By David Yerger

As with most things in life, Bitcoin (BTC) isn’t all-good or all-bad, although I think its pros significantly outweigh its cons.

Sure, it's not the only digital currency out there — there is Ethereum (ETH), Litecoin (LTC), and Bitcoin Cash (BCH) just to name a few. But when it comes to the cryptocurrency market, Bitcoin is the original network and token that started the crypto movement, is still the go-to choice for many, and should really be researched first when going down the rabbit hole of learning about crypto.

This list of pros and cons is not meant to be exhaustive, nor is it meant to be investment advice. I hope it will serve as a primer if you might consider investing in the broader crypto market via a fund or other managed strategy, or perhaps you might buy or sell Bitcoin yourself at some point.

Bitcoin Pros

Bitcoin has a combination of benefits that are totally unique, which is why [not investment advice] I recommend buying at least a small amount or setting up a small recurring buy as soon as you feel comfortable about the investment/savings method during your research.

Understanding Bitcoin intimately can take months and even years, but understanding it’s basic properties that give it value can take days or weeks. Don’t wait until your an expert to make your first buy. Buy when you have that first light bulb moment, and then continue to learn. Perhaps you’ll increase your buys in the future as you gain confidence in the network, especially if the bitcoin token price goes on a steep discount and you understand firmly the fundamental value proposition.

When people ask me why they should buy Bitcoin (i.e. what is the fundamental value proposition?), a few points come to mind. The points below don’t have anything to do with it’s price going up in the future, but could be factors that increase demand for bitcoin tokens which could theoretically lead to price going up.

Strong censorship resistance

As a distributed peer-to-peer network, Bitcoin is, by its very nature, designed to be resistant to censorship and financially inclusive.

This means that anyone, anywhere with electricity and access to the Internet can download Bitcoin for free and run an open-source, peer-to-peer monetary network.

The Bitcoin network is oblivious to the color of my skin, the amount of money my family has, or my position in society.

This is in stark contrast to the fiat banking system, where states require banks and other gatekeepers of money transmission to report and prevent outlawed uses of monetary goods.

Good Durability

Does your money deteriorate and how easily can it be moved across time?

Bitcoin is not perishable and cannot be destroyed as the Bitcoin blockchain ledger is just computer code.

While the Bitcoin blockchain will always show that your bitcoin tokens exist at your wallet address, the ability to access them can be lost if you lose the private key to your wallet.

BTC, having no issuing authority, may be considered durable so long as the network that secures them remains in place.

It’s too early to draw a strong conclusion on Bitcoin’s durability, but it seems to have a remarkable degree of anti-fragility.

Highly Verifiable

Decentralized and Distributed are technically two different things. The basic gist is that no one person or entity can change Bitcoin’s network rules or monetary policy.

Distribution of the open-source code and the ledger of truth (i.e., longest blockchain) effectively moves the function of transactional banking and ledger keeping to a distributed computer network.

There is no central bank to decide monetary policy because all computers on the distributed network de facto agree to the monetary rules by simply running Bitcoin’s open-source code.

This is a massive benefit since computers and code aren’t subject to the same whims of folly and emotion that humans are. Math, a fundamental building block, created the software, network, encryption algorithm, blockchain, monetary policy (issuance/block reward), and record of supply. All these are verifiable and public.

While difficult to counterfeit, fiat currencies and gold are not immune from sophisticated criminals duping nation-states and their citizens. Bitcoin, on the other hand, can be verified with absolute mathematical certainty and is nearly impossible to counterfeit.

Excellent Divisibility

BTC can be divided down to a hundred millionth of a bitcoin and transmitted at such infinitesimal amounts (network fees can, however, make transmission of tiny amounts uneconomic). The lightning network is an idea that could enable fast and cheap transactions using a second layer on top of the Bitcoin blockchain.

Fiat currencies are typically divisible down to pocket change, which has little purchasing power, making fiat divisible enough in practice.

