What Are The Real Threats To Bitcoin?
If you have been tracking the value of bitcoin and other cryptocurrencies for any amount of time (even just a couple of days), you will certainly have seen how volatile these can be. Are these large fluctuations just normal market movements or are they the reflection of more serious, fundamental threats to Bitcoin and cryptocurrencies in general?
These violent moves are two sides of the same coin. Cryptocurrencies (including Bitcoin) are still very new and therefore that there is a general lack of understanding for how this currencies and markets operate. As a result of this, there is a general lack of confidence in these markets and therefore in the same way that investors and traders can get very excited about a given currency by buying it up, they can also very fast (if not faster still), decide to dump the coin. All of this can results in very sharp moves up as well as down.
These factors don’t have much to do with the coin or currency per se, but rather with how new these markets are. The positive side of this is that a savvy investor with even just a basic understanding of cryptocurrencies can quickly get miles ahead of others and profit from this. Unsurprisingly, some early adopters and investors have made small (and large) fortunes from getting in early on cryptos.
So the obvious question is – why is this all happening now and why not keep using the existing forms of payment?
Over the last ten years, Bitcoin’s popularity (the “oldest” cryptocurrency) has increased significantly to the point that more and more businesses accept bitcoin as a valid form of payment, not just online but also off-line.
Why is this?
One of the main reasons is transaction fees. Because no banks nor governments have control over Bitcoin and cryptocurrencies, the transaction fees are significantly reduced.
What are cryptocurrencies?
Cryptocurrencies are basically codes that a group of users created together. Every transaction is collectively confirmed by a number of entities and therefore there is no specific individual or organization that controls the currency.
Younger people are becoming increasingly passionate about cryptocurrencies due to the lack of government involvement and anonymity. All transactions are done via keys with no names and identities associated with them.
More experienced traders and investors understand the many and deeper benefits arising from the lack of bank or government control on the currency. Just to name a couple (and perhaps the most obvious):
- Banks cannot print money at will and therefore cannot devalue the currency through inflation or currency devaluations
- Because there is no one central organization holding the currency, banks or governments cannot arbitrarily seize people’s funds as happened in Argentina and more recently in Cyprus.
So other than an initial phase of volatility, are there any real threats to bitcoin and cryptocurrency?
The main threats are the usual threats associated with technology including malware attacks, hackers, lost keys and passwords et cetera. Considering the heavy amounts of encryption in most currencies and in the blockchain, these are fairly remote threats but exist nevertheless. For them to materialize (and they do occasionally materialize, especially in the earlier phases of development), they would require large amounts of electric power and technology.
In a nutshell, there are threats to Bitcoin and cryptocurrencies but they are very different and more manageable compared to the threats associated with traditional currencies. Rather than the threat coming from banks and governments, the threats to cryptocurrencies are more akin to technological threats.
As cryptocurrencies become more and more understood, accepted and used we would expect the threats to be tackled just in the same way as most people tackle the threat of having a burglar break into their home by installing a secure door lock.