Bitcoiners are very excited about bitcoin, so we tend to see the future world of bitcoin adoption through orange colored glasses. The enthusiasm gets even worse during a bull market, when vibes are high and it seems like hyperbitcoinzation is here. Million dollar bitcoin is just around the corner!
Bull market adrenaline can only last so long, and eventually, reality starts to set in. Normies still have no idea what the fuck bitcoin is, and it wouldn't matter if they did because bitcoin isn't ready for mass adoption yet.
Look, bitcoin isn't perfect. I've gone through the typical hype cycle of peak inflated expectations and the trough of disillusionment, then back again. These days, I try to be realistic about the challenges of bitcoin; challenges that lie ahead for the protocol itself, as well as challenges users will face as we move towards critical mass.
Some of the smartest minds in the world are volunteering their time to make sure bitcoin succeeds, so I am confident we can get there.
This article is about disadvantages from a user perspective. There certainly are technical challenges that are currently being worked on, as well as future technical challenges that will arise as more people adopt bitcoin. I am not technically savvy enough to explain these in detail, so I'll continue to learn and maybe write something in the future on the topic. For now, consider this an article aimed at newcoiners who are looking for some nuanced perspective about the challenges of using bitcoin.
5 Disadvantages To Buying, Saving, & Using Bitcoin
1. It Requires An Interest In Your Own Money
One of the most glaring challenges that bitcoin faces is not an issue with bitcoin itself, but an issue with the people who could benefit from owning bitcoin. The truth is, most people don't care about money, how it works, or how to leverage it.
84% of Americans have less than $100,000 saved for retirement. If you retire at 70, a hundred thousand dollars lasting twenty years is a stretch. Could you make it work? Sure, but it wouldn't be a dignified retirement. It's just shocking to me that the vast majority of Americans haven't given any serious thought to how they'll take care of themselves in old age.
Only 56% of Americans own stocks, which means a lot of people are just sitting in cash, yielding -2% to -8% in thanks to inflation.
What that says to me is that 50% to 80% of people just really don't care about their financial wellbeing as long as they can pay the bills and have a little bit of extra money for fun.
How exactly are we going to present the case to them that owning bitcoin is important? I just don't understand how that conversation would go because before you even get to the bitcoin part, you have to convince them that they should actually want to save and invest money.
I'm not sure exactly what the trigger would be for Americans to be more interested in money, but perhaps the global monetary revolution will not be US-centric. After all, it's been said many times that stable money is very much a Western Democracy phenomenon. Billions of people around the globe are experiencing double-digit inflation as a normal way of life. Perhaps it will be easier to make the case for bitcoin when you have personally seen your own, or your parents' life savings inflated away by government mismanagement of monetary policy.
- Lebanon: 214% inflation
- Turkey: 61% inflation
- Argentina: 55% inflation
- Nigeria: 16% inflation
- Brazil: 11% inflation
2. There Are Unfamiliar Risks To All Custody Options
As it stands, people don't have to think about money because their money is “safe” in the bank at all times. Of course, we know that fiat money is never safe from inflation, but in terms of it being theft resistant, our current banking system is spot on.
I put the money in the bank, and I know it's going to be there when I need it. I get FDIC insurance up to $250,000. I can buy everything I need with a credit card and get unlimited fraud protection from the credit card companies. I have access to ATMs everywhere, and Visa is accepted by everyone. I can get my income deposited and my bills paid automatically.
With bitcoin custody, the story is much different.
First, you have to get over the hump of realizing that there's no backstop. If you lose your bitcoin, you're screwed. You better do everything right because there's no insurance. There's no support email. There's no customer service. You better figure it out and do it right because you're in the driver's seat here.
Then, even if you do get comfortable with that idea, AND you learn how self custody works, now you have a ton of options to consider.
- single sig wallet with 12 or 24 words?
- write down the seed phrase on paper or metal?
- split the seed with Shamir Secret Sharing or use a single seed?
- where to store the seed for emergencies
- what about a multi-sig?
- 2-of-3 or 3-of-5?
- what's an xpub?
- should I do it myself for privacy or use a custodian for ease?
