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Author : Bitcoins Basics 101 PDF Ebook by DAVID DODGE and BRIAN DIXON
This is actually an incentive for governments to legally recognize Bitcoin as proper money. No one is sure when or if this will happen, but it’s something to think about as Bitcoin continues to experience a lot of growth around the world. Weaknesses. Next, let’s take a look at some of the weaknesses of Bitcoin. There’s a good chance a lot of these problems are going to be solved going forward, but for now they’re weaknesses. Government interference While this hasn’t happened a lot - yet - there are many signs pointing to governments around the world interfering with the growth of Bitcoin. Whether it’s stopping bitcoins from being transferred to bank accounts or something else, one of the biggest weaknesses of Bitcoin currently is the chance of even more government interference as the virtual currency becomes more popular around the world. This is also a good thing on some levels, however. For example, no one wants money laundering or other illegal activities to be condoned or made possible due to Bitcoin. So, in some ways, the fact that governments are starting to get involved is a good thing that will help Bitcoin grow even more in the years ahead. No Monetary Sovereignty. Another weakness of Bitcoin is that it has no monetary sovereignty. Basically, this means that Bitcoin is not yet accepted as “real money” around the world. Bitcoin is not backed by any government currently. Some may consider this a strength, but it also poses some problems for people (especially corporations) that want to make money with Bitcoin.
Bitcoin is, at its core, another fiat currency that isn’t backed by precious metals or other items of value. The exact value of a single BTC is that which is given to it by people. This makes Bitcoin extremely vulnerable to destabilization. For example, if a large number of people who have bitcoins suddenly decide to sell, this may cause a panic that devalues bitcoins considerably. Deflationary by design. As mentioned above in a previous section of this ebook, Bitcoin is subject to deflation and may end up in what’s known as a deflationary spiral that’s hard to escape once it starts going. Because there’s going to be a finite amount of bitcoins - 21 million - there’s a chance that they’ll just keep increasing in value. While that may sound good at first, you have to look at the big picture. If Bitcoin deflation happens too quickly, investors are not going to want to invest large amounts of BTC because their efforts won’t be rewarded as BTC becomes more valuable during the time it takes them to create a product and take it to market. There’s also the real possibility of a recession if a large number of people who purchase BTC for investment reasons hold onto their bitcoins. If they can control large amounts of the 21 million bitcoins that will be in circulation, there’s a good chance that others won’t be able to conduct transactions because they don’t have enough bitcoins in their possession. At this point, a recession or even a depression become a real possibility.
Accidental Loss and Theft. Another problem is the loss or theft of bitcoins. Because Bitcoin has no protection mechanism built into the currency, it’s possible for someone to lose their wallet file. If this happens, the bitcoins they had in the wallet will be taken out of the system - theoretically forever. This could help spur the problems with deflation mentioned above. Additionally, if someone manages to steal bitcoins from another person, there’s no way to rollback the transaction, even if there’s proof that a theft occurred. The Bitcoin system is built so that once a transaction happens it’s there permanently. If not, it would destroy the integrity of the block chain. With most current financial transactions - like with a credit card - you can contest a transaction and get your money back. This isn’t possible - currently - with Bitcoin. It’s definitely something that needs to be considered moving forward. Black market appeal. Because of the decentralization of Bitcoin as well as the anonymity that it can provide, there’s a good chance that many are going to try to abuse the system for financial gain. Because of the way it’s set up, there’s no way to deny any person or corporation from participating in the Bitcoin network. And this may make it favorable for black markets - like Silk Road - to use Bitcoin as a means to commit crimes online without being caught. It is complicated to use While the Bitcoin software is relatively easy to use, it’s not as easy as whipping out your credit card and making a transaction.
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From: Clyde Thorburn