The Pros and Cons of Bitcoin

Being markedly different from traditional fiat currency, Bitcoin has various pros and cons. If you want to become a part of the Bitcoin movement and are still trying to weigh whether or not it’s worth the money and effort, this chapter will help you decide if the pros and benefits outweigh the cons and risks.

Pros

Pro 1: It’s decentralized: This book has already extensively outlined Bitcoin’s decentralization. Because it runs on a peer-to-peer blockchain rather than through a centralized authority, Bitcoin cannot be manipulated in any way. No one or entity, not even Satoshi Nakamoto can implement any policy, change any information, or change the source code (only with approval) unilaterally. This means that Bitcoin works with a pure model of economic supply and demand, which makes it more viable than fiat currencies that are centralized.

In addition to not being able to be manipulated, the decentralization of Bitcoin means that it is trustless. What this means is that there are no middlemen or trusted third parties involved in any transaction. When you wish to pay for your groceries using your MasterCard, that purchase has to go through a third party, in this example, the MasterCard Company. You must trust that the company is taking its own internal measures to ensure that you are not charged twice for this one purchase and that it is behaving ethically, especially in regards to your account. If you take out a student loan through the United States government, you must trust that the third party — Sallie Mae — is engaging in ethical conduct, is not misappropriating funds, and has adequate security to prevent the system from being hacked; if it were not doing so, your account could be compromised. When you make a payment to your MasterCard or Sallie Mae account, you are trusting that the institution will apply the payment to your account correctly. Numerous companies — including Enron and Goldman Sachs — have fallen and people have lost trillions of dollars because of poor policies and management by trusted third parties.

Trustless means that you don't have to engage a trusted third party to complete a transaction. Because the information is broadcast to everyone on the blockchain and must be verified with a proof-of-work protocol, the network is fail-safe without the involvement of a third party. Since Bitcoin's inception at the beginning of 2009, no third party has had to come in to mediate any type of dispute. You may have to trust a third-party wallet, such as Kraken, but the blockchain itself does not require any trust.

The trustless feature of blockchain is so powerful that a programmer named Vitalik Buterin, who worked on Bitcoin software, saw its potential in creating something called smart contracts. A smart contract is an entirely digital, entirely enforceable contract held on a blockchain. An example would be if Emir is paying premiums to an insurance company for a health insurance policy through a smart contract. He develops pneumonia and must spend a week in the hospital. Instead of a claims adjuster or other type of negotiator trying to bring down the payments that the insurance company is responsible for, the smart contract automatically releases a certain amount of money to Emir to pay for his hospital stay. There are no angry phone calls, no hassling back and forth with demands that the insurance company pays what it owes, no hospital or insurance liaison trying to explain why only this certain amount was paid. Buterin used smart contracts to develop Ethereum, a blockchain network that developers can use to design their own apps. The potential of trustless smart contracts is virtually endless because they inhibit the potential for any corruption from either party involved.

Pro 2: It’s easy to set up:  Setting up a bank account or getting a new credit card can be an exhausting process. You have to either go to the bank or the credit card’s website, wait in a long line, fill out a lot of information, call family members to find out some of the information, and hope that the bank or credit card approves your account. You have to hand over to the financial institution a lot of personal information, including your address, social security number, references, date of birth, place of employment, income, etc. It can be stressful knowing that if that company’s security is breached, all of your personal information can be compromised.

Getting started with Bitcoin is very, very easy. To buy Bitcoins, all that you need to do is set up a wallet with an exchange. To set up a wallet, first decide which type is best for you: a hot or cold wallet? Once you make that decision, decide whether you want a mobile wallet, a desktop wallet, a hardware wallet, etc. Go to the wallet’s homepage, download the wallet (if applicable) or order the hardware (if applicable), and create an account. You are now able to buy Bitcoins through the wallet’s exchange service.