- what are the potential threat models of using a custodian?
The struggle is real. Even as a bitcoin-enthusiast for several years now, I still second guess myself, practice my setup, and continue to educate myself about how to properly secure and use bitcoin. It's a continual learning process.
What can we expect of normies who aren't going to spend their weeknights updating their wallet firmware?
Custody options will improve over time, so this is not a permanent problem. Eventually, it's likely that banks will offer bitcoin services, meaning banks will have full custody of your bitcoin. Some modern banks may even offer multi-sig or other advanced custody options as a service. We could even see bitcoin insurance issue as a 3rd party service, or as a bank-native service.
It's interesting to think about what the future of bitcoin custody could look like, but we're not there yet.
Risks of Exchange Custody
Most people who want to buy a little bitcoin “just in case” will end up leaving their bitcoin on exchanges, which is better than owning no bitcoin, but not ideal. The biggest risk of leaving your bitcoin on an exchange is that you are reliant on them for security and privacy. If the exchange is hacked (this has happened many times in the past), your funds are at risk of getting stolen and your private information is at risk of being exploited. The risk doesn't stop there though.
When your bitcoin is on an exchange, you can never be sure if it's being rehypothecated or not. That means even though your account says “0.5 bitcoin”, they may have lent out your bitcoin to someone else in order to earn yield on that bitcoin.
How can they do that? You probably signed something in the terms of service. The exchange has control of your bitcoin, and since you're not using it, they can lend it out for a fee. When you request your bitcoin back, they'll just give you someone else's bitcoin, playing hot potato… until there's a bitcoin bank run and everyone wants their coins back at the same time.
What could cause a bitcoin bank run?
One possible scenario could be that a high profile exchange becomes insolvent, files for bankruptcy, and it's discovered that they don't have the bitcoin they said they did. Everyone with bitcoin on exchanges would “wake up” simultaneously, attempt to withdraw their coins, and we'd find out who's swimming naked.
Furthermore, when exchanges own your bitcoin, they can tell you what to do with it. They can tell you how much you're allowed to take out, or where you can send it. If they don't like what you're doing, they can block the transaction. At this point, you don't really own bitcoin. You own a bitcoin IOU.
Let's also not forget that keeping your coins on an exchange also exposes your funds to all sorts of unknown risks, both present and future. It was recently discovered in a new disclosure from Coinbase, the most popular American crypto exchange that they will be able to access customer funds in the case of bankruptcy. As I understand it, this means that if Coinbase is irresponsible and their company goes bankrupt, they can use your funds to pay back investors who lent them money!
Risks of Self Custody & Collaborative Custody
Self custody of bitcoin is a strong choice for many people, but it's not without risk. Self custody means that you rely on yourself to make sure your bitcoin is stored properly. The benefits of self custody are clear: privacy, sovereignty, and low risk of confiscation.
One of the most common risk factors for bitcoiners who self custody their coins is the possibility that they will get exploited and lose their coins through theft. If you store your seed phrase in an easily accessible online document in cloud storage or unencrypted on a local device, malware or an individual attacker could find that document and sweep your coins.
Getting rekt via self-own is also common. Even something simple as writing a single seed word incorrectly could make your bitcoin funds inaccessible. I did this once with a practice wallet. Luckily there were no funds on it, but it was an early lesson that swapping “clump” and “dump” on your word list can be catastrophic. (I never figured out which word was incorrect)
Once you get into more complicated setups like using your own node, or multisig quorums, then you increase the possibility of doing something wrong, or even doing everything right, but then leaving your coins so long that you forget some details. This happened to me as well. I created a multisig, then came back six months later, and couldn't find the money in my wallet. It took me a couple of days to figure out what was wrong, but what if I had waited six years? It was another good lesson that I had to practice my setup every couple of months to refresh my memory.
So, there is certainly a number of real risks involved with self custody, but you can mitigate those risks with lots of education and practice.
One popular compromise between self custody and using a full custodian is to do what's called “collaborative custody”. This is usually in the form of a 2-of-3 or 3-of-5 multisig, where a custodian holds one key, and you hold the rest of the keys as a hardware wallet or mobile wallet keys.
