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10 scary facts about Bitcoin

Colin Neagle | June 10, 2013
Before diving into Bitcoin, make sure you know the facts.

2. If Bitcoin fails, it has no safety net.
Another much-discussed attribute of Bitcoin is that it doesn't rely on a governing body, like the U.S. dollar. That prevents it from being subjected to inflation and transfer fees for international purchases.

However, as Eichenwald discussed, the support of a governing body comes in handy when someone needs to bear the brunt of a drop in value.

"Bitcoin fans admit that the currency has value only because the users in the Bitcoin market think it does but say that that is no different than in the markets for dollars, yen, and other national currencies. And that is absurd," Eichenwald wrote. "There is no country, no national bank, nothing standing behind the Bitcoin valuations other than other Bitcoin investors. If the dollar falls, the Fed will jump in. And if the Bitcoin falls? Well, personal bankruptcies will probably go up. "

He's not the only one who has warned of this. Economist Paul Krugman tackled Bitcoin in relation to the larger global economy in April, warning that many Bitcoin supporters may be driven by misconceptions about the value of a new currency in the context of an already-massive economy.

"Paper currencies have value because they're backed by the power of the state, which defines them as legal tender and accepts them as payment for taxes," Krugman wrote. "Bitcoins, however, derive their value, if any, purely from self-fulfilling prophecy, the belief that other people will accept them as payment."

1. Leaders in the Bitcoin community call it risky.
In 2011, after the data leak at Mt. Gox wreaked havoc on Bitcoin's value, Gavin Andresen, a lead developer on the Bitcoin Project, issued a stern warning to those caught up in the hype of the currency.

"I've said it before, and I'll say it again: Bitcoin is an experiment. Treat it like you would a promising Internet start-up company: maybe it will change the world, but realize that investing your money or time in new ideas is always risky," Andresen wrote in his personal blog.

The Bitcoin community is nothing but forthcoming in regards to the risk involved with investing in Bitcoin. The main takeaway from this warning, and all the other troubling facts about it, is that Bitcoin is not an infallible system, similarly to other currencies.

 

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