency. The nature of blockchain technology is that each of the nodes, i.e., exchanges, is able to update its database independent of a center of control. It is a distributive system. There are no border considerations either, which makes for easier transaction handling on a global basis;
- Low Transaction Fees: Since no central sorting and control is required, settlement costs are low. The issue of high merchant discount fees is greatly muted;
- Cross-border Transactions: These occur instantly with Bitcoin. There is no 48-hour delay, as in traditional payment systems where parties require a trusted intermediary to ensure that no theft takes place;
- Popularity: After the events of the past two years, everyone has heard of Bitcoin, even if they do not understand the inner workings of blockchain technology or exactly what a miner does in the process. Public awareness is at an all time high;
- Supply Limitations: System controls on the number of Bitcoins that can be mined is set at 21 million. The current level of coin issuance is just north of 17 million. Demand can grow, but a fixed supply implies that prices must rise over time.
Now, the Cons:
- Capacity Issues: It may be easy to handle a transaction, but updating the blockchain is another matter. Current payment systems can process tens of million of transactions in a short period of time, but the size of a Bitcoin record slows down the process. Until this problem is solved with new technology, there will always be scalability issues with Bitcoin;
- Anonymity Issues: Anonymity has always been a big selling point for Bitcoin and other cryptocurrencies, but the inability to screen out transactions of a criminal nature will always be an issue for government, regulatory, and law enforcement officials. Lifting the veil of secrecy will grow as an issue over time;
- Privacy: Organized hacking and system compromises have been and continue to be a major problem in the industry. Public access keys for users are also stored in the public domain. If hackers break this “puzzle” into pieces, greater system compromises could be in the offing;
- Competitive Pressure: Bitcoion is not perfect by any means. It has its flaws. There will always be a competitive threat from another coin system. By the latest estimate, there are over 1,500 coin systems in operation in some fashion. Will one of these have the “magic sauce” to topple the leader from its throne?
Bitcoin is still the unquestioned leader of today’s crypto world. Falling prices in the marketplace may have caused doubt in minds of a set of investors, but just as many individuals, after weighing the various pros and cons, foresee a bright future for Bitcoin and its brethren, regardless of the recent correction in market valuations.