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The Pros & Cons of Bitcoin as a Digital Investment

Bitcoin (BTC) is the world’s most popular cryptocurrency. According to CoinDesk, its market capitalization — the cumulative value of all BTC in circulation — topped $1 trillion in May 2021, although day-to-day volatility makes a precise accounting of BTC’s market cap all but impossible.

Bitcoin is so popular because it has a lot of built-in advantages. Some it shares with other cryptocurrencies, like Ethereum and Dogecoin, while others are attributable to its market-leading status.

But Bitcoin also has some important downsides that should give investors and everyday users pause. Like the broader pros and cons of cryptocurrency, these Bitcoin-specific drawbacks — and advantages, to be sure — deserve careful consideration. Let’s take a look at each in turn.

Advantages of Holding and Using Bitcoin

Bitcoin offers some distinct advantages both in relation to other cryptocurrencies and to fiat currencies writ large. Most relate to its decentralized nature, inherent anonymity, and independence from political and corporate influence.

1. Greater Liquidity Relative to Other Cryptocurrencies

As the most popular cryptocurrency by a significant margin, Bitcoin has far greater liquidity than its peers. This allows users to retain most of its inherent value when converting to fiat currencies, such as the U.S. dollar and euro. By contrast, most other cryptocurrencies either can’t be exchanged directly for fiat currencies or lose substantial value during such exchanges.

In this regard, Bitcoin is more like fiat currencies than most other cryptocurrencies — although it’s not yet possible to buy and sell Bitcoin in virtually any quantity at any time, as is the case with the U.S. dollar and other major world currencies.

Pro tip: If you’re planning to invest in Bitcoin, open an account with Coinbase. You’ll receive a $5 bonus after opening your account, plus you can receive up to $25 more when you learn about other cryptocurrencies.

2. Increasingly Wide Acceptance as a Payment Method

Hundreds of merchants accept Bitcoin payments. Thanks to heavyweights like Overstock.com and Tesla jumping on board, it’s possible to buy virtually any physical item using Bitcoin units. If you’re serious about reducing your exposure to fiat currencies, Bitcoin’s growing mainstream acceptance is likely to be a big help.

3. Ease of International Transactions

Bitcoin transactions that cross international borders are no different from Bitcoin transactions that stay in-country. There aren’t any international transaction fees or red tape to navigate, as is often the case with credit card payments, ATM cash withdrawals, and international money transfers. International credit card and ATM fees can range up to 3% of transaction value, and sometimes higher, while money transfer fees can be as high as 15%.

While most other cryptocurrencies also lack international red tape, cross-border Bitcoin transactions are easier simply because Bitcoin is more popular around the world.

4. Generally Lower Transaction Fees

Bitcoin comes with lower transaction fees compared to other digital payment methods, such as credit cards and PayPal. Although such fees are variable, it’s rare for a Bitcoin transaction to cost more than 1% of its value. Compare that to 2% to 3% for most other digital payments.

5. Anonymity and Privacy Relative to Traditional Currencies

Holding U.S. dollars or other fiat currencies in an online bank account or executing online credit card and PayPal transactions doesn’t protect your privacy any more than physically handing cash or a credit card across the shop counter. Although your online accounts are hopefully protected from all but the most sophisticated hack attacks, they’re clearly associated with you -—meaning private merchants and public authorities can track how you spend and receive your electronic funds.

By contrast, Bitcoin’s built-in privacy protections allow users to completely separate their Bitcoin accounts from their public personas if they so choose. Although it’s possible to track Bitcoin flows between users, it’s very difficult to figure out who those users really are.

6. Independence From Political Agents and Its Creators

Because Bitcoin isn’t created or controlled by any state entity, such as a central bank, it’s not beholden to political influence. Because it exists outside any political system, it’s also much harder for governments to freeze or seize Bitcoin units, whether in the course of legitimate criminal investigations or as retribution for political acts, as often occurs in repressive states like Russia and China.

Due to its completely decentralized nature, popularity, and liquidity, Bitcoin is also unbeholden to its creators. Many less popular cryptocurrencies are characterized by concentrated holdings — the majority of existing units are held in a handful of accounts. This allows the currencies’ creators to manipulate supply and, to an extent, value relative to other cryptocurrencies, negatively impacting other holders.

7. Built-In Scarcity

Bitcoin’s built-in scarcity feature — only 21 million will ever exist — is likely to support its long-term value against traditional currencies, as well as non-scarce cryptocurrencies such as Dogecoin, a popular Bitcoin alternative. In a way, Bitcoin’s scarcity imbues the currency with intrinsic value — similar to gold and other precious metals.

Most traditional (fiat) currencies controlled by national governments are non-scarce. Central banks can create new units of currency at will, and often do — for example, the U.S. Federal Reserve began a program of quantitative easing that created trillions of dollars in the aftermath of the late-2000s global financial crisis. Although the long-term effects of such policies are unclear, they make many economists uneasy.


Disadvantages of Holding and Using Bitcoin

Bitcoin has some inherent weaknesses and risks that make it unsuitable for many investors and consumers. Decentralized currencies tend to attract unscrupulous actors who threaten — directly or indirectly — more honest participants, and Bitcoin’s price volatility is not for the faint of heart. And Bitcoin itself presents an ethical quandary for environmentalists due to its vast carbon footprint.

