Bitcoin was the first cryptocurrency to be created and as with all new technologies there are some flaws to it.
These flaws can make bitcoin a dangerous investment to make for some. In this article, I’ll explore why bitcoin has flaws and why alternative cryptocurrencies may be a better fit for investment.
A trial in progress
As the first cryptocurrency, bitcoin is effectively a trial in progress. Bitcoin is an experiment that was developed on the back of a white paper rather than from a fully worked out master plan. While bitcoin can be developed and changed, the fundamental basics of bitcoin rule that certain processes must be followed. As a prototype it is yet to be seen whether these processes can last over the long term or whether flaws will occur. Some key flaws have already been demonstrated with bitcoin that we will explore here.
How money is created
Bitcoin has been designed so that new coins can be ‘mined’ at a predetermined and naturally accelerating speed. There is a cap of 21 million coins and over half have already been created, which essentially means that bitcoin will soon become a fixed money supply with no potential for further expansion or growth.
While the limited supply feature prevents abuse of power through bitcoin, it has also turned it into a speculative asset that does not increase in line with the number of people using it. Therefore, the more people who adopt the currency the more valuable it will become because the demand will increase faster than supply can.
As the value of bitcoin rises users want to keep it as an investment instead of spending, which inevitably results in inflation of prices. Newer cryptocurrencies have developed new ways to regulate coin creation that helps to avoid such speculative behaviours.
Bitcoin rewards speculators
As money can be ‘mined’ the bitcoin system is set up to reward speculators by allocating them to bitcoin holders. The early adopters who sold at the right time could have turned $5 into $19,000, but the result of this is that bitcoin has become difficult to use as a viable currency. The currency instead serves to benefit those who sit on the currency and wait for it to increase in value and prevalence. Newer cryptocurrencies have been designed so that they can work as a transactional currency and can actually be used to pay for services.
Bitcoin is less secure than currency
Another flaw of bitcoin is that it is less secure than other currencies. Bitcoin is protected by a ‘private key’ which is effectively a password. If this password is lost to someone else, then they can easily steal and spend your bitcoins.
As a result, the security of your bitcoin relies on the security of your computer and your password, which can make them vulnerable. For instance, a single alleged hack caused the loss of 650,000 bitcoins, but such a loss is untraceable, unaccountable and effectively unpoliced.
Those holding bitcoins are advised to move them to a hard drive placed in a physical safe, but this still relies on the hard drive continuing to function. In another case, a hard drive was sent to landfill before the bitcoins stored on it increased in value by over 1,000 per cent.
Bitcoin is an interesting trial cryptocurrency, but the fact that it is a trial means that it is vulnerable to abuse and flaws. With newer cryptocurrencies such as Ripple, Dash, Litecoin and Zcash, there are others that are less flawed and more secure. If you’re looking to raise funds to invest in cryptocurrency, then consider seeking the advice of an initial coin offering advisor to get the best guidance on which new cryptocurrency to embrace.