Advantages and Disadvantages of Bitcoin

What Are the Advantages of Paying With Bitcoin?

Due to the unique nature of virtual currencies, there are some inherent advantages to transacting through bitcoin over fiat currencies. Although over a decade old, the digital currency landscape is constantly changing, with most tokens being untested as a medium of exchange, and users should be careful to weigh their benefits and risks. That said, bitcoin is designed to offer users a unique set of advantages over other payment methods. We’ll take a closer look at those below, but before we do, it will be useful to explore what bitcoin is. By better understanding how bitcoin was designed, it will be easier to see what advantages of using bitcoin for payments are.

What Is Bitcoin?

Bitcoin is a decentralized, peer-to-peer cryptocurrency system designed to allow online users to process transactions through digital units of exchange called bitcoins (BTC). Started in 2009 by a mysterious entity named Satoshi Nakamoto, the Bitcoin network has come to dominate and even define the cryptocurrency space, spawning a legion of altcoin followers and representing for many users an alternative to government flat currencies like the U.S. dollar or the euro or pure commodity currencies like gold or silver coins.¹

Why the need for bitcoin in the first place, if there are already so many traditional means of making payments? A key element of bitcoin is its decentralized status, meaning that it is not controlled or regulated by any central authority. This immediately distinguishes it from fiat currencies. Bitcoin payments are processed through a private network of computers linked through a shared ledger. Each transaction is simultaneously recorded in a “blockchain” on each computer that updates and informs all accounts. The blockchain serves as a distributed ledger and obviates the need for any central authority to maintain such records.

Bitcoins are not issued by a central bank or government system like fiat currencies. Rather, bitcoins are either “mined” by a computer through a process of solving increasingly complex mathematical algorithms in order to verify transaction blocks to be added to the blockchain, or they are purchased with standard national money currencies and placed into a “bitcoin wallet” that is accessed most commonly through a smartphone or computer.

Benefits of Bitcoin

Now that we have seen a brief overview of what bitcoin is, we can better understand how this leading cryptocurrency provides potential benefits to its users.

User Autonomy

The primary draw of bitcoin for many users, and indeed one of the central tenets of cryptocurrencies more generally, is autonomy. Digital currencies allow users more autonomy over their own money than fiat currencies do, at least in theory. Users are able to control how they spend their money without dealing with an intermediary authority like a bank or government.

Discretion

Bitcoin purchases are discrete. Unless a user voluntarily publishes his Bitcoin transactions, his purchases are never associated with his personal identity. much like cash-only purchases, and cannot easily be traced back to him. In fact, the anonymous bitcoin address that is generated for user purchases changes with each transaction. This is not to say that bitcoin transactions are truly anonymous or entirely untraceable, but they are much less readily linked to personal identity than some traditional forms of payment.

Peer-to-Peer Focus

The bitcoin payment system is purely peer-to-peer, meaning that users are able to send and receive payments to or from anyone on the network around the world without requiring approval from any external source or authority.

Elimination of Banking Fees

While it is considered standard among cryptocurrency exchanges to charge so called “maker” and “taker” fees, as well as occasional deposit and withdrawal fees, bitcoin users are not subject to the litany of traditional banking fees associated with fiat currencies. This means no account maintenance or minimum balance fees, no overdraft charges and no returned deposit fees, among many others.

Very Low Transaction Fees for International Payments

Standard wire transfers and foreign purchases typically involve fees and exchange costs. Since bitcoin transactions have no intermediary institutions or government involvement, the costs of transacting are kept very low. This can be a major advantage for travelers. Additionally, any transfer in bitcoins happens very quickly, eliminating the inconvenience

Mobile Payments

Like with many online payment systems, bitcoin users can pay for their coins anywhere they have Internet access. This means that purchasers never have to travel to a bank or a store to buy a product. However, unlike online payments made with U.S. bank accounts or credit cards, personal information is not necessary to complete any transaction.

Accessibility

Because users are able to send and receive bitcoins with only a smartphone or computer, bitcoin is theoretically available. to populations of users without access to traditional banking systems, credit cards and other methods of payment.