1. Bitcoin-Specific Scams, Fraud, and Risk of Theft

As the world’s most popular cryptocurrency, Bitcoin has seen more than its fair share of medium-specific scams, fraud, and attacks. These range from Ponzi schemes like Bitcoin Savings & Trust, which wiped out about $4.5 million in investor assets in the early 2010s, to massive hack attacks, such as the breaches that felled Sheep Marketplace and Mt. Gox.

Bitcoin users are also vulnerable to smaller-scale theft, including gambits targeting individual users. One common vector for Bitcoin theft is the unauthorized use of private keys. When stored in Internet-connected Bitcoin exchanges or cloud storage drives, private keys can be hacked, stolen, and used to access and spend or transfer the key owners’ Bitcoin holdings — depriving them of the value stored within.

Some other cryptocurrencies don’t have the critical mass of users necessary to make such malfeasance profitable to criminals, and such activity is more likely to be prosecuted by law enforcement agencies when traditional currencies and payment platforms are involved.

2. Black Market Activity May Damage Reputation and Usefulness

Despite high-visibility prosecutions of the most egregious offenders, Bitcoin remains attractive to criminals and gray market participants. Obviously, dark web marketplaces like Silk Road and Sheep expose rank-and-file users to fraud and the threat of criminal prosecution.

More disturbingly, the pursuit of nefarious activity by seemingly upstanding Bitcoin users — such as Charlie Shrem — threaten to corrode Bitcoin’s reputation. And it’s unclear that the international legal system is properly equipped to tackle the problem. If shady uses for Bitcoin outweigh legitimate ones over time, and the authorities can’t effectively put a stop to the shenanigans, the entire system faces marginalization.

3. Susceptible to High Price Volatility

Although Bitcoin is the most liquid and easily exchanged cryptocurrency, it remains susceptible to wild price swings over short periods of time. In the wake of the Mt. Gox collapse, Bitcoin’s value fell by more than 50%. Following the FBI’s announcement that it would treat Bitcoin and other virtual currencies as “legitimate financial services,” Bitcoin’s value spiked by a similar amount. In late 2017, Bitcoin’s value doubled several times, only to halve in the first weeks of 2018 — wiping out billions in market value almost overnight.

While Bitcoin’s volatility sometimes offers short-term benefits for speculative traders, it renders the currency unsuitable for more conservative investors with longer time horizons. And because Bitcoin’s purchasing power varies so widely from week to week, it’s difficult for consumers to use as a legitimate means of exchange.

4. No Chargebacks or Refunds

One of Bitcoin’s biggest drawbacks is a lack of standardized policy for chargebacks or refunds, as all credit card companies and traditional online payment processors have. Users affected by transaction fraud — for instance, they purchase goods that the seller never delivers — can’t request a refund through Bitcoin. In fact, Bitcoin’s decentralized structure makes it impossible for any single party to arbitrate disputes between users. While miners take responsibility for recording transactions, they’re not qualified to assess their legitimacy.

Some newer cryptocurrencies, such as Ripple, have rudimentary chargeback and refund functions, but this feature has yet to be built into Bitcoin.

5. Potential to Be Replaced by Superior Cryptocurrency

Bitcoin spawned a host of successor cryptocurrencies. Although many are structurally quite similar to Bitcoin, others — such as Ethereum — make notable improvements.

Some newer cryptocurrencies make it even harder to track money flows or identify users. Others use “smart contract” systems that hold service providers accountable for their promises. Some even have in-house exchanges that let users exchange cryptocurrency units directly for fiat currency units, eliminating third-party exchanges and reducing associated fraud risks.

Over time, one or more of these alternatives could usurp Bitcoin as the world’s dominant cryptocurrency. That could negatively impact Bitcoin’s value, leaving committed, long-term users holding the bag.

6. Environmental Impact of Bitcoin Mining

Bitcoin mining consumes vast amounts of electricity. According to Business Insider, some of the biggest Bitcoin mining companies are based in China, where most power comes from dirty coal plants and horrific smog routinely makes even low-key outdoor activity unsafe for healthy adults.

In the long run, widespread adoption of low- or no-emissions energy production will hopefully mitigate the environmental ills of Bitcoin mining. In the meantime, however, it’s a growing threat to an already fragile planet.


Final Word

As the world’s most popular and widely used cryptocurrency, Bitcoin has some inherent advantages over competing coins and over traditional “fiat” currencies too. It’s accepted by an ever-growing number of national and international merchants, is cheaper to use for cross-border buying than fiat currency, and has built-in scarcity that should put a floor under its value and make it a suitable hedge against inflation — to name just a few.

But Bitcoin has some glaring downsides as well. Some Internet-connected coin and key storage media have significant security flaws that increase users’ risk of monetary loss. Bitcoin’s blockchain doesn’t allow chargebacks or refunds in the same way that fiat currency payment processors like credit card companies do. As an investment, Bitcoin is wildly volatile, to the point that it’s unsuitable for all but the most risk-tolerant investors. And carbon-intensive Bitcoin mining is an environmental disaster.

As a current or would-be Bitcoin user, it’s up to you to decide whether the advantages of the world’s most popular crypto-coin outweigh the downsides. There’s no “right” or “wrong” answer here, only the answer that works best for your investing objectives, values, and tolerance for risk.

Brian Martucci
Brian Martucci writes about credit cards, banking, insurance, travel, and more. When he's not investigating time- and money-saving strategies for Money Crashers readers, you can find him exploring his favorite trails or sampling a new cuisine. Reach him on Twitter @Brian_Martucci.

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