Disadvantages, Bitcoin


Like any currency, there are disadvantages associated with using Bitcoin:

Bitcoins are still only accepted by a very puny group of online merchants. This makes it unfeasible to entirely rely on Bitcoins as a currency. There is also a possibility that governments might force merchants to not use Bitcoins to ensure that users’ transactions can be tracked.

If a hard drive crashes, or a virus corrupts data , and the wallet file is corrupted, Bitcoins have essentially been “lost”. There is nothing that can done to recover it. These coins will be forever orphaned in the system. This can bankrupt a wealthy Bitcoin investor within seconds with no way form of recovery. The coins the investor wielded will also be permanently orphaned.

The value of Bitcoins is permanently fluctuating according to request. As of June 2nd 2011, one Bitcoins was valued at $9.9 on a popular bitcoin exchange site. It was valued to be less than $1 just six months ago. This constant fluctuation will cause Bitcoin accepting sites to continually switch prices. It will also cause a lot of confusion if a refund for a product is being made. For example, if a t T-shirt was primarily bought for 1.Five BTC, and returned a week later, should 1.Five BTC be returned, even tho’ the valuation has gone up, or should the fresh amount (calculated according to current valuation) be sent? Which currency should BTC tied to when comparing valuation? These are still significant questions that the Bitcoin community still has no consensus over.

When goods are bought using Bitcoins, and the seller doesn’t send the promised goods, nothing can be done to switch roles the transaction. This problem can be solved using a third party escrow service like ClearCoin, but then, escrow services would assume the role of banks, which would cause Bitcoins to be similar to a more traditional currency.

The Bitcoin system could contain unexploited flaws. As this is a fairly fresh system, if Bitcoins were adopted widely, and a flaw was found, it could give tremendous wealth to the exploiter at the expense of ruining the Bitcoin economy.

Since the total number of bitcoins is capped at twenty one million, it will cause deflation. Each bitcoin will be worth more and more as the total number of Bitcoins maxes out. This system is designed to prize early adopters. Since each bitcoin will be valued higher with each passing day, the question of when to spend becomes significant. This might cause spending surges which will cause the Bitcoin economy to fluctuate very rapidly, and unpredictably.

Since Bitcoins do not have a physical form, it cannot be used in physical stores. It would always have to be converted to other currencies. Cards with Bitcoin wallet information stored in them have been proposed, but there is no consensus on a particular system. Since there would be numerous challenging systems, merchants would find it unfeasible to support all Bitcoin cards, and therefore users would be compelled to convert Bitcoins anyway, unless a universal system is proposed and implemented.

Since there is no central authority governing Bitcoins, no one can ensure its minimum valuation. If a large group of merchants determine to “dump” Bitcoins and leave the system, its valuation will decrease greatly which will immensely hurt users who have a large amount of wealth invested in Bitcoins. The decentralized nature of bitcoin is both a curse and bliss.

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