Bitcoin vs. Credit Card Transactions: What’s the Difference?

Most people have a credit card they can use to pay for things. But some also have bitcoin at their disposal. Which one should people use, and when, to maximize their assets?

KEY TAKEAWAYS

  • Bitcoin transactions seek to operate more like cash: exchanged person-to person without a financial intermediary.
  • Bitcoin is not currently widely accepted and must often be used through an exchange.
  • Credit card companies are widely accepted but charge fees.
  • They also offer fraud protection that Bitcoin does not.

Bitcoin Transactions

Satoshi Nakamoto, the inventor of bitcoin, titled his original white paper on the subject “A Peer-to-Peer Electronic Cash System.” This description touches on the core differences between bitcoin and credit card transactions.

Bitcoin payments are analogous to wire transfers or cash transactions, where payment is “pushed” directly from one party to another, without going through another financial institution. Payment processing is executed through a private network of computers, and each transaction is recorded in a blockchain, which is public. Bitcoin is based on peer to-peer technology and relies on the blockchain and the cryptography securing it, without any third-party oversight.

When making a bitcoin transaction, it is not necessary to provide personal identification, such as your name and address.

Credit Card Transactions

By contrast, credit card transactions entail the buyer effectively authorizing the seller to “pull” a payment from their account, passing through financial intermediaries in the process. For example, a typical Visa transaction involves four parties: the merchant, the acquirer (the financial institution that enables payments to the merchant), the issuer (the cardholder’s bank), and the individual cardholder.

Key Differences

Bitcoin transactions are made using and anonymous alphanumeric address, that changes with every transaction, and a private key. Payments can also be made on mobile devices by using quick response (QR) codes.

While credits cards are stored physically in a wallet, bitcoin transactions are sent to and from electronic wallets, which can be stored on your computer, smartphone, or in the cloud.

Bitcoin transactions are irreversible and can only be refunded by the receiving party-a key difference from credit card transactions that can be canceled. This means there are no charge-backs for merchants when taking payment via bitcoin. A charge-back is the demand by a credit-card provider for a retailer to cover the loss on a fraudulent or disputed transaction.

Bitcoin merchants also save on credit card fees that can range anywhere from 0.5% to 5%, plus a 20 to 30 cent flat fee for each transaction made. Bitcoin payments can be sent and received at a very low cost or none at all, as bitcoin fees are based on the amount of data sent.

For merchants, the advantages of receiving bitcoin are obvious. Payments made using the virtual currency save substantially on processing fees and eliminate the risk of charge-backs. For shoppers, the advantages of paying with bitcoin include greater simplicity in placing the transaction, user anonymity, no interruptions from intermediaries, and very low transaction fees. (For example, your account being frozen as a result of a fraud alert).

Credit cards offer important beneficial features, such as the ability to borrow money, protection against fraud, reward points, and vastly wider acceptance among merchants. While a few major retailers, including Overstock.com (OSTK) and Newegg, have started to accept bitcoin, most have yet to make it a payment option. However, using credit cards carries the risk of incurring late fees, interest charges, foreign transaction fees, and potentially adverse effects on your credit score.

Benefits and Risks of Trading Forex With Bitcoin

The forex market is the largest and most liquid market in the world. It’s a truly global currency market, open 24 hours a day, seven days a week, everywhere.

As if forex was not dynamic enough,cryptocurrencies like bitcoin have added a fascinating new dimension to currency trading. In recent years, many forex brokers have begun to accept bitcoins for currency trading, with some accepting a variety of other digital currencies as well.

Should you jump in and begin using your hard-mined bitcoins in the forex markets? Find out the risks and benefits first.

KEY TAKEAWAYS

  • The forex market is dedicated to trading in the world’s currencies.
  • Many forex brokers now accept bitcoin and other cryptocurrencies. Bitcoin trades benefit from the anonymity and decentralized valuation system the currency represents.
  • They add a new layer of risk to forex trading, exacerbated by the extreme volatility of crypto-currencies.

