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Pros and Cons of Investing in Bitcoin

While one can book a lot of profit by investing in Bitcoin during the right time, its high volatility can also make you lose a lot of money. This Buzzle article will tell you about the pros and cons of Bitcoin investment.
Pros and cons of bitcoin investing
"Bitcoin is a technological tour de force."

― Bill Gates

Recently, Bitcoin has emerged as a successful, first-of-its-kind cryptocurrency. Many people from all over the world are investing in Bitcoin and are utilizing bitcoins for transactions. There are many advantages and disadvantages of doing so. It is being said that Bitcoin is going to grow and develop further, and may prove to be an important e-commerce tool. It is interesting to note that even when it is not supported by any central bank, it is still traded on many exchanges and transacted throughout the globe. Please beware that while investing in Bitcoin may bring increased profitability, it also entails an increased risk. A few pros and cons of this kind of investment are as follows.

Pros

Lack of Centralized Authority
There is no central authority, middleman, or a person in control who looks after the day-to-day transactions of Bitcoin. Transactions are carried out directly through the network. In fact, its developers promote this idea. Hence, there is a lot of financial freedom involved in the transactions. This makes it a popular choice for investment with many investors.

Global Reach
So, you have to transfer money to a remote destination. Don't worry as Bitcoin will do it for you easily. All that you will need is access to Internet, a bitcoin wallet, and the bitcoin address of the person where you want to transfer the money. Forget PayPal and other wire money transfers; you can easily transfer bitcoins to other users' accounts.

Faster Transactions
Transfer of money takes place within a matter of few minutes. It does not have to go through the time-consuming and rigid systems of banks and other financial institutions. Hence, it is often predicted that it can rise as a major player in the remittance market. It allows businessmen to easily diversify their mode of transactions.

Secured Transactions
Bitcoin transactions are well-secured. This is because the private keys are only known to a particular user, and hence, only he is entitled to make the payment. You can rest assured that your money is safe as Bitcoin uses military-grade cryptography for the transactions.

Transparency
As the record of all the Bitcoin transactions remains in the blockchain, you can easily know about the number of bitcoins owned by a particular user. You can also get a summary of all the transactions and hence, there is transparency in the system.

Anonymity
The identities of the Bitcoin users remain anonymous. It is advisable that the users create a new address for every transaction and hide your IP address. Doing this will not allow someone to trace your IP address and reveal your identity. One of the key benefits of Bitcoin is that no one will be able to question you about the source of the funds utilized to procure bitcoins.

Not Owned by Government
As Bitcoin is not owned, operated, and regulated by any government, it is not subjected to any kind of change brought about by failure of the government. It is a decentralized cryptocurrency. If a government fails, it can bring about hyperinfalation or a total collapse of the currency. This can cause an investor to lose a lot of hard-earned money. However, with Bitcoins, that risk is eliminated as it does not face the problem of government control or manipulation.

Limited Number of Bitcoins
Bitcoins have been developed such that the total number will never exceed 21 million. Hence, the supply will be limited for an unlimited demand. This will ensure that the price of a single bitcoin will never fall beyond a certain level. Hence, new additions to the bitcoins within the 21 million range will not undervalue the price of existing ones.

Transaction Fees
With Bitcoin, there is zero or very limited amount of transaction fees. If you want a transaction to take place earlier, want to secure it, or do not want to wait 10 minutes for confirmation, then you can pay a voluntary transaction fee. Thus, when you are transferring bitcoins to known entities like family members or friends, you may not pay the fees. Usually, banks and other payment processing companies charge a heavy fee for processing the transaction. Many merchants have started accepting bitcoins for payment as the cost of transaction is relatively lower than traditional modes of payment like debit cards or credit cards.

Other
According to Market Oracle, supporters of Bitcoins say that it could be utilized in future as a major tool of economic exchange on a global level. This is because it has emerged strongly as an independent and transparent currency, and could bring about the much-awaited financial reforms.

