I once came across an opinion that as soon as people understand how Bitcoin works, they will immediately stop investing in it. In some ways, I agree with this position - from a technical point of view, Bitcoin, as a pioneer, has significant shortcomings. But on the other hand – the market side – it also has huge advantages. In this article, I want to summarize the pros and cons so that, firstly, you understand what you are trading, and secondly, you can form your own opinion about the prospects for the future life and development of this cryptocurrency. Let's start with the shortcomings.
Disadvantages of Bitcoin
Slow transactions
The “original” Bitcoin (BTC) blockchain is capable of 3 to 7 transactions per second. In the modern world, where Bitcoin costs several thousand dollars, where many people want to buy or sell it, where Bitcoin payment methods are being introduced to almost every website, this is not enough. For example, Visa carries out several thousand transactions per second (2000, according to Wikipedia). If you can pay with a card at a coffee shop and immediately get coffee, then with Bitcoin you can wait from 10 minutes to several days.
Some forks, cryptocurrencies and tokens (for example, Ripple) are designed for high transaction speeds, but this is not the case with Bitcoin (and other coins have other problems).
Commission cost
Despite the fact that you don’t have to pay a commission at all, you have to pay it - the higher the commission, the faster the transaction will go through. The more space a transaction takes up (in bytes), the more money the miner wants to receive for adding it to the block.
The fact is that each block in the blockchain has a fixed size (initially 1MB), so it is more profitable for each miner to cram as many small transactions into this block as possible, and receive a commission for each. Which transactions will be added to the block depends on the settings of the miner software, but in general, transactions with a higher commission and a smaller size will be included in the block first.
The transaction size depends on the inputs and outputs. For example, if money came to your address from one address, and you send it all to someone else, then you have one input and one output.
If you send part of the money (you send 30%, leave 70%), then you have one input and two outputs - one output is 30% to the recipient, the other output is 70% of the change to you at your address.
If you received 10 payments at 0.1 to your address, and you want to send it to 100 addresses at 0.01, then you will have 10 inputs and 100 outputs.
The more inputs and outputs, the more the transaction weighs in bytes; moreover, the older your inputs, the more expensive it becomes to service your transaction.
So, the commission size is not fixed, but, with a high Bitcoin exchange rate, the commission amounts to a significant amount. Transferring small amounts is simply not profitable - you might want to send 0.000001 BTC (about 100 rubles) to a friend, but the commission today (February 2018) will be 0.0001 - 50 rubles. In December 2020, the average transaction cost ranged from 40 to 70 dollars - the network was overloaded, and in order to “push through” your transaction, you had to strangle a toad.
Premine
Technically, the term is not entirely correct, but it reflects the essence well. Before Bitcoin went into general use, the technology and code were tested and tested. The same Satoshi mined a million bitcoins for himself when it could be done on a home computer, and who knows how many other “early programmers”. Think about it, somewhere there is a person who has a million bitcoins - a million coins worth $10,000 each, he got it for free.. What happens if he throws them on the market?
Attack 51%
The Bitcoin blockchain is vulnerable to the so-called “51% attack.” This means that once someone owns 51% of the network's computing power, they will be able to write anything to the blockchain. For example, such an attacker can attribute bitcoins or false transactions to himself, after which he will need to generate 6 blocks in a row, and the blockchain will follow his chain.
Blockchain developers envisioned this type of attack, but, according to them, it would be more profitable for such an attacker to mine bitcoins with such power, because If people stop trusting the blockchain, then this type will not benefit - Bitcoin will depreciate very quickly.
Large blockchain size
Three years ago I set up a Bitcoin node for myself and it weighed 30GB. Now this size has gone beyond 150GB and continues to grow - you can see the graph here. So now, if you want to install a Bitcoin wallet for yourself, get ready to allocate 200 gigabytes on your hard drive.
In general, this is not such a big problem, but the first installation is too long - all 150GB needs to be downloaded from the network, everything checked, synchronized.. In general, several days may pass from the moment you start installing the wallet until you start using it.