A Standard Forex Trade

Before you consider whether to trade forex using bitcoin, it’s helpful to understand how a conventional forex trade works..

A forex trade is simply an exchange of one currency for another at its current rate. Unlike tourists who exchange their home currency for local spending money, forex traders are trying to make money off the continual fluctuations in the real value of one currency against another.

Trading a ‘Pair’

Imagine you are an American trader betting that the British pound will lose value compared to the U.S. dollar. This is called trading on the British pound/U.S. dollar currency pair (GBP/USD).

You deposit $100 with a forex broker. Assuming the rate of $1 = £0.5, you will receive £50 for your $100. If the GBP/USD rate changes to 0.45, you close the position to 50/0.45 $111.11. That is, you make an 11.11% profit over your initial $100 deposit.

Most forex trading is conducted in a decentralized fashion via over-the-counter markets. However, the fact that the forex market is decentralized and that bitcoin is considered to be a decentralized digital currency does not mean that the two are equivalent.

The Impact of Decentralization

The key distinction is that, though forex exchanges might be decentralized, the currencies themselves are backed by central banks in the countries that issue them. It’s the job of those banks to stabilize the value of their currencies and keep them stable. Bitcoin and most other cryptocurrencies do not have that support.

A Forex Trade Using Bitcoin

Now consider an example of a forex trade using bitcoin. First, you open a forex trading account with a broker who accepts bitcoins. These include Ava Trade, ¹eToro, and LiteForex.2 You then transfer 2 bitcoins from your digital wallet to the forex broker’s digital wallet.

If you want to trade using bitcoin, use only a locally regulated forex brokerage. And avoid using leverage until you know what you’re doing.

Assuming the current bitcoin to U.S. dollar rate is 1 bitcoin = $7,500, your deposit of 2 bitcoins is worth $15,000. Now, assume that you want to take a position in British pounds. If the exchange rate is £0.5 = $1, you will receive £7,500. After some time, the GBP/USD rate changes to 0.45, and you square off your position to get $1,666.65 in your trading account. You

have made a tidy 11.11% profit and you are ready to cash out.

The Bitcoin Effect

However, suppose that the bitcoin to U.S. dollar rate has changed during this period of time to 1 bitcoin = $8,500. When you withdraw your money in bitcoins, you receive ($16,666.65/$8,500) = 1.961 Bitcoins.

$5,332-$11,982

The range in value of a bitcoin over the year ending in July 2020.

Despite the fact that your bet on British pounds earned you an 11.11% profit (from $15,000 to $16,666.65), the fluctuation in the bitcoin to U.S. dollar rate means that you sustain a loss of 0.039 bitcoin or about-2.%. (Initial deposit of 2 bitcoins – 1.961 bitcoins = .039 bitcoin).

However, had the bitcoin to U.S. dollar exchange rate changed to 1 bitcoin = $7,000, you would realize a profit from both the forex trade and the bitcoin exchange. You would have received ($16,666.65/$7,000) = 2.381 bitcoins, a profit of 19.1%.

Increased Unpredictability

This hypothetical example illustrates the big reason to exercise caution when using digital currencies for forex trading. Even the most popular and widely used cryptocurrency, the bitcoin, is highly volatile compared to most traditional currencies.

In the year ending July 24, 2020, the value of a bitcoin ranged from $5,532 to $11,982.

This unpredictability means that the risks associated with trading forex using bitcoin are that much greater.

Beyond the exchange rate fluctuations impacting profit and loss, there are other benefits and risks to consider before trading forex with bitcoin.