Cons

New Concept
This peer-to-peer cryptocurrency concept is still relatively new in the market (just 4 years old). Though Bitcoin is the first of its kind, it already has a lot of competitors. Over a period of time, it may so happen that one of the competitors may emerge to be more successful than Bitcoin. As there is not much history to predict the cryptocurrency trend in future, you may be taking a huge risk by investing in it at this stage.

Traceability
As the Bitcoin transactions are not easily traceable and source of funds may be unknown, it can lead to illegal activities and crimes, like acquiring and selling drugs, weapons, tax evading, smuggling, etc. It may also be used for black market transactions. This may pose a threat to the people as well as the economy.

High-risk Investment
Bitcoins are highly volatile in nature. Just recently, the price of a single bitcoin had skyrocketed and passed beyond the $1,000 mark. Just few days later, as the Chinese government barred banks from trading in Bitcoin transactions, its price came crashing down. As Bitcoin is not regulated by a central authority, it is subject to huge risk and instability. Its value is not decided by an authority but based on the buying capacity of the peer-to-peer network. You may end up losing out on a substantial amount of savings if you buy at a higher price, thinking that it will increase further, and then the value crashes.

Irreversible Transactions
You will have to ensure that you have added the right Bitcoin address, as the transactions are irreversible once the confirmation is received. If you have to reverse the transaction, you can do that in the first ten minutes while you are waiting for a confirmation from the network. In most cases, Bitcoin will correct the typos in an address; however, if you are duped by a fraudulent user into sending the money to the wrong address, consider your money to be gone.

Complicated Process
If you think that the whole Bitcoin transaction is a cake walk, well, it's certainly not. As I mentioned earlier, transactions cannot be reversed unless the other party decides to refund you the bitcoins. Hence, you should ensure that you are keying in the right Bitcoin address. This means that you have to learn the transaction process thoroughly before you start using it for your advantage. This will mean creating a wallet, separate addresses for new transactions, securing transactions, hiding your IP, etc.

Acceptance Level
Bitcoins, as an alternative currency, have not met easy acceptance from many merchants yet. This may change in the future, but as of today, there are not many merchants who will accept payment in bitcoins. Especially, at brick-and-mortar storefronts where maximum number of transactions take place, bitcoins are yet to be accepted. Hence, practically seeing it as an alternative to paper currency may be a distant dream but as of now, people are using it more as an investment.

Loss of Wallet
There is no way to retrieve a lost wallet. If you lose the key to your wallet or the computer hard disk where you have stored it crashes, there is absolutely no chance that you will be able to retrieve them back. The money will remain locked up and will not be used in any kind of transaction. This will increase the price of other bitcoins which will still be in circulation.

Restrictions in Future
As of now, Bitcoin does not face any kind of regulation or interference from a government body. Hence, its rates are rising. However, the day governments will start controlling Bitcoin, the price of bitcoins may get adversely affected. This kind of intervention may also impose various kinds of taxes, asking for the source of money and revealing the identities of users.

Trading is Difficult
Acquiring and selling bitcoins is not very easy. Hence, trading in them can be tedious and time-consuming. However, it is being said that as the field of virtual currency will get more and more players, it will become competitive, and this will result in an ease in trading.

Legality
In most countries, governments decide and regulate the currency. However, bitcoins have been based on a peer-to-peer network. It is not regulated by any government. Hence, the status of bitcoins' legality is not certain.

Apart from this, as bitcoins can be easily transferred throughout the globe, they can be misused for money laundering. However, it is relatively easier to carry bitcoins. For example, you can easily carry thousands of bitcoins in your mobile device, without having to worry about them getting stolen. Now that you know the various pros and cons, do not forget to use your discretion and seek financial advice before investing in them.
Will you invest in Bitcoin?
Yes
No
Maybe
I will wait and watch
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Published: December 12, 2013
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