Cryptocurrency: Advantages & Disadvantages Explained
With the price spike of digital currencies such as Bitcoin in 2017, the space has begun receiving more media attention than it ever has before. Its coverage frequently takes the form of a debate, with advocates citing cryptocurrency as the clear future of money while opponents point out many flaws that have yet to be worked out. The public’s knowledge base in this area is relatively lacking, the fact that both sides use to sway general opinion toward their position.
This article serves as a primer on the arguments for and against crypto. It does not include all information on the topic; instead, it sticks with fundamental concepts to allow the layman to decide for themselves whether to support cryptocurrencies or not.
The most persuasive argument in favor of digital monies is their underlying blockchain technology. The blockchain is a decentralized public ledger displaying every transaction that has ever taken place on a given token’s network. This system enables the tracking of individual coins through every account that they have ever been in, making it very easy to track stolen coins. Backers cite this feature as proof that Bitcoin and similar currencies are hack-proof where traditional banking is not.
Hackers may also have a hard time with the lack of a central hub on which to focus a cyber attack. While the U.S. government and large banking institutions have centralized information ripe for stealing, the blockchain has no equivalent. Every block, or group of transactions on the blockchain, is checked against previous blocks to ensure that they are valid by volunteer miners who use computers to process complicated algebraic equations. With no central authority, the crypto community has total control over the digital money supply, making it a far more democratic financial system.
Digital money offers several practical advantages over more traditional currencies as well. For example, citizens of developing countries may have a hard time locating a currency with any worth in the global marketplace, effectively locking them out of it. A digital currency with universal acceptance would theoretically open the global market to every possible participant, allowing everyone to compete on an even playing field.
Some blockchains, such as the one used by Ethereum, are also programmable. That serves twin purposes: first, it enables developers interested in blockchain technology to work on a common platform with multiple applications. Second, it allows for the development of smart contracts, or electronic contracts capable of fulfilling themselves. These agreements have the potential to revolutionize the way people conduct their global business.
Finally, crypto transactions may involve less money than those reliant on fiat currencies. For instance, a Bitcoin transaction requires only a Satoshi (5,430 millionths of one Bitcoin) to process. Deals using American dollars must be worth at least $0.01, as there is no physical coin for less than that. That opens a broad range of microtransactions that are just impossible to process otherwise.
Most crypto skeptics struggle with the idea that digital currency is worth anything at all. Gold has enjoyed high value since the dawn of history, and government-issued money gets backing from that government. Bitcoin serves no practical purpose in the modern marketplace and has nothing underwriting its value, so it could theoretically become utterly worthless in a day.
Wild price fluctuations often exacerbate these fears. Even in Bitcoin’s banner 2017, there was a two-week stretch in December where it lost 25 percent of its total value. These fluctuations make it challenging for businesses to accept crypto as payment for goods and services, as the effective price can vary dramatically by the hour.
Some cryptos, including Bitcoin, are also too slow to process for everyday commercial use. For example, Bitcoin miners can handle three to seven transactions per second, compared to Visa, which can process more than 24,000 over the same period. The resources required to verify Bitcoin transactions are also cost-prohibitive at times, producing transaction fees of up to USD 25 during peak periods. That renders Bitcoin unsuitable for cheaper transactions even as it touts an ability to go less expensive than traditional monies can.
Many people do not trust the underlying code behind blockchain either. The technology was the brainchild of a person or group calling themselves Satoshi Nakamoto. Their true identity was never made public, leading many to question how much influence they might still hold over the cryptocurrency.
Other scams are also common in the space. So-called crypto experts frequently take advantage of the lack of regulation to buy a lot of a cheap token they then hype up in the media. Their recommendation causes a demand spike that allows the expert to profit handsomely from their investment. Everybody else loses their money as a part of the scheme.
The exchanges that facilitate crypto trades are also unscrupulous at times. For instance, one popular exchange called BitConnect was forced to shut down amid allegations that it was orchestrating a Ponzi scheme rather than offering a legitimate service. Even honest exchanges lack insurance, meaning that a hacker can delete anybody’s virtual assets and leave them with no method to recover their money. That is what happened to an exchange called Mount Gulg in 2014 when someone discovered $473 million worth of Bitcoin siphoned from their customers’ accounts over a period of years.
An unbiased observer is likely to conclude that digital currencies have a lot of future potential, but a lot of problems to overcome before they realize it. It’s up to you whether you think the time is now for cryptocurrencies, or if traditional money systems are safe for the time being.
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