For individual users, there are both benefits and drawbacks in Bitcoin, depending on the payment situation. The benefits mainly relate to anonymity/integrity, convenience, rapidity and costs. The drawbacks mainly relate to the lack of any kind of protection for users. In certain situations the benefits can outweigh the drawbacks, and vice versa in other situations. Normally, the benefits should weigh heavier in situations in which there are no simple, cost-efficient traditional payment services.
Bitcoin Protects user Identity
The stated purpose of Bitcoin is to enable anonymous payments online and make them independent of governments, banks and other institutions. So, for users, the benefit of Bitcoin is that the network in which payments are mediated is global, and that certain payments that were not previously made for integrity reasons can now be made, both locally and globally.
If a payment on a website is reduced to the push of a button instead of requiring entering a volume of payment information such as card numbers, etc. the time(cost) of the paying party for a payment is reduced. The risk of fraud can also be perceived as lower unless card numbers or account numbers need to be disclosed to the recipient. Personal integrity can then also be perceived as higher.
A virtual currency can also allow users to make payments to new groups of recipients that are otherwise hard to reach, especially for payments for which the sender and recipient are in different countries. For some cross-border payments of this kind, Bitcoin can also prove a much cheaper and/or convenient alternative to more traditional payment services.
Bitcoin is Not Regulated by any National Legislation
There is no central Bitcoin issuer because the value units are created automatically in the network. Bitcoin thus does not come under any national legislation, neither is there a body to which any claims can be directed. The payments are also anonymous and as a rule it is not possible to show that a payment was made to a certain recipient.
The exception is if the parties involved know each other’s identities and it is possible to demonstrate who owns a certain wallet. Individual users thus only have a narrow possibility of asserting their rights in the event of a payment going wrong.
A Bitcoin payment differs from a payment in Swedish kronor from a consumer protection perspective due to this very factor – i.e. that the Bitcoin payment is mediated via a global, decentralised network outside of the financial sector. The regulations governing normal payment mediation, such as the Payment Services Act, are not applicable, so neither do consumers have the same protection as in e.g. credit transfers or card payments. In other words, it might be more risky for the paying party to make payments using Bitcoin than using traditional payment services.
Sharp Fluctuations in the Bitcoin Exchange Rate
Bitcoin does not represent a claim on another party; rather, its value consists entirely of an expectation that it can be used in future transactions. The value is thus highly sensitive to changes in such expectations.
Depending on the point in time at which somebody buys or receives Bitcoin, major exchange rate gains or losses can be made. Whether this is bad or not depends on the purpose of holding Bitcoins. If it is purely for transaction purposes, the exchange rate risk is considered to be negative because it makes the payment more risky; that is, the sender and recipient of the payment find it more difficult to set prices in BTC. This is perceived as an increased transaction cost.
For the Bitcoin holder, there is also a risk of losing value, either by fraud or accident. This is because the wallet and encryption keys are stored in some type of medium, such as on a hard drive. Should the hard drive be destroyed for some reason, the information would also be lost and hence so too access to the Bitcoin registered in the wallet. Through hacking, an external party can also access the value by initiating a payment to another wallet he controls.
Fraud has occurred, the primary example being that which happened to exchange company Mt Gox, in which several hundred thousand Bitcoins were lost.
In this way, Bitcoins are more like cash than funds in bank accounts. If one loses or inadvertently destroys cash, its monetary value is lost. It can also be stolen. Funds in banks accounts are more protected. If the bank acts negligibly, it is liable to pay compensation. If the customer acts negligibly there is a statutory limit to his liability to pay compensation, and if the bank goes bankrupt there is a state deposit guarantee scheme that protects funds in accounts up to a value equalling EUR 100,000.
This short video will show you the main benefits of Bitcoin.