Gold, while physically divisible, becomes difficult to use when divided into small enough quantities that it could be useful for lower-value, day-to-day trade.

Absolute Scarcity

The free market thrives on supply and demand. Bitcoin’s most distinguishing attribute from fiat currencies and gold is its predetermined, hard-coded limited maximum supply. This amount can’t be added to by humans (unlike the USD or gold).

Bitcoin’s future supply inflation schedule is also hard-coded and publicly verifiable, which is great if you’re seeking protection from the inflation of another currency.

New supply inflation for Bitcoin comes from the mining reward that is granted to the winning miner at the verification of each block (roughly every 10 minutes).

The amount of the mining reward (and therefore supply inflation) is cut in half every 210,000 blocks (or roughly every four years).

Bitcoin’s current supply inflation is ~1.75%. Compare that with 25% of the total supply of all US dollars being created in 2020 alone. Bitcoin’s supply inflation is also lower than the constantly changing and historically flawed US Consumer Price Index, which has been above 2% for years. Real consumer price inflation in the US is likely well over 10%.

Sometimes it’s most helpful to just see the statistics visually. Below is Bitcoin’s supply inflation rate, CPI 12-month percentage change (not seasonally adjusted), and broad M2 supply of US dollars.

Bitcoin supply inflation rate, 7 day moving average

US M2 Money Supply, Monthly, Seasonally Adjusted. M2 includes M1 plus savings deposits, including money market accounts

Portability and Self-Custody

What is the density of value and the ease with which it can be moved across space?

Using Bitcoin can be much faster and cheaper than traditional banking and international money transfer services. If you do a lot of large payments or business internationally, this may be the top Bitcoin pro for you.

Like traditional currencies, Bitcoin allows you to self-custody. This means you can hold it yourself, and you don’t need a bank to store your Bitcoin.

While the following isn’t an exhaustive list, the keys to your Bitcoin could be held in a hardware cold wallet (something like a USB thumb drive that you could put in your pocket), a mobile phone wallet, a personal computer desktop wallet, a personal Bitcoin node, written on a piece of paper, or even just remembered in your “brain wallet.”

Good Fungibility

Fungibility means that one specimen of the good should be interchangeable with another of equal quantity. BTC are fully fungible at the network level, meaning that every Bitcoin, when transmitted, is treated the same on the Bitcoin network.

However, because BTC is traceable on the blockchain, some BTC may become tainted by its use in illicit trade, and merchants or exchanges may be compelled not to accept such tainted bitcoins. Despite this, there is no alternative pricing for “tainted bitcoins” so it remains highly fungible. All that said, without improvements to the privacy and anonymity of Bitcoin’s network protocol, BTC cannot be considered as fungible as gold which is not tied to any public ledger of prior transactions.

(Some) Established History

Although it hasn’t been around as long as banks, the Bitcoin network has been alive more than 10 years and has never gone down and does not have closed hours, always providing real-time access to global transactions. This makes it a great remittance method if you need to pay your employees after normal working hours.

You could think of it like an ATM that you can access straight from your iOS or other mobile device and send money in 10 minutes.

Unforgeable Costliness

This means money that is costly to create, due to either original cost (gold) or the improbability of its history (art), and that it is difficult to fake this costliness. Bitcoin’s proof-of-work ensures the cost to mine a Bitcoin is a near equivalent to how much it would cost to purchase one on an exchange.

Openly Programmable

Bitcoin is open-source. Its design is public. It is usable by anyone, anywhere, at any time. Developers can freely program applications on top of the Bitcoin protocol without having to ask anyone for permission.

“It is dynamic, upgradable, and extendable. It does not need throwing out and replacing with each new iteration, it will continuously improve.” - Neil Woodfine

Bitcoin Cons

Bitcoin does have some drawbacks, but as we look critically at a few of these issues, I think you’ll see that in total they do not come close to measuring up to Bitcoin’s positives, and no one item should prevent an investor from getting exposure for the first time.