Pro 3: It’s anonymous: In addition to being much, much easier to use than traditional financial institutions, Bitcoin is entirely anonymous. You don’t have to use your real name in connection with your Bitcoin account; in fact, many blockchain security experts advise you not to. You do not have to give out any personal information, nothing that could somehow compromise your identity. In addition to the anonymous feature of Bitcoin, you can take additional steps to ensure that you remain anonymous on the network. Don’t use a thin wallet, always use a VPN when on the Bitcoin network, use multiple addresses, and don’t connect your bank account to your Bitcoin wallet.

Pro 4: It’s completely transparent: Nobody expected Enron to fail, not even auditors or the IRS. By all measures, it seemed to be doing quite well and was not in any type of financial trouble. However, unethical internal accounting practices were being used, making it appear that there was money when there was not. The lack of transparency with the internal accounting led to people losing trillions of dollars when the company collapsed.

With Bitcoin, there is no need to worry about unethical practices because the entire network is completely transparent. All transactions, excluding none, are visible to every single person on the blockchain network. Anybody can log in to it and see exactly what is going on. There is no question that your money is safe from unethical practices.

In keeping with the decentralization philosophy behind the Bitcoin movement, any changes to Bitcoin protocol must go through a 51% consensus of the entire community. The team of core developers cannot implement any changes on their own because they want to ensure that the network remains entirely transparent.

Pro 5: Transaction fees are minuscule:  Many credit card companies impose a transaction fee — usually around $3 — which is usually incurred by the merchants. Three dollars may not seem like much, but imagine that you use your card five times in one trip to the mall. That’s $15, not including interest that goes straight to the credit card company! The transaction fee is there to make sure that the credit card company makes money, which it undoubtedly will. Those transaction fees add up for retailers and actually drive up the cost of goods. For example, you can expect to pay 10 cents less per gallon of gas if you don’t use a credit card because there won’t be a transaction fee.

In contrast to the high transaction fees associated with credit cards, Bitcoin's transaction fees are quite low. They are associated with the cost of mining and ensure that miners are fairly compensated for their work. If you want your transaction to be processed within the next block — within 10 minutes — you can expect to pay $1.35. If you want it processed in the next three blocks — within half an hour — you can expect to pay $1.12. If you want it processed within the next six blocks — within the next hour — you can expect to pay $0.45. Because the fee is paid by you and not by the merchant, the cost of goods is not driven up.

Pro 6: It’s fast: Have you ever looked at your bank statement and realized that some transactions are missing? Maybe you made a deposit that has not yet appeared on your account or a major purchase that has not yet been processed. As a result, your account may look artificially low or high, and you are responsible for knowing how much money is actually in there as opposed to how much is shown on your account page. Bitcoin transactions are processed in as little as 10 minutes, so there is much less waiting time to see transactions appear on your balance. If someone sends you Bitcoins, you can expect to see them in your account within 10 minutes to an hour, depending on the speed.

Pro 7: It’s non-repudiable: One way that fraudsters make money is by contesting payments that they legitimately made for goods or services that they legitimately received to get that money back into their accounts. Fraud by some people means that the cost is incurred by everyone who uses the same financial institution. For example, imagine that David used his Discover card to buy a hot airplane ticket for a flight that leaves in two hours. Once he has arrived at his destination, he calls Discover to report a fraudulent transaction for an airplane ticket. Unless Discover can find a way to prove that the same person was not on that flight (a gargantuan task, considering David could always insist that the flight was taken by a relative who looks a lot like him), it will have to refund him the money. Interest payments and other fees associated with Discover card, paid by all the users are used to cover the cost of David's fraud.

With Bitcoin, there is no way to get that money back unless the recipient returns the transaction. If David used his Bitcoins to pay for that airline ticket, there is no central authority to which he can appeal to fraudulently request that the payment be returned to him. His only hope is that the airline itself will return the money, which is a very unlikely scenario. Because Bitcoin is non-repudiable, there is less chance for fraud to occur.

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Mastering Bitcoin for Beginners - Neil Hoffman