Mining difficulty
Once upon a time, you could mine dozens of Bitcoins on your home computer. Later we had to buy video cards. Nowadays they buy dozens of ASICs, and they recoup their value for quite a long time. Most of the production facilities are located in China, where hangars and factory workshops are equipped for mining; it is difficult for an ordinary user to compete with them, even with the help of pools. Other cryptocurrencies are relatively profitable for mining today.
However, China has already started putting pressure on miners, and they are leaving the country, and it’s not a fact that they won’t be put under pressure in a new place, so the situation may change someday.
Well, now about the advantages.
Bitcoin - history of creation
The second half of 2008 - the beginning of 2009 - it is from this time that the history of Bitcoin begins its countdown. In those days, an anonymous person or a group of people hiding under the pseudonym Satoshi Nakamoto publishes a document describing the first cryptocurrency, releases a client to work with the network and generates a genesis block, for which a reward of 50 BTC is awarded. This is how the world first heard about Bitcoin.
The history of Bitcoin begins in 2008-2009 and is based on earlier research
This is not to say that the history of Bitcoin arose out of nowhere. It was preceded by numerous earlier studies, dating back to the 80s of the last century. In 1983, scientist David Chaum came up with a system for sending anonymous payments using a so-called “blind signature.”
In the late 90s, researchers Adam Back and Nick Szabo worked on the prototype of a digital currency. Their developments later formed the basis of the Bitcoin network.
In the first years after the creation of cryptocurrency, it attracted the attention of only enthusiasts of the world of digital money. Miners are joining the mining of coins, but in the eyes of most users they did not have much value. Owners of tokens easily part with them, throwing hard drives in the trash or paying thousands of BTC for one pizza.
Active development of Bitcoin
The history of Bitcoin caused widespread public outcry in 2011. The Bitcoin exchange rate became equal to the dollar, the first cryptocurrency exchange MtGox appeared, and the famous Time magazine mentioned Bitcoin. All this did not escape the attention of hackers, who launched serious attacks on the network. At the same time, Bitcoin also became associated with the criminal world, as it increasingly began to be used when concluding transactions on shady platforms.
In subsequent years, dozens of cryptocurrency platforms began to open where you can trade digital coins. In the spring of 2013, the price of Bitcoin crossed the psychological threshold of $100. Hundreds of new altcoins are appearing, among them Ethereum, Ripple, Dash, and Monero have gained the most popularity. The latter, by the way, began to actively displace BTC from the black market.
The world is experiencing an ICO boom, with the help of which numerous projects raise money for their development by issuing digital tokens. Bitcoin is increasingly being accepted as payment by all kinds of shops, hotels, and services.
In the spring of 2020, BTC was recognized as legal tender by one of the most technologically advanced countries in the world - Japan.
All this most directly affects the value of Bitcoin, and accordingly its capitalization, which at its peak exceeded $300 billion.
Bitcoin forks
The growing popularity of Bitcoin has led to users increasingly encountering long wait times when making transactions. Commissions in the system have also increased by an order of magnitude. Developers began to actively look for ways to modernize the network - as a result, offshoots of the platform appeared that “lived” an independent life. Among the most famous are Bitcoin Cash, Bitcoin Gold, Super Bitcoin, Bitcoin God, Bitcoin Diamond.
Making changes to the network leads to the emergence of new Bitcoin forks)
They differ from the original Bitcoin in different parameters: block size, mining algorithm. This made it possible to reduce the amount of commissions in networks and speed up payments. In some forks, for example, Bitcoin God, smart contracts also appeared. According to the latest forecasts, there will be about 50 more forks in 2020.
Who created Bitcoin
Almost a decade after its founding, today the history of the origin of Bitcoin has one blind spot - we are talking about the personality of the creator of the coin. Attempts to solve this mystery were unsuccessful.
Who has not been credited with the honorable role of a pioneer - the above-mentioned Nick Szabo and cryptographer Hal Finney, entrepreneur Craig Wright and Litecoin creator Charlie Lee, programmer David Kleiman and engineer Dorian Nakamoto. Recently, Elon Musk has even been added to this list.