This is a great option for people who are concerned about catastrophic loss due to user error. With a 2/3 setup, you can screw up one key and still recover your funds with your other key, plus the custodian key. With a 3 of 5, you can screw up two keys and you still have two more to save your ass, which you can then combine with your custodian key to unlock your funds.
Plus, the custodian often serves as a de facto educator and mentor to help you get done what needs to get done. Bitcoin is very much still in the educational phase, and these companies realize that to get and retain customers, they are going to need to make sure they feel supported.
The big risk with custodians is that you lose privacy to these companies. If their customer information isn't stored securely, your name, address, contact information, and the size of your stack could be compromised. These custodians often then have full view of how much bitcoin you own, which could make you a target for exploitation if you are an attractive enough target.
3. There's No Central Support Line
The trouble with technology is that you can't learn everything about everything. You can't be an expert at fixing your own car AND fixing your own phone AND repairing your house, AND so on. With practice and dedication over the course of years, you can become an expert at one or two things, but that's about it.
We can't expect the average person to be able to troubleshoot their bitcoin setup constantly. This means most people are going to need help. A large portion of people, like my mom and dad, will simply not even try. They will need a bitcoin bank.
There's a middle group of people, however, who will understand the benefits of holding their own keys, but need help in the learning process and need an outlet to troubleshoot. Right now, there are only a couple of companies attempting to do this, and they are still very much in the early stages, and you still have to seek them out yourself.
As with most “disadvantages” to bitcoin, there are pros and cons to consider. Here, the fact that there's no central point of support also means there are no central points of failure. It's not like you get much better service with centralized companies.
Just look what a MASSIVE pain in the ass to contact Comcast or Kaiser or any one of these other monopoly organizations. The reason Comcast sucks is that they have no incentive to be better. Maybe if bitcoin helps services start cropping up as support for newbie bitcoin holders, Bitcoin could potentially have amazing customer service!
4. Tax Laws Are Not Optimized For For Spending Bitcoin
Buying and holding bitcoin is simple, and spending bitcoin is as easy as scanning a QR code. The problem with spending bitcoin isn't that it's hard to do, it's that you need to track and report a bunch of shit.
Every single time you spend bitcoin it is a taxable event. If you spend at a profit, you owe taxes. If you spend at a loss, it's a write-off. The only way around this would be to use diligent coin control and only ever spend coins that were purchased at a higher value, continually selling them at a loss as you spend. I don't think it's illegal to pay more taxes than you owe, so I'm guessing that if you don't take those write-offs it's not an issue (Disclaimer: I'm not a CPA so I have no idea).
A simplified way of living on a bitcoin standard could simply be to have the majority of your wealth in bitcoin, and sell in “chunks”, like of like dollar cost averaging out of bitcoin. Rather than exchanging bitcoin for coffee every day, you'd sell bitcoin at the beginning of the month, then use dollars to buy coffee throughout the month. I think lots of people use this strategy.
It kind of defeats the purpose of bitcoin being peer to peer though, so many people are striving to get to a bitcoin circular economy where stores accept bitcoin, so you can spend your bitcoin everywhere. Considering Strike's recent partnership with Shopify, that seems to be well on its way. I have to wonder if Strike tracks your taxes for you though.
Regardless, even if Walmart accepts bitcoin, you still gotta pay taxes on the capital gains.
That means any bitcoin wallet you use is going to need some robust tax calculation software, or you're going to have to take meticulous notes on what you bought, when, and what was the price of bitcoin when it happened. If you are using multiple wallets, it gets complicated.
5. The Future Is Still Uncertain
I've done thousands of hours of research into bitcoin, so I am confident that I made the right decision to store a large portion of my wealth in it. I know how bitcoin works, and I think the bitcoiners are right about the future of money. That is just my opinion though. Is bitcoin the future of money, or will bitcoin fail? We'll only find out what happens as time unfolds and the truth is slowly revealed.
I'm also an experienced investor and have invested an appropriate amount based on my risk tolerance. I've seen investments I own go way up, and I've even seen some investments to zero. I understand the risks involved.