Requires Internet Availability

Use of the Bitcoin network depends on Internet availability. With limited ways to access Bitcoin offline, this isn’t great if you live in an area with spotty Internet service or frequent power outages.

Varying Transaction Speeds and Fees

Transaction speeds and fees can vary widely. Differences in speed and fees are due to network congestion and the efficiency of Bitcoin mining.

Undetermined Regulatory Landscape

Bitcoin’s regulatory landscape, not unlike our entire financial ecosystem, is increasingly experiencing fluctuations. Unfortunately, Bitcoin regulation is still mostly undetermined.

Regulation changes could have a ripple effect that potentially makes it more difficult or less favorable to invest in Bitcoin.

With that said, an incredible amount of legislation globally regarding Bitcoin and crypto assets have already been proposed and accepted.

El Salvador adopting Bitcoin as legal tender is the most unique event to date. Much is still uncertain in the regulatory landscape going forward, but the tide is certainly moving in the direction of acceptance versus outlawing.

Immutable Transactions

Immutable transactions could easily be listed as a pro since merchants are protected from chargebacks on transactions, but we’ll discuss it as a con here since it can be both.

The finality to Bitcoin transactions means senders and receivers aren’t protected if Bitcoin transactions are inadvertently sent to the wrong address.

So, while I think it works well as a payment system overall, it has drawbacks.

Hacking Vulnerability

Organizations and individual users are vulnerable to having their computers, phones, email, files, or wallets hacked.

If you've ever had your bank account or PayPal account hijacked, you know how much of a pain it can be. When this happens, your credit card, debit card — heck, your entire digital life — is compromised.

You’ll want to make sure you have plans in place for securing your Bitcoin appropriately. Thankfully, there are many good solutions for storing and backing up your keys.

While individual wallets can be hacked through stolen credentials, the Bitcoin network itself has never been hacked and would be so costly to attack that hacking it is economically unfeasible. Bitcoin users know this. It’s just one reason why more and more people are entering the Bitcoin market.

Wrapping Up

These are just some of the pros and cons of Bitcoin that come to mind. I hope you’ve gleaned why I believe this virtual currency's pros greatly outweigh its cons. It does have its drawbacks, but it gives financial inclusion and property rights a whole new meaning.

Additional Notes

Bitcoin’s algorithms, cryptography, and other complexities can make it confusing. Blockchain technology, which is built on open-source code, is a totally new form of ledger keeping. In short, Bitcoin is revolutionary because a set of pre-existing technologies were assembled in a novel way such that the sum of the parts makes something truly incredible. A worthy comparison would be protocols such as TCP/IP, FTP, and HTTP, which make up the backbone of the Internet today. Think of it as a value transfer protocol that is native to the Internet. Because of its complexity, we at Redwood Digital Group are constantly learning about this space so we can better serve all our stakeholders and help others learn too.

Although cryptocurrency can be used for illicit activity, the overall impact of bitcoin and other cryptocurrencies on money laundering and other crimes is sparse in comparison to cash transactions. As of 2019, only $829 million in Bitcoin has been spent on the dark web (a mere 0.5% of all Bitcoin transactions.) Former acting director of the CIA Michael Morell says, “there is mounting evidence that illicit activity is flowing away from Bitcoin and toward anonymity-enhanced cryptocurrencies” such as Monero. According to Morell, Bitcoin’s publicly available and verifiable blockchain makes it ill-suited for criminal activity. “In fact, its transparent nature led one blockchain analytics expert to compare transactions on blockchain to having the ‘whole world’ be a witness to paying someone $2,000 in a dark alley. Based on our research, I have come to believe that if there was one financial ecosystem for bad actors to use that would maximize law enforcement’s chances of identifying them and their illicit activities, it would be blockchain.” Morell further observes that the “broad generalizations about the use of Bitcoin in illicit finance are significantly overstated.”

Bitcoin Pros and Cons (a Simplified List)