Despite the various evidence and facts presented by journalists and researchers, each of the “suspects” categorically denied their involvement in the creation of the first cryptocurrency.
Benefits of Bitcoin
Bitcoin has a well-established brand
Bitcoin is known to almost everyone today - it was actively promoted in the TV news, advertisements with “investors” and “experts” are constantly running in YouTube videos, every news site wrote about its value at $20,000, etc. You don’t need to explain to people what exactly you want to sell or what they will receive after the purchase - both Stepan Vasilyevich from the third entrance and Albert from the second B class know that they can make money from this. If you offer them to buy, say, BNB coins, then they will look at you as a foreign swindler.
The same applies to business and investment - large companies are more willing to invest in Bitcoin, because either it will increase in price and they will make a profit, or they will pump it up and sell it on an already promoted market, using the “greater fool” theory. With unknown coins, you will have to wait until the market is ripe for its mass purchase.
Bitcoin has a developed infrastructure
Many exchanges appeared before the birth of Ethereum, before the mass emission of all kinds of tokens, and began to trade Bitcoin and other first currencies - Litecoin, Dogecoin, Darkcoin/XCoin/Dash, etc. You can buy or sell Bitcoin almost anywhere, including using fiat money from different countries.
There are many exchangers, many people ready to exchange your Bitcoin for cash, services that allow you to implement the acceptance of Bitcoin on the site, shops and organizations that accept Bitcoin for payment, etc. Other coins and tokens are mainly intended for investment, and buying and selling them often comes down to transferring them into BTC and then exchanging it for fiat.
Bitcoin has time-tested wallets, and there are services that provide the possibility of cloud storage of bitcoins (read more about creating wallets here).
Bitcoin has a history
Trust is not easy to earn, but Bitcoin has been on the market for 9 years. At first it was known only to enthusiasts, then it gained fame as a coin for laundering dirty money, then it became the main driver of investment in cryptocurrencies.
A lot of money has already been invested in Bitcoin, so it has actually acquired a body. If earlier Bitcoin was only a set of bytes in the blockchain, now it is also the number of dollars spent on its purchase. If a person spent, say, $10,000 on buying these bytes, then he is unlikely to want to sell them for less.
Contractual relationships between people and the exchange of fiat money move the Bitcoin market and create interesting volatility - in one trading day the value of Bitcoin can change by $1,000 per coin several times. There were days when the value fell and rose by much larger amounts.
Well, Bitcoin also has a lot of educational materials in the language of the end user. Today, anyone can read an article, watch a video, go to a conference (which is growing like mushrooms) and find out everything they want to know about this coin. There are analytical sites where you can read forecasts about growth/decline, there are specialized blogs of professional investors, telegram channels with news and forecasts, and even dozens of books have been written.
There is a cyclical connection here - Bitcoin owns a larger share of the market - Bitcoin is sold and talked about. The more they talk about it, the more it expands its sphere of influence and the more persistently it captures the market. Other coins are growing amid general interest, but Bitcoin is the driving force.
Minuses
At first glance, especially if you know nothing about cryptocurrencies, it may seem that it will have many more disadvantages than common stocks.
But this is not entirely true: in our opinion, stocks have more disadvantages than cryptocurrencies. Next you will understand why we think so.
BUT this does not mean that we are against investing in stocks, we just want to “arm” you, and if armed means protected!
Disadvantages of Investing in Shares
The need for an intermediary – brokers and private equity investors
The first and most important disadvantage of shares is that you cannot buy shares without a broker!
This means that you will always have to give a percentage of the profit to a third party who will simply act as an intermediary between the seller and the buyer.
Surely, someone will now say: “you can buy mutual funds, then you don’t need a broker.” Yes, you will be right, but only partly.
Units are mutual investment funds that pool the money of different investors in order to collectively invest them in some financial instruments: stocks, bonds, real estate or others.
You can buy a share in this portfolio. Or several shares - their number depends on the price of the share and the amount you deposited.