Benefits of Trading Forex With Bitcoin

  1. Decentralized Valuations: A major advantage of trading forex with the bitcoin is that the bitcoin is not tied to a central bank. Digital currencies are free from central geopolitical influence and from macroeconomic issues like country specific inflation or interest rates.
  2. High Leverage: Many forex brokers offer leverage for bitcoin trades. Experienced traders can use this to their benefit. However, such high margins should also be approached with great caution as they magnify the potential for losses.
  3. Low Deposit Amount: A trader can start with as little as $25 with some bitcoin forex trading firms. A few forex trading firms have even offered promotions like a matching deposit amount. Traders should check that the broker is legitimate and appropriately regulated.
  4. Low Cost of Trading: Most forex brokers that accept cryptocurrency are keeping brokerage costs very low to attract new clients.
  5. Security: You don’t need to reveal your bank account or credit card details to make a bitcoin transaction. This is a big advantage in terms of cost and financial security.
  6. No Global Boundaries: Bitcoin transactions have no global boundaries. A trader based in South Africa can trade forex through a broker based in the United Kingdom. Regulatory challenges may remain a concern, but if both traders and brokers are willing to transact, there are no geographical boundaries.

Risks of Trading Forex with Bitcoin

  1. Different Exchange Rates: Bitcoin trades on multiple exchanges and exchange rates vary. Traders must ensure they understand which bitcoin exchange rates the forex broker will be using.
  2. U.S. Dollar Rate Risk: While receiving bitcoin deposits from clients, almost all brokers instantly sell the bitcoins and hold the amount in U.S. dollars. Even if a trader does not take a forex trade position immediately after the deposit, he or she is still exposed to the bitcoin-to U.S. dollar rate risk from deposit to withdrawal.
  3. Danger of Volatility: Historically, bitcoin prices have exhibited high volatility. In the absence of regulations, volatility can be used by unregulated brokers to their advantage and a trader’s disadvantage. For example, assume the intraday bitcoin rate fluctuates from $5,000 to $5,300 U.S. dollars per bitcoin. For an incoming deposit of 2 bitcoins, the unregulated broker may apply the lowest rates to credit the trader $10,000 (2 bitcoins * $5,000 = $10,000). However, once the trader is ready to make a withdrawal, the broker may use the lowest exchange rate. Instead of the original 2 bitcoins deposited, the trader receives only 1.88679 bitcoins ($10,000/$5,300 = 1.88679 bitcoins). The unregulated broker may be exchanging bitcoins and dollars at, say, $5,150, and pocketing the difference at the expense of the client.
  4. Security Risks Inherent to Bitcoin: Deposited bitcoins are prone to theft by hacking, even from a broker’s digital wallet. To reduce this risk, look for a broker who has insurance protection against theft.
  5. Risk of Leverage: Using leverage is risky for new traders who may not understand the exposure. This risk is not unique to cryptocurrency forex trading and comes into play in traditional forex transactions as well.
  6. Asset Class Mixing: Cryptocurrency is a different asset class altogether and has its own valuation mechanism. Trading forex with bitcoins essentially introduces a new intermediate currency which can impact profit and loss in unexpected ways. Any money that is not locked down in a trader’s base currency is a risk.

The Bottom Line

Although cryptocurrencies like bitcoin are gaining popularity, there are still many associated risks. In forex trading, dealing in a decentralized currency that offers qlobal transactions with no fees is an advantage. But the tradeoff is essentially adding a third currency to what was a trading pair.

Traders who want to take on that risk should use only a locally regulated forex brokerage.

Investing in Bitcoin IRAS: Reading Into the Pros and Cons

Given its volatile price swings, bitcoin might not be an ideal investment for retirement. Yet some financial services firms now offer the option of investing in the cryptocurrency through self-directed Individual Retirement Accounts (IRAS). Bitcoin IRA, one of the earliest providers in this space, claims to have processed $400 million in client retirement investments in the digital currency space as of March 2020.¹

Below, we’ll look at some of the pros and cons of investing in a Bitcoin IRA. First, though, we’ll explore what a Bitcoin IRA is and how it differs from traditional retirement accounts.

KEY TAKEAWAYS

  • A Bitcoin IRA is an IRA with bitcoin or other cryptocurrencies in its portfolio.
  • To the IRS, bitcoins are considered and are taxed as property.
  • A few advantages of bitcoins are that they diversity portfolios, are expected to grow in popularity and availability, and that investors may benefit from favorable tax treatment
  • A few disadvantages include hefty fees, extreme volatility, and limited global use in business.

What Are Bitcoin IRAs?

