The year 2021 has been a tumultuous year for cryptocurrency as a whole. Bitcoin specifically has seen a record high cut in half, within two months. This is leaving many investors questioning if Bitcoin is the futuristic currency many crypto bulls had predicted it to be. In this article, I will spell out the pros and cons, and the possible futures of Bitcoin as a cryptocurrency.
- Bitcoin as an investment is great because it has extremely high liquidity, meaning that if you wish to sell your coins, you can do so very quickly. Its advantage is that it is not a physical asset, unlike gold. If you were to invest and buy physical gold, you are now responsible for storing, protecting, and paying taxes on the gold. Bitcoin is stored in a relatively secure virtual wallet that costs nearly nothing.
- Secondly, it is extremely difficult to counterfeit a bitcoin. As detailed in the founding document of Bitcoin, there only will ever be 21 million coins in existence. On February 24, 2021 18.638 million bitcoins have been mined. This leaves 2.362 million that have not been introduced into circulation. It is nearly impossible to counterfeit bitcoin because of how transaction records are kept. Each coin is represented by what’s called a block chain, meaning each transaction using a coin is a block chained together giving a complete record of the coin. For every transaction, each coin is cross-checked by multiple other computers to make sure that all coins used are real and not counterfeit.
- Third, Bitcoin is virtual property. This is in contrast to physical property like gold. Gold and physical currency needs to be protected at risk of theft. When it is time to spend the gold, typically you cannot pay with gold directly, you must first take gold to a bank, pawnshop, or cash for gold store. Then, you will typically pay a fee to get your gold converted to cash, and next you can spend your value. However, Bitcoin is in itself a currency. It is quickly and cheaply converted to fiat currency (dollar, euro, etc.) and can be spent in minutes. On top of that, it can be spent around the world without government influence because it is a decentralized currency. Bitcoin is simply more practical than any physical currency because it is outside the control of government and physical limitations of securing it as an asset.
- The first problem Bitcoin faces is the fact that right now, it is not a great store of value. Bitcoin has shown that it is capable of losing ten percent of its value in a day. This is not good. Why would a store accept payment in Bitcoin, if it knows the next day it may not be worth what it was today? Most experts agree that for Bitcoin to become valuable as a currency, it must be able to hold its own value whether there is an agreed upon exchange rate or pegged value, it must hold value efficiently.
- The second problem Bitcoin has is becoming an efficient medium of exchange. This means acceptability and being able to spend coins at places like Starbucks, Home Depot, etc. Stores don’t trust crypto in general, because they don’t know who else will which in turn creates a paradox. However it can work in a positive way too, as more people accept Bitcoin, it incentivizes more people to also accept Bitcoin.
- Lastly, there is the issue of theft. Proponents of Bitcoin will tell you all about the encryption and security of bitcoin as a system. However, the system is only as strong as its weakest link, which is the individual wallet. For example, a Japanese Bitcoin exchange was robbed of 850,000 coins. There is no recourse to getting the coins back either. This means more advanced encryption and security measures need to be in place for bitcoin to be valued as a currency.
Bitcoin also has a recent argument against it that it is bad for the environment. They believe that mining and maintaining the Bitcoin network is bad for the environment because of the massive power draw. However, the counterpoint to that argument is that Bitcoin may actually be more efficient than fiat currency. If you think about the gross impact of powering Bitcoin versus the impact of mining, logging, and creation and transportation of metal coins and paper currency, it creates a real argument for which is the lesser of two evils. More research is needed to quantify whether this is the case.
In conclusion, there are real advantages to a crypto currency like Bitcoin. However, there are large obstacles in its path to becoming a true currency. In order to overcome some of the obstacles Bitcoin may have to deviate from its founding document. As it sits right now, this writer would categorize Bitcoin as a speculative investment for most people and a risky one at that. This is not investment advice, just the opinion of one writer.