Last Updated 19 Jan 2023

A Review of the Strengths and Weaknesses of Bitcoin

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Bitcoin is regarded as the first digital currency across the world. The fact that the cryptocurrency works without the regulation from a single administrator or central bank makes it a decentralized currency. Ever since its creation in 2009, the cryptocurrency has grown popularity across the globe and has been accepted as a medium of exchange by several merchants. The peer to peer network enables users to directly transfer money from one person to another without the involvement of an intermediary. This method of transfer has enabled transactions to be much cheaper compare to other means of money transfers. However there have been many speculations about the vulnerability of bitcoin. The volatility of the currency also raises the question of whether bitcoin is worthy of being a real currency and whether it is safe. To better understand the safety of bitcoins, it would be appropriate to compare the strengths and weaknesses of bitcoins.

Strengths

Unlike other currencies, cryptocurrencies allow for peer to peer transactions. This means that users can make transactions without involving an intermediary since the transactions are recorded in a public ledger. Regulated currencies require a 'middleman' to facilitate the transaction. In this case, banks act as the middle men and they need to charge for the transaction which increases the transaction fees. The lack of middlemen in digital currency transactions make it a cheaper transaction method. Transaction costs for bitcoins are as low as $0.61 (Dumitrescu, 67). The low transaction fees has also attracted several traders across the globe who now accept the digital currency as a medium of exchange for products. The security offered by bitcoins is also an important consideration. Consumers with bank accounts are offered protection for their accounts with the specific bank. This means that the security of their accounts is at the hands of middlemen. Cryptocurrencies on the other hand do not depend on middlemen. Once a user opens an account they are provided with unique private keys that are used to access their accounts and make transactions. Since the safety of a digital account depends on the owner, it is advisable to create passwords that are difficult to guess in case of a hack.

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The large amount of returns from investing in bitcoins is also a great advantage for users who invest in cryptocurrencies. In 2016, bitcoin investors recorded more than 100% return on their investments. The large amount of returns cannot be compared to bank interest rates per annum and for this reason, many customers have opted to invest in bitcoins. Weaknesses

The volatility of bitcoins most worrying when it comes to investing in cryptocurrencies. Since it is a decentralized monetary system, it has no regulator. Unlike banks that regulate the flow of money through their set policies, bitcoins are fully dependent on the users. This means that the price of the digital currency can neither be determined nor controlled. The lack of regulation has seen the cryptocurrency wildly fluctuate over the past years. For that reason, bitcoin has been termed as a risky investment since an investor might buy high and sell low with the aim of earning more returns but the price may drop by the time the sale order goes through.

Conclusion

Bitcoins have proven to be the cheapest currency to make transactions with and the high investment returns have also encouraged many individuals to invest in them. Since the creation of bitcoin, the cryptocurrency has experienced a significant growth in its price. The lack of a centralized regulation system has enabled the currency to be cheap and flexible since it can be used by individuals across the globe. The security of the system is also advantageous to users since each user has their own unique keys used to make transactions.

The significant amount of returns on investments over a short period of time has also attracted many individuals to buy bitcoins to make more money. However aside from the benefits, the volatility of bitcoins has ruled out the option of using bitcoins as a stabilized means of investment. Users are limited to using bitcoins as a means of making transactions and as short investments rather than using the currency as a means of saving. Its volatility also discourages its use as a real currency since it is not stable. The security of a digital account is also dependent on the user's keys therefore a user must input a password that is hard to figure out but at the same time easy to remember. In most cases owners use passwords that are complicated and end up forgetting. With regards to the strengths and weaknesses of bitcoins, they can be considered as a safe method of making transactions and short term investments but it is risky for an individual to consider bitcoins as a means of saving for the future.

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