For many people, this is not the case. They buy bitcoin for the dollar price gains and freak out at any price movements.
If they buy a little bit of bitcoin and it goes up, they want to sell it at 1.5x. They made a few hundred bucks and want to upgrade their phone. If they buy a little bitcoin and it goes down 30% after a week, they figure they should cut their losses, or worse, they wait out the bear market and sell once they are at back even. Imagine buying at $15k, riding it down to $3k, then selling back up at $15k, only to see it rise up to $69k!
For a lot of folks, it just KILLS them to invest in something with uncertainty and watch it go down. These are the people who capitulate during selloffs.
Though we like to meme that Bitcoin is designed to pump forever, it may not. Or it may be down for a long time. Nobody knows for sure, and this is a disadvantage to bitcoin right now. Nobody can say that bitcoin is a guaranteed safe way to store money. The future is still uncertain, so to own bitcoin, especially to own a significant amount of your wealth in bitcoin, means you need to be able to accept a certain amount of risk.
What About The Volatility?
Is the volatility of bitcoin a disadvantage? Personally, I don't see it as a disadvantage, although it does seem to get a lot of negative press.
The benefit of volatility is that it attracts liquidity to the market, meaning that a lot of traders are willing to come and buy or sell bitcoin as they try to make a profit. Although I'm not a trader, I can appreciate that traders make it so that I can buy or sell bitcoin at any time of day and get my order filled.
Volatility also means that there are lots of opportunities to buy the dip during a bull run. Plus, the volatility tends to work out pretty well to the upside as the price of bitcoin rockets 10x over the course of a couple of months.
It's also important to remember that stability can't be expected at this point. First off, the dollar and other fiat currencies are stable because they are manipulated. Central banks make human decisions about the money supply in order to create stable prices. This is not necessarily a natural way that money works.
Gold was and is stable, but it also has 5,000 years of history as a money. Bitcoin is 13 years old by comparison. What else would you expect from a brand new monetary asset that is being slowly distributed to 8 billion people around the world? I don't think a stable price was ever in the cards for bitcoin.
As the market cap of bitcoin increases and so do liquid markets, we may see more stability regarding short term price fluctuations, but in a 24/7/365 market with no backstops, no off switch, and total permissionless access to every single person in the world, Bitcoin's volatility may be here to stay.
Lastly, bitcoin isn't the only volatile asset on the block lately, so it's odd that it is the only one getting flack for it. Just last week Netflix was down 35% in a single day, and it's down 70% off its highs from a few months ago. Other behemoth companies, Facebook and Amazon, have both experienced double-digit drops in stock price in a single day, and we've seen insane price action in oil, nickel, and lumber over the past couple of years. Price volatility is not limited to bitcoin these days.
What About The Energy Consumption?
The consumption of energy is a requirement for bitcoin to work at its core level. The consumption of real-world resources to run the necessary computations to create blocks and mine for bitcoin is what links the physical to the digital world. Without the link from real resources to digital commodities, it would be much easier to attack bitcoin's hard limit of 21 million coins.
The consumption of energy for block creation is also known as proof-of-work, and it is a non-negotiable aspect of bitcoin.
Energy consumption through PoW is also what makes bitcoin distribution fair. Bitcoin is energy agnostic, meaning that it doesn't matter if you use natural gas, solar, wind, coal, hydro, geothermal, or nuclear power to run your ASIC. Whatever local energy is cheap and abundant can be used to mine bitcoin.
Though the geography of every nation is different, most have some kind of abundant energy resource available. They may have expansive deserts with gigantic solar power generation capabilities, or snowy mountains and flowing rivers with endless hydropower available. I heard on a podcast that Quebec alone has enough hydropower to power the Bitcoin network 3x over and Texas has enough natural gas to do something similar.
Plus, the fact that the bitcoin commodity can be brought to market without physical transportation means that stranded energy resources in communities can also benefit from bitcoin mining.
