Advantages and Disadvantages of Cryptocurrency
A cryptocurrency is a digital asset developed moreover used as a medium of exchange. Therefore, it is also a type of digital currency and a form of electronic money. However, it is based explicitly on encryption techniques or cryptography and decentralized control, and the concept of a peer-to-peer electronic currency system.
Cryptography is used to secure and safe transactions, control additional units’ creation, and authenticate transfers. Moreover, decentralized control is likely using a distributed ledger technology, mainly through blockchain technology.
This new medium of exchange marks a different turning point in the modern history of money. See that there are different types of cryptocurrency, such as Bitcoin and Litecoin, with others. But, the encrypted and decentralized nature of cryptocurrencies has earned them considerable appeal. Still, critics have seen associated drawbacks, limitations, also challenge.
The Pros: Advantages of Cryptocurrency
Decentralization is one of these purported advantages of cryptocurrency. Unlike traditional currencies based on fiat currency models such as the dollar of the United States or the European Union’s euro, there are no central banks tasked with the sole authority of controlling the use of money.
Supporters of cryptocurrencies have argued that centralizing control over money gives that single authority a substantial amount of power that can be abused. Note that central banks always adjust the value of the money through financial policies to meet targets. The authority does not sit properly with others.
The 2008 Financial Crisis in the U.S. and the Eurozone Crisis have also demonstrated the extent of these central authorities’ power. While Greece during the Eurozone Crisis, citizens could not withdraw and use their money after the Greek government locked down their assets to check bank overruns.
Additional examples of the drawbacks of centralized currencies. Thus, the advantages of decentralized money systems such as cryptocurrency are the hyperinflation in Zimbabwe and Venezuela’s overall economic crisis. In both countries, goods’ prices increased exponentially as their respective currencies lost their power partly because their governments increased the money stock.
Decentralization of currency has more specific Advantages.
That, in turn, translates further to the advantages of cryptocurrencies. Take note of the following
• Decentralized currencies preserve different users from bank failures, collapse the financial system, and stringent bank policies and fees.
• A notable advantage of cryptocurrencies is that it is simple to complete and use, making them attractive to populations underserved by banks.
• Payments or fund transfers are more borderless and uninhibited. These make cryptocurrencies indeed a global medium of payment.
• The fact that cryptocurrencies are borderless allows individuals and communities to participate in the worldwide economy.
• Different advantage of cryptocurrency is that it helps electronic commerce while maintaining privacy and security through cryptography.
• In theory, cryptocurrencies and different decentralized currencies are not affected by inflation and deflation.
• Decentralization makes cryptocurrencies unaffected with foreign exchange rates. The value is nearly always compatible across the globe.
• Countries experiencing destabilized fiat currencies can use cryptocurrencies both as a stabilizing factor and as an alternative medium of exchange.
The Cons: Disadvantages of Cryptocurrency
Critics and skeptics should also scrutinize both cryptocurrencies and decentralized currencies in general. One case is that unlike gold and silver that had value due to their rarity and fiat money with value based on legality, cryptocurrencies have nothing underwriting their value.
Here are more specific concerns over and criticisms against cryptocurrencies:
• Difficult to Understand: Digital technology serves as the general foundation of cryptocurrencies. But, this digital asset uses special technology concepts that can be complicated, thus hampering widespread adoption.
• Legality and Acceptability: Although it has gained mainstream appeal, cryptocurrencies are not yet acceptable in most parts of the globe. Some countries have not legalized their use as a traditional medium of exchange because of the fiat system’s prevailing adherence.
• Uncertainty: Uncertainty is a crucial disadvantage of cryptocurrency. Several factors contribute to this uncertainty, including market volatility, lack of legal status, and overvaluation due to public hype, among others.
• Slow Processing: The digital and borderless nature of this asset is indeed an advantage. In practice, some cryptocurrencies, including Bitcoin, are too lazy to operate and sustain wide-scale day-to-day operations and transactions.
• Power Consumption: Perhaps, a notable drawback of cryptocurrency is energy inefficiency. The combined power consumption of computers and servers used to mine and run the system is equal to one million transatlantic flights.
• Leanings Toward Scams: Some people and groups have exploited the hype built around cryptocurrencies. New types of cryptocurrencies have surfaced, and others give rewards for mining or blockchain participation. However, most of these are pure scams. Any perpetrators have used a Ponzi scheme that agrees to pay in cryptocurrencies in exchange for selecting members.