For those who don't know. Investment fund shares are usually offered for purchase by special companies that manage investments. For example, shares of investment funds can be purchased at Sberbank, VTB and other large banks that have proven themselves well. That is, these companies will act as a broker. In addition, shares can also be purchased on the stock exchange through a broker.
In essence, buying mutual funds is a slightly stripped-down version of trading on the stock exchange. Moreover, you cannot select specific shares, but must purchase only a whole package of securities, which includes Units of investment funds that interest you.
Thus, by purchasing Units, you can try to gain the advantage of investing in a specific industry, or sectors of the economy, with a minimum of effort.
But we are reluctant to recommend this approach, because often investment fund units are a less profitable financial instrument, in contrast to direct investment in shares.
For example, direct formation of a block of shares based on, say, the MICEX 10 index will be more profitable than investing in an open-end mutual fund of market financial instruments “Ingosstrakh Pension”.
Why? It's simple: when buying shares of investment funds, a commission is often charged - the so-called markup, premium, and when you sell shares to investment funds, they buy them from you at a discount. Plus, the fund takes its own commission for servicing, which can amount to several percent per year, regardless of the financial result (positive or negative).
Thus, if we look at this situation more closely, from the point of view of servicing your investments, it turns out that trading through a broker is slightly more profitable than investing in shares.
Through a broker, commissions are significantly lower, and often there are no fixed commissions at all, and thus, if you do not receive any financial result and do not make transactions, then you are not required to pay a commission to the broker.
Honesty of brokers
On the Internet you can find many comments about which brokers are “not honest”, “greedy”, “scammers” and so on.
Therefore, finding a decent broker will not be so easy. Someone may not care about your investments: “they will lose money, and to hell with it, I will get my percentage anyway,” someone may, for the sake of profit, offer to invest in a “100% sure thing, which tomorrow will give +100%” , which is almost always a lie, and so on.
Therefore, finding a decent broker may take you a lot of time.
Stocks are slower
Almost all investments in stocks are investments for the long term. If you want to earn some interest in the next month, it is easier to put money in the bank at interest: stocks will not give you quick results.
You need to understand that in the long term, stocks grow (and they can also fall, we’ll talk about this separately later), however, during the month they can behave as they please, but as practice shows, these are very small fluctuations in up/down rates.
For example, you can set an investment goal: “Save for an apartment within 5 years by investing in stocks” - this is a completely realistic goal, but getting the same profit in a month or a year is almost unrealistic.
Many grow, but not all
On average, according to statistics, all stocks are growing, but it may be like this: out of 10 stocks, 8 have increased, and 2 have fallen in price!
What is the conclusion from this? Do not invest all your money in 1 share, as there is a chance that this particular share will fall. As the saying goes, “don’t put all your eggs in one basket.”
Even a random selection of 1 of any stock gives a probability of success of 70%-80%, but for an investor, when it comes to all the money, even an 80% chance does not inspire confidence, since there is another 20% chance of failure, that is, the possibility of losing all the money .
Therefore, it is necessary to distribute money between at least 8-10 stocks in order to maximize the likelihood of success.
Statistics for the last hundred years say:
“If you randomly select 10 stocks for investment, then over a 3-4 year horizon the probability of success will be more than 90%!”
The downside is that not all stocks can generate income.
Shares act as collateral in banks
Very often, shares act as collateral for a company: a company pledges its shares to attract a bank loan or credit from counterparties, but when the price of shares falls sharply, the loan collateral also falls.
Accordingly, the company is placed in a margin call situation - this means that the owner of the company must contribute either shares or money, which is usually not available, in order to continue this lending, and if he cannot do this, then the bank actually takes his share of the shares, that is, control over this company.
In fact, we see that after 2009, in such largest banks as VTB, Sberbank and others, entire divisions were formed to manage companies whose shares pledged for the loan fell in price, and, accordingly, control over these companies passed to jar. An example is VTB Capital, which has received a huge number of companies under its management.
You say: “So what, now the new owner will manage the company /such and such Bank/, but what about us, the owners of the shares of this company?” But it's not that simple.
