- 4 min read
- Be aware of Bitcoin's volatility.
- Understand how the use of Bitcoin by criminals exposes it to risk.
- Protect and safeguard your Bitcoins to prevent loss.
Is Bitcoin Here to Stay?
It seems as if every day we hear that someone bought something more expensive with bitcoin.
In December 2013, there was the man who bought a $103,000 Tesla Model S with bitcoins in Florida. Then in March 2014, a buyer from Texas bought a villa in Bali for an estimated 1,000 bitcoins, around $600,000 at the market valuation at that time.
Despite these impressive purchases, there are still plenty of skeptics of the cryptocurrency. Here are the four top reasons why some people believe that bitcoin could be headed for failure.
- Dependent on exchanges that can fail
- A preferred currency of criminal enterprises
- Easily lost and stolen
Bitcoin Prices are Highly Volatile
Bitcoin supporters celebrate every time that a new vendor accepts the cryptocurrency. Their thinking goes a bit like this: the more people use bitcoins, the more bitcoin becomes an accepted currency. The problem with that logic is that a currency needs to keep a predictable value.
Even unstable foreign currencies have a predictable floor and ceiling for value. Once those ranges get out of control, the currency becomes worthless. This is why Ecuador and El Salvador had to give up their own currencies in 2000 and 2001 respectively and adopt the U.S. dollar as their official currency.
According to data from Blockchain.info, in 2013 the market value from one bitcoin started at $13, peaked at $1,100, and closed at around $500. This price volatility makes keeping all of your wealth in bitcoin a potential time bomb.
Mt. Gox Fails and More Than $500 Million Disappears
Bitcoin exchanges are markets where people can buy and trade bitcoins. Mt Gox, a bitcoin exchange in Japan, crashed and burned. It is estimated that losses to users was more than half a billion dollars. Mt. Gox had a major share in the global bitcoin market, over 75% of all transactions went through Mt. Gox, according to some estimates.
At the time that Mt. Gox filed for bankruptcy, over 750,000 customer bitcoins had vanished. which at one time reportedly processed 80 per cent of global bitcoin transactions, last week sought bankruptcy protection from the Tokyo District Court and admitted it had lost half a billion US dollars worth of the digital currency.
Bitcoin is the Preferred Currency for ‘Shady Business’
Discussions about bitcoin invariably bring up Silk Road, at some point. Silk Road was an online market, operated as a Tor hidden service. A site user could browse it anonymously and without monitoring. On top of that, the preferred form of payment was bitcoin, which provides a certain degree of anonymity.
This libertarian paradise quickly turned to illicit activity. As of March 2013, 70% of the site’s 10,000 listed products were illegal drugs. That was just the tip of the iceberg. In October of that year, the site owner, Ross Ulbricht was arrested on suspicion of drug trafficking, soliciting murder, facilitating computer hacking, and money laundering.
Although Silk Road no longer exists, there have been plenty of substitutes, such as Atlantis, Project Black Flag, and Black Market Reloaded. All of them ready to take bitcoins for illegal activity. This is why U.S. Attorney for the Southern District of New York, Preet Bharara, responsible for Ulbrich’ts arrest, is scrutinizing all bitcoin exchanges, no matter how clean their rap sheet appears to be. The New York Attorney believes that bitcoin exchanges often harbor, even if it is unintentionally, illegal activities. Given Bharara’ successful prosecution record, bitcoin critics may be right that it is only a matter of time until Bitcoin is shut down for good.
Bitcoin Can Be Easily Lost (and Stolen!)
If you have a bank account, you don’t need to memorize your bank account number to access your money. If you have a valid ID, you can identify yourself at a teller window and the teller can look it up. If you lose your debit card or credit card, you can order a replacement and still have access to your funds.
The same cannot be said from a bitcoin wallet. If you completely lose access to your digital wallet ID, then the money is gone! The story of the U.K. man, who lost his hard drive full of bitcoins worth several millions dollars, serves as a cautionary tale to bitcoin users.
If human error doesn’t do away with your bitcoins, then hackers are the next threat. Bitcoin exchanges are constantly under attack from cybercriminals. On March 2014, Flexcoin became the victim of hackers, who stole 896 bitcoins. Later on that month, another exchange, Poloniex had to shut down because it lost 12% of its total bitcoins to hackers.
Summary: Is Bitcoin Headed For Failure?
The high price volatility, dependence on what could be unstable exchanges, the potential abuse by cybercriminals, and the threat from hackers might prove too overwhelming for bitcoin exchanges.
Even if the bitcoin exchanges survive these three powerful forces, the heavy scrutiny from Bharara’s office may be the final straw. Given that more bitcoin ATMs are sprouting around the country, it might be a good idea to cash out before it’s too late.
What do you think the future holds for Bitcoin?