Bitcoin's advantages and inconvenients

It's 2016, and everytime I post something related to bitcoin, I keep getting comments such as: "What's bitcoin again?" or "Sure, but what are the advantages and inconvenients?"

What's bitcoin has been covered enough, by me and others. It doesn't really help the layman to know what bitcoin is. Why is that? I remember that, in the process of understanding bitcoin, I had to first realize I didn't know what money was actually. Then I had to learn what money was. Then I could finally learn what bitcoin was. It took me a while.

But I had lived just fine my whole life not really knowing what money was but still using it. Maybe the nature of bitcoin is better left unexplained, and we should instead list advantages and inconvenients so people get a hang of it.

I will focus on comparing bitcoin with national currencies such as the dollar. But bitcoin is so similar to comodity-currency such as gold, that I'll sometimes use gold as a crutch.

Advantages of bitcoin

The two main characteristics of bitcoin are that it is a decentralized and secure currency. Let's start with those.

Bitcoin is decentralized

Just like gold, no one controls bitcoin. The government can't manipulate it's value. This is of no concern to some people who live in super-stable places such as the dollar-zone or the euro-zone. But, for most people on Earth, it's super duper cool to have a currency that the kooks in office can't damage. It might be of no importance to you, but it's easily what makes bitcoin such an attractive choice of global currency.

Don't worry, it has other perks. But this one alone should be enough for us all to start using it.

Bitcoin is secure

It's very difficult to make a fake 100 euro bill. It's a little difficult to make a fake 100 dollar bill. It is impossible to make a fake bitcoin. Nuff' said.

Bitcoin is easy to use

Say I have a credit card, some cash, some gold powder in a bag and some bitcoins on my smartphone right now. I go into a shop that accepts all these means of payment and I want to buy something. Which is easier to use?

If the thing is very cheap, I can't use my credit card. Using gold will be very hard without a super high precision scale. So I'm left with cash and bitcoin. It takes about as long to make a cash transaction than a bitcoin one. The cash requires me to have cash and the merchant to have change. Bitcoin requires both of us to have an internet connected computer. I call it a draw. In some cases bitcoin wins, in some, cash wins.

If I want to buy a computer, cash is unpractical because carrying large sums isn't very common. Bitcoin is now up against gold and credit card. Unlike in the example above, the merchant will want to wait for a transaction confirmation from the bitcoin network, which takes 10 minutes. Bitcoin would be a little more lengthy than gold or credit card. I'd call it a win for credit card, because you're not worried about spilling gold dust.

If I want to buy a house, cash and credit card are out because of the amount. Gold is just as good as bitcoin here.

In each case, bitcoin wasn't always the best choice, but it is the only one that is quite practical in all cases. From micropayments amounting to fractions of cents in a mobile game to buying a castle for millions. From a face to face transaction to sending money anywhere in the world (plus the ISS).

In case you're the merchant, accepting bitcoin is a matter of installing a bitcoin program on your smartphone/laptop, printing out the QR-code of your bitcoin address and sticking it to your counter. Seen from the merchant perspective, bitcoin is by far easier to start accepting than credit card.

Bitcoin is cheap

I'm not talking about the price of one bitcoin. I'm talking about the cost of operation of the bitcoin network. Before we examine it, we have to start wondering, what exactly is the "cost of operation" of a currency?

For gold to be used, it has to be mined, refined, transported and secured. Those vaults in Switzerland don't build and operate themselves. All the people that are employed in the life cycle of an ounce of gold could be employed in other fields if we had an alternative for gold. Now let's try to consider what amount of wealth is being used in the production, maintenance, distribution and management of a fiat money such as the dollar. Banks, financial institutions... thousands upon thousands of people are needed, and very well paid, just to keep the machine running.

How about bitcoin? Well, bitcoin isn't free either. It is built on the back of a server network that needs to be produced, powered and administered. But the footprint of bitcoin, per unit of value, is way, way, so-much-way smaller than the old-world alternatives such as dollar and gold.

Bitcoin is very cheap to operate.

How does that matter to us? Well, less wasted ressources can only be good news. But it has one very direct consequence: the transaction cost is very very small to the user. A fraction of a fraction of a percent.

With credit cards, transaction cost is 2% for big numbers, up to 50% for micropayments. With gold, it's included in the price of the commodity (you do pay for it when you buy it). With national currencies, the cost is hidden everywhere. Some of it is tax, some of it is bank fees. Even cash costs money to print, distribute and manage. Those armored trucks that fill up the ATM machines don't drive themselves. The ATM machines aren't free either.

Bitcoin is pseudonymous

Some people don't have a reward card at their supermarket, because they don't want the supermarket to keep track of what they buy. Many people are like this. No reason, they just like to keep their purchase history to themselves. They can't really keep it secret from their bank of course. Their credit card is associated with their name and the credit card company know exactly what they bought and when.

Cash is a way to buy things without leaving a trace. But cash only works in certain situations. Like explained earlier, bitcoin works in almost every situation. And, in bitcoin, no one has your name.

When you install a bitcoin wallet program, it gives you a bunch of bitcoin addresses. Here's one of mine: 1KFCc1qbYgNJKZo8Vtus1bRLcCpZJbxwga. This is who I am on the bitcoin network. Actually, it's who I am as long as I don't switch to another address. Privacy-minded people never use the same address twice.

Tracking someone on the bitcoin network is very tedious. And you can never be sure of the name of that person.

Bitcoin is deflationary

Deflation is the opposite of inflation. Very stable government-backed currencies have a little bit of inflation. Collapsing economies usualy have runaway inflation. It means one unit of currency loses its value over time. That's why when we look at the price of things in the 60s, it has to be adjusted to today's prices. It also means that if you stashed away a bag of dollars a few decades ago, it would now be worth peanuts.