Firstly, banks are often not very keen to manage companies - they are not professionals in this field. It is much better when the company was headed by people who loved their business and led it in the right direction, that is, developed their business.
Secondly, in such situations it is not uncommon for stocks to fall. Yes, it is very difficult to predict that this will happen, but it is still a risk and a minus and you need to understand it.
Cons of Bitcoin
Watch our video on the YouTube channel: “Lost Bitcoins: How and how much did we lose in crypto?” In this video, we point out common mistakes made by beginners, and also tell us where, how and how much we lost in cryptocurrency.
Theft, break-ins
Probably the most important disadvantage in this area of investment is theft and hacking.
To buy Bitcoin (cryptocurrencies) you need exchanges. Storing cryptocurrency on an exchange is very risky! They are often hacked. In 2020 alone, 4 exchanges were hacked, 2 of which were quite large.
Therefore, to buy cryptocurrency (Bitcoin) you need preparation.
You need to install a cold wallet, sync it and once you have bought Bitcoin, transfer it to that wallet. Simply holding cryptocurrency on exchanges, especially in large amounts, is very risky, you can be left without funds!
Convenience
Convenience, or rather almost the lack thereof, for beginners. Installing and synchronizing wallets, getting a digital wallet address, getting a payment id (for some coins), understanding the interface of exchanges and much more is quite difficult when you are new to the cryptosphere.
This side of the crypto world is still just at the start.
Yes, of course, there are multi-currency and hardware wallets - but they are not reliable, since they are not official wallets.
READ:
List of 10 Most Reliable and Secure Hardware Wallets Cryptocurrency Wallets: A Step-by-Step Guide to Secure Wallets What is a Cryptocurrency Wallet? Types of wallets
There are also official “Light” wallets (without synchronization), but they are almost always buggy, work poorly, and so on.
Conversion
To buy Bitcoin, you need to deposit money on the exchange. And this is not so simple, because not all exchanges allow you to enter Rubles, even fewer - the Hryvnia, and almost a few - the Belarusian Ruble.
Therefore, most often you have to use either special online exchangers or those few Exchanges that allow you to enter Fiat.
It is also worth noting that quite often when purchasing Bitcoin through an exchanger or on an exchange with a plastic bank card, Banks (in Russia) freeze transactions and you have to call the bank and explain the purpose of the transfer.
Therefore, most often people use payment services - such as YandexMoney, Qiwi and others.
In 90% of cases, payment services do not block the transaction, BUT this is an extra intermediary, because if you do not have money on these services, then a commission may be charged when replenishing your account.
The same goes for making a profit after selling cryptocurrency.
Commissions
Yes, there are commissions everywhere, and we are not talking about commissions for trading on the exchange or for transferring from wallet to wallet, from exchange to wallet, and so on.
The following commissions await you here:
- When you top up money through payment services, there is a commission. Yes, not for everyone, but many banks charge a percentage for a transfer to any payment service
- Top up the exchange with Fiat - commission
- If you rent a Fiat – commission
In fact, yes, not so much, but the average commission will be 2% (add here the trading commission from 0.05% -0.1%) for each item, which is not so little in the end.
Regulation
There is no regulation regarding cryptocurrency and mining in the Russian Federation. There is also no regulation in many other countries.
Therefore, in the eyes of the government, cryptocurrency is in a precarious state and is seen by many as money laundering or illegal activity.
General cons
Now let’s look at the disadvantages that are inherent in each type of investment: both stocks and cryptocurrency.
- The first disadvantage is government intervention of any country. For example, a country declares that it is against a particular company or shares of this company. If the country is large, then most often this can affect the company's stock price.
- The second disadvantage is government intervention in your country. That is, for example, a new bill is coming out that is not very positive / loyal to the company (or is just being proposed for introduction), a complete ban on this company or cryptocurrency, and much more that is related to the laws of your country. This is likely to affect the price of both stocks and cryptocurrencies.
- The third disadvantage is natural disasters and mass diseases.
