Now that you know what is cryptocurrency and its history, you may want to find out more. Media often reflect the cryptocurrency market as black or white, either presenting it as a financial revolution or as an easy way to lose your investments. So who is right? The truth is that it’s more complicated than just labeling the digital asset as good or bad and there are many pros and cons of cryptocurrency. In this article, we discuss some of the major advantages and disadvantages of cryptocurrency, so if you want to know more about it, then keep reading.
Note: This article is written for informative purposes and under no circumstances should be regarded as a solicitation to buying or selling cryptocurrencies.
Let’s start with the positive: what is great about cryptocurrency?
Anonymity and data protection have been the main concern of cryptocurrency. Thanks to the blockchain and its strong encryption, a hacker will need one’s private keys to put them at risk. In comparison, hacking a bank system (although it is still very hard) could give access to more than one bank account. Also, you can create Bitcoin addresses without reference to personal information (name, address). Because the blockchain is public, this is made in full transparency.
The transaction fees are very low and sometimes you can even have a cryptocurrency exchange without fees. One of the reasons for this is that there are no third-parties involved to verify the transaction. According to Investopedia, compared to credit card transactions, Bitcoin users can save between 0.5% to 5%, plus a 20 to 30 cent flat fee for each transaction made.
One of the biggest advantages is the decentralization of cryptocurrency. This means that there is no central control authority in the network and also implies a peer-to-peer procedure. A direct consequence of this is that there is no institution to determine rules for cryptocurrency owners, nor the cryptocurrency flow and value - which is not the case of fiat currencies that are controlled by the government.
When it comes to Bitcoin, there is a fixed maximum number that is 21 million Bitcoins. As we mentioned above, no authority can change this number. In consequence, the increasing demand will result in an increased value, thus keeping up with the market - and limiting the risk of inflation. This is the opposite of the Global Financial Crisis from 2008/2009.
Because there are no third-parties involved, the transfer speed is much more important than for a regular transaction. You can also track it 24/7.
Now let’s dive into what is less amazing about cryptocurrency.
Most cryptocurrencies, such as Bitcoin, have strong volatility. Because its value can change rapidly and unpredictably, the time of investment is very important. The volatility in cryptocurrency can be hard to handle, especially for investors and amateur traders who don’t have much knowledge in the domain and can lead to losses of funds.
Cryptocurrency combines strong encryption and anonymity and decentralization. This makes it very hard for the government to track down users, and even if this can be great for the regular person, this occasion could be used for money laundering and by criminals.
One of the biggest cons is that there is no refund policy for cryptocurrencies: if you mistakenly pay someone, there is nothing to guarantee your money back. Since the Bitcoin era and because of the many stories of getting rich thanks to Bitcoin, cryptocurrencies have gained much attention and have, unfortunately, attracted many scammers. The lack of refund policy makes it easier to fraud people.
Cryptocurrency is the product of computer science - this can make the vocabulary very hard to understand, as well as how it functions, without dedicating an important amount of time. Also, even though more and more people become familiar with the idea of cryptocurrency, its use is still limited and regulation policies vary from country to country.
Images: Unsplash: @Bermix Studio; @Launchpresso; @Austin Distel; @Pierre Borthiry
Sources: Global Economic Observer, No. 2, vol. 5/2017; Investopedia; EFG International