This October had been a memorable month for Bitcoin industry, the price of Bitcoin went up more than 30% due the increasing amount of investment from other big institutions especially financial institution like Amex, Visa (NYSE:V) and so on. However, investors should be aware of some drawbacks of the Bitcoin because of its bulid-in characteristics.
The privacy and anonymity Bitcoin provides can also cause a lot trouble, without the governance by a central authority there is no control over the market which means the price could fluctuate a lot. 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 6 months ago. At the end of year 2013, the price of one Bitcoin is $945, but right now the price for one Bitcoin is only around $450 even after a recent bullish market. Although, as market gets more mature it would be more stable but we can still expect larger volatility than regular currencies.
No Buyer Protection
There is other drawback because of the privacy and anonymity, there is zero buyer protection. A person who has sent Bitcoins cannot try to retrieve them without the recipient’s consent.
Built in Deflation
Since the total number of Bitcoins is capped at 21 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 reward early adopters. Since each Bitcoin will be valued higher with each passing day, the question of when to spend becomes important. This might cause spending surges which will cause the Bitcoin economy to fluctuate very rapidly, and unpredictably.
No Valuation Guarantee
Since there is no central authority governing Bitcoins, no one can guarantee its minimum valuation. If a large group of merchants decide to sell 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 blessing.
There is many other drawbacks of Bitcoin, like Bitcoin is not widely accepted right now, risk of technical flaws and so on. As the Bitcoin industry gets more advanced, those problems won’t be existed anymore.