This could affect both stocks and a specific cryptocurrency. Take, for example, the same coronavirus of 2020, due to which many stock exchanges suffered and with which the fall of cryptocurrency at the end of February 2020 is associated. There is an article on our website that states that the historical events of miner capitulation show that investors should be concerned about the processes taking place. Read more in the article “What is miner capitulation? How will this affect the cryptocurrency market? - The fourth disadvantage is the most obvious disadvantage: both companies and cryptocurrencies are dying. That is, you need to be careful when choosing investments: which company to invest in or which cryptocurrency (if not only Bitcoin).
False cons
And this, in our opinion, is the most important. There will be only 1 point, but many people misunderstand it!
Volatility is the false negative we want to talk about here.
Why do you invest money in stocks or cryptocurrency?.. That’s right, to make money.
But first, let's answer the main question: what is volatility?
Volatility is the rate at which the price of a security increases or decreases for a given set of returns. Volatility is measured by calculating the standard deviation of annual returns over a specified period of time. It shows the range over which the price of a security can increase or decrease.
Simply put, volatility is a mathematical tool or index by which we measure price movements over time for a traded financial instrument or asset.
A stock or cryptocurrency gave +20% today, and tomorrow -15% - this is volatility.
Read more about this in this article.
And yes, the definition of volatility in the financial world = the definition of volatility in the world of cryptocurrencies.
So, back to our question. To make money on the market, you need rates to grow not by 1-5% per year, but by 10-50% per year. These are the percentages that will give you a good profit.
If you are investing in assets such as pension savings, then it is best to invest money in a reliable, proven, stable company, without volatility.
But if you want to make money, then volatility is your friend.
Of course, these are risks: the risks that the price may rise by 10%-50% (for example), or may fall, since the market is volatile.
But, we repeat, this is the market that is most suitable for making money!
Features of Bitcoin
Anonymity
I did not classify this point as either an advantage or a disadvantage, because... this effectiveness of this feature, firstly, is controversial, and secondly, it can be both harmful and beneficial.
Just as the rescue of drowning people is the work of the drowning people themselves, so the anonymity of Bitcoin owners is the work of the owners themselves.
To remain truly anonymous, you need to follow the rules - create separate addresses for each transfer/receipt, do not transfer between your addresses, do not combine money from different addresses within one transfer, do not store bitcoins in the clouds but use them locally, the local node must access the network through a proxy, and proxies and node synchronization ports need to be changed with each operation, in some cases it is worth additionally using Bitcoin mixers (which sometimes adds risk), etc. In general, you need to know the rules, and they are very easy to break - and then anonymity will not be so anonymous. No, random robbers will not find you, but organized, targeted structures can.
Now the identity of the owner of bitcoins is determined by a number of factors - for example, the authorities receive information from exchanges and exchangers, who paid from which IP addresses from which addresses, receive information from large IT companies (which we all use, for example, for search, email or as a Mobile phone OS, Internet providers, etc.) about money transfers between nodes, look at what other sites were visited by people who transferred bitcoins, and what other bitcoin transactions were carried out on these sites (this makes it possible to determine with a high degree of probability the ownership of different addresses one person) and much more. In general, anonymity is a matter of separate, careful study for those who really need it.
Price
The price of Bitcoin can be both a plus and a minus - a high price limits the entry of people with a small amount of capital into the market, but attracts people and organizations with large capital. Again, buying at a high price is scary, but selling for more than you bought is nice.
Price volatility allows you to either increase your capital in a matter of days or lose a significant part of your investment. Trading on such waves requires experience, calculation, patience and nerves of steel.
There is no accurate information about the amount of money actually invested - from here there is no way to even approximately calculate the actual value of the coin. Different experts give different figures, but no one knows for sure where Bitcoin’s “bottom” is. In addition, from time to time people with really big money come to the market, influencing the price both up and down - due to the characteristics of Bitcoin, there is no way to detect such phenomena in advance. Transactions can be carried out both through exchanges (with influence on the rate and volume) and through dark pools (without influencing the market at all, a simple redistribution of gigantic funds).