Inflation is a nasty trick played by central banks in order to motivate people not to hoard cash. "Spend it now or lose some of it." They do it by having banks create money out of thin air and sell it to you, I'm not kidding.

People that want to hoard value need to buy commodities that don't lose value over time.

Bitcoin is designed to do the opposite. There's a ceiling of how many bitcoins can exist. Since bitcoins can't be created after we reach that ceiling (can't be printed or created out of thin air), the pool of coins will be fixed and known. If the economy grows, the value of each bitcoin should grow accordingly.

The deflation is meant to be very slow. But it makes bitcoin a proper store of value.

Bitcoin is easy to backup

There are so many ways you can securely backup your bitcoin that it would be boring to list them. Basically, your bitcoins are controlled by a secret password called the "private key". Knowing the private key = being able to spend the bitcoins. All you need to do is save that private key in a bunch of places only you can access; and you're safe in case the computer you keep your bitcoin on has a meltdown. You don't even need to refresh your backups. Backup once and you're good for as long as you use that particular private key to control your coins.

Your private key can even be "translated" in a little poem called a "seed phrase". As long as you remember the seed phrase, you can't lose your bitcoins. How cool is that?

Bitcoin seed phrase

Inconvenients

I'm going to first focus on the inconvenients inherent to the nature of bitcoin, rather than inconvenients due to the fact that bitcoin is an emmerging currency with a small userbase. The latter will disappear as bitcoin reaches critical mass.

10 minutes payment confirmation

Payment itself is almost instant.

Here's how buying candy works in a shop that has bitcoin well integrated: I go to the counter, they scan my chocolate bar, a QR-code appear on the checkout display for me to flash. I scan it with my bitcoin-holding smartphone, check that the price is right and hit send. Within seconds, the shop's computer receives notice of the payment and I walk out.

But that wouldn't work if I wanted to buy a computer. The dealership would not be satisfied with a mere "notice of payment". They would want my payment to be confirmed by the complex validation network that backs bitcoin. The reason why they want confirmation is that, if I was a good hacker, I could fake a payment notice. But no hacker can get past the confirmation. That confirmation process takes place every 10 minutes. For very high prices, the merchant will insist on waiting for an arbitrary number of confirmations. It takes time.

I figure that this delay would be an inconvenience in some cases.

You can lose your bitcoins

If you don't have a backup, and the computer where you keep your bitcoins dies / gets lost, your bitcoins are gone forever.

Bitcoin is very much like gold and cash in this way, and not at all like a bank account or credit cards. You lose a gold nugget or a wad of cash, and it's really lost.

That is, if you keep your bitcoins yourself. You could totally decide that you're too clumsy to handle your own money and entrust your bitcoins to a "bitcoin bank", that you'd have to pay for their service one way or another.

Through this, we can see that bitcoin is not that revolutionary. Bitcoin does not at all spell the doom of banks. Many people would rather pay a trusted institution to keep their funds secure rather than do it themselves. Bitcoin-banks would be quite different than dollar-banks, but they would be banks nonetheless.

Bitcoin dies with you if you don't pay attention

Being the only one having access to your private key means that they are lost forever if you die.

That's a quite new problem as far as money is concerned. Every bitcoin owner should find a way for their bitcoins to be available to their heirs after they die. Your private key (or your poem thing) should be in your will.

Bitcoin isn't very anonymous

A dedicated detective could trace your bitcoin activity and link it to your name. It still beats having your bank log everything, but it's not perfect.


And now, for the inconvenients that merely come from the fact that bitcoin is still emerging.


Not a lot of places to spend it

Even though it is quite trivial to start accepting bitcoins, you still don't see a lot of "bitcoin accepted" signs outside shop. Even online shopping in bitcoin is quite rare. I sell my books in bitcoins as well as euros. I even sell the bitcoin version much cheaper. But I haven't made a single sale so far. Not one. The math is easy to do: even if setup is very easy, it's still not worth it for zero customers.

It's a vicious cycle: not enough bitcoin owners means merchants don't have much incentive accepting it, which in turn makes people wonder why the hell they would need to get bitcoins.

Yet, the user base in increasing. And you do find more and more places that accept it. So we're getting nearer critical mass every day.

It's very hard to buy bitcoin

Converting government money into bitcoin is very difficult. It's much more complicated than opening an account on a website. There's a bit of paperwork involved. It's a real pain in the ass.

Unfortunately, converting dollars or euro to bitcoin is the main way of getting bitcoins. If bitcoins were more mainstream, you could get bitcoin just as you get paper money: by selling something or doing work. Like I said, I am selling my books in bitcoins, but no one is buying with that currency. And I never found a job that pays in bitcoins ever. So we'll have to live with the fact that we need to go through an exchange service to get bitcoin until we reach critical mass. Exchange services suck. Also, they take a cut.

The value fuctuates a lot

That's actually not true. The value used to be very volatile when the userbase was smaller than what it is now. Now, the value still has ups and downs, but it's been mostly steadily increasing with very tiny bubbles here and there that took a month or less to recover from. I mention it because people still use this argument. This is what bitcoin was worth over the ages:

Bitcoin market cap history

It might look bumpy to you, but what I see is that nobody that ever bought bitcoin lost value. And only the first half of the graph is really jagged. That's the long long ago in internet-time. Since the middle of the graph, (mid 2015), it has gone steadily up with a bit of up-and-downing. I'd say it fluctuates a little, not a lot.


Wow, I managed to not even say the word "blockchain".

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