The requirement for energy consumption via proof of work also means that established entities with more capital or more equipment don't have an advantage over new entrants to the network. In Bitcoin, more coins does not equate to more voting power. Miners are rewarded with bitcoin for securing the network, but they are not given more control if they choose to accumulate those bitcoin. They must fairly compete for each new block, every single time.
The fact that bitcoin network consumes energy is a benefit to the network, not a disadvantage.
What About It Being Slow & Expensive?
Altcoiners love to say that bitcoin is “old tech” and that it's slow and expensive. What they fail to mention is that every alternative method of consensus comes with tradeoffs. There's a reason that bitcoin is “slow and expensive”.
Bitcoin has a target of creating one block every ten minutes because it requires a global network of computers to agree on what is the “true” order of blocks. Global information transfer is not instant, so there has to be some way to make sure that transactions are ordered in a fair way. It can't be the case that “whoever is fastest, wins”, because that would centralize miners in one geographic area. What is “fast”, if there's no single point of bitcoin generation?
A ten minute block time allows for transactions to pool in a queue, and then market fees are the deciding factor of which transactions are included in the next block. “Faster bitcoin” is not “better bitcoin”
So what about those fees? Is it expensive to use bitcoin? Sometimes!
The more people who try to put transactions through bitcoin, the more congested the network becomes, and transactions are typically chosen by their fee rate. Miners are incentivized to make more money by choosing the transactions that have the highest fees first.
When blocks are full, users can bid up the price to get their transactions approved faster. If there isn't a lot of competition for the next block, users can bid low, and still get into the next block. This is how the free market of bitcoin transaction fees works. A free market is a fair market.
The inclusion of fees also prevents spam. If it was free to create transaction data and send it to the network, I could send gigabytes of data at zero cost to me and grind the network to a halt. This has happened several times on other networks with “cheap transactions”. Spam has happened on the bitcoin network before, but it's self-regulating. Spammers can only spend so much before they run out of money, so they are disincentivized to even start.
With regards to bitcoin versus other payment networks like Visa or PayPal, you must consider that these are not “final settlement” networks. When you send money to someone on PayPal or charge your Visa card, they are not receiving physical cash. The actual money hasn't been transferred to them. It's more of an “IOU”, tracked by a company database. The fact that bitcoin does global final settlement in 60 minutes (6 confirmations of 10-minute blocks) is actually extremely fast. Try sending cash to someone in a different country. It takes days or even weeks!
What About The Other FUD?
The reason I wanted to write a whole article about what I perceive to be the disadvantages of bitcoin is that I want to show that I'm attempting to look at all angles of bitcoin, not just the positive side. I'll always present the facts and present ideas as I see them. Are there some issues with bitcoin that need to be considered and worked out? Yes. Are there some negative headlines out there worth addressing? Sure.
That doesn't mean you should consider all types of FUD in the bitcoin space. A lot of the negative shit you hear about bitcoin is written by people who simply haven't done their homework and are trying to get clicks by writing salacious headlines. For example, the NY Post recently published an article titled Bitcoin fans are psychopaths who don’t care about anyone, study shows. The article cited a study of just 566 people about “crypto”, and the study's lead author described anyone interested in investing as having “dark tetrad traits” with “evil qualities“.
Of course, bitcoiners loved how idiotic the article was, and NY Post got what they wanted, clicks and shares.
Just a few weeks later, The Verge published an article titled “Crypto Is Winning, And Bitcoin Diehards Are Furious About It”, where the writer complained that she didn't like the art and that NFT parties were more fun than Bitcoin events. Of course, it's no coincidence that the title image has a bitcoiner in a red hat and mentions January 6th within the first few paragraphs.
The article then mentions every negative thing she could find about the conference, ignoring the fact that there were 30,000 average people at the conference celebrating bitcoin for some reason.
These types of articles will continue to be pumped out for clicks, and there's nothing we can do about it. My advice is to do your own research, make up your own mind, and even if you end up hating bitcoin by the end you may want to have a little stash for yourself just in case.
So what do you think are the main disadvantages of bitcoin? Have I overlooked something in my own list? Your comments help me think of ideas of articles to write for the site so I can help newcoiners figure out bitcoin for themselves!