There is not a specific Internal Revenue Service (IRS) account designed for cryptocurrencies. Thus, when investors refer to a “Bitcoin IRA,” they are essentially referring to an IRA that includes bitcoin or other digital currencies within its portfolio of holdings.

Since 2014, the IRS has considered bitcoin and other cryptocurrencies in retirement accounts as property, meaning coins are taxed in the same fashion as stocks and bonds.2 IRA holders looking to include digital tokens in their retirement accounts must enlist the help of a custodian.

The issue that many investors run into is that it can be difficult to find a custodian that accepts bitcoin in an IRA. Fortunately for those individuals committed to including bitcoin in their IRAS, self-directed IRAS (SDIRAS) more frequently allow for alternative assets like cryptocurrencies.

Recently, custodians and other companies designed to help investors include bitcoin in their IRAS have become increasingly popular. Some of these companies include BitIRA, Equity Trust, and Bitcoin IRA, one of the early leaders in the field.

Advantages and Disadvantages of Bitcoin IRAS

Advantages

Individuals may find that including bitcoin or altcoin holdings may add diversification to retirement portfolios. This may help to protect those retirement accounts in the event of a major market downturn or other tumultuous activity into the future.

Perhaps more than diversification, investors inclined to add bitcoin holdings to their IRAs likely believe that cryptocurrencies will continue to grow in popularity and accessibility into the future. With their long-term outlook, IRAs are an excellent vehicle for investments that hold major potential on the scale of decades. Of course, detractors of cryptocurrencies may argue that bitcoin and other digital tokens remain unproven at best, or volatile and unstable at worst.

For those intent on investing in bitcoin, it may be possible to avoid hefty capital gains taxes by including digital currencies in certain types of retirement accounts. However, there are other fees to consider as well, as we’ll see below.

Disadvantages

Bitcoin’s extreme volatility in recent years makes it a tough sell as a retirement investment for many. The leading cryptocurrency routinely experiences significant price fluctuations; following a record price of over $16,000 per bitcoin in December 2017, the price plummeted. Bitcoin recovered somewhat in 2019, but as of June 2020, it remains priced at almost half of that record value.3

Worse, pessimists would likely argue that the hype surrounding bitcoin and digital currencies as a revolutionary new form of currency has so far proven to be dramatically exaggerated. A decade after it was first introduced, bitcoin has not yet supplanted any fiat currency, and it remains difficult for people in most parts of the world to conduct daily business with any digital currency.

Another key disadvantage of including bitcoin in an IRA is the fees. Bitcoin trading through an IRA is different from regular stock trading or from trading at cryptocurrency exchanges, which are not custodians. The potential tax benefits of trading bitcoin through a self-directed IRA account come with their own set of challenges. The most important of these is the expense of added fees and risk. Because firms offering self-directed IRA services are not bound by broker fiduciary duties, investors are on the hook if they do not assess risks associated with crypto markets.

Fees for bitcoin trading take on various forms during the investment process, from initial setup fees to custody and trading fees to annual maintenance fees. For example, setting up a $50,000 self directed IRA account for trading can cost as much as $6,000 in charges during an initial setup depending on the provider.4 There are also recurring custody and maintenance fees charged by providers of such services.

Finally, each cryptocurrency trade also incurs its own set of fees from the service provider’s trading partner and custodian. A typical provider may charge 3.5% per transaction for each purchase and 1% or a flat fee for each sale. Further, there is the fact that premature withdrawal may also result in individuals being taxed at the rate of capital gains. Cumulatively, those fees could negate the tax advantages offered by IRA accounts.

Special Considerations

Bitcoin’s unique requirements, such as security and custody, have bumped-up fees for services offered through IRA accounts. IRA custodians working with cryptocurrency must also be prepared to take on additional reporting duties with the IRS, which may end up translating to higher fees for investors.

Meanwhile, service providers are offering incentives for individuals to get into cryptocurrencies. Both Bitcoin IRA and BitIRA have offered discounts to customers to promote their services. Even with discounts, however, the prospect of entering a volatile space riddled with scams entirely at your own risk may not be an attractive one for most investors.

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