Bitcoin was the first cryptocurrency. This digital asset came into existence in 2009 when it released as open-source software. It is designed to work as a medium of exchange that uses robust cryptography to secure a financial transaction. The blockchain component of this technology is also useful in the exchange of almost any form of data.
What makes cryptocurrency unique when compared to a fiat currency is the decentralized control of the financial transactions. It is different than the centralized central banking systems and digital currencies because it works through a distributed ledger – that’s the blockchain. It serves as a public financial transaction database with greater transparency throughout the entire process.
The history of cryptocurrency dates to 1983 when David Chaum came up with the idea of “ecash,” or cryptographic electric money. Chaum implemented the idea in 1995 with Digicash. Research from MIT, Wei Dai, and Hal Finney helped to establish the eventual formation of a decentralized network that over 4,000 different currencies use today.
List of the Pros of Cryptocurrency
1. Most cryptocurrencies are built with security as the top priority.
User security and privacy are usually the basis for a cryptocurrency’s creation. Most of them that exist today are built from the bottom up with these attributes as their top priority. This emphasis allows users to expect additional anonymity with an online transaction as if it were cash. Even though the information shared is in the public domain, the lack of identifying features allows for individuals to secure goods or services without the increased risks of fraud or identity theft related to hacking.
2. Cryptocurrency creates another avenue for transactions.
Cryptocurrency is legal in most places around the world today. It creates a borderless system for value exchange that eliminates the need to convert one fiat currency into another so that it has local value for the individual or business. When individuals or entities claim the funds correctly for taxation purposes, then it creates another avenue for potential transactions because it allows for another value exchange opportunity.
3. Most cryptocurrencies have low transaction costs.
When you compare the cost of a cryptocurrency with digital options like PayPal, then transactions with Bitcoin or other altcoins will usually reduce the cost for consumers. Some coins don’t even charge people to finalize a transaction. Although Bitcoin can get expensive at times when fast processing is necessary and traffic levels are high, the rest of the advantages of using a cryptocurrency still provide enough value that makes it the better choice.
More businesses are accepting cryptocurrencies for online and in-person transactions than ever before. You won’t have as many options as you would with Visa or MasterCard, but the numbers are growing.
4. Anyone can start to make money off of cryptocurrency mining.
Cryptocurrency mining involves securing the transactions that occur on the blockchain so that they receive validation. Anyone who has access to a computer and the Internet has the option to start making money by using this advantage. There are specific requirements to consider that may not make this advantage suitable for everyone, so you would need to check your connection speed, processor quality, and additional technical factors to ensure that you can earn value from this work.
Cryptocurrencies have a total limit that provides them with value, which is why mining can be profitable. Almost 18 million of the 21 million available Bitcoin are in circulation right now, which means getting active in the mining process can become immediately profitable for some individuals.
5. The volatility of cryptocurrencies can add immediate value to an investment.
Cryptocurrencies are one of the most volatile investments that people can make today. The higher risks of this commodity make it possible for extreme rewards to come into your portfolio. There are numerous stories of Bitcoin investors becoming millionaires overnight. If you can buy low and sell high, there is a lot of potential for wealth-building. Most people need to reserve 10% or less of their total portfolio to cryptocurrencies to ensure that there is enough coverage for the risks involved to maximize the benefits of this advantage.
6. You can trade anywhere in the world when using cryptocurrency.
If you want to conduct a transaction anywhere in the world, then cryptocurrency makes that process a lot easier than other forms of payment. Because it is decentralized as a currency, there are new financial options available for people in countries where financial services may not exist. The lack of a data connection can adversely impact an ability to keep a wallet organized and growing, but it is also the one true global form of exchange that doesn’t rely on governments or financial institutions to manage the process as a third party. That means the cost of doing business goes down while the number of accessible markets goes up.
7. It has more freedom from political influences than other currencies.
The decentralized nature of cryptocurrencies allows them to stay outside of the sphere of political influence. When a government makes a specific decision on the global stage, such as Brexit, then the politics of the choice can adversely impact the value of what people hold.
At its peak in the 1970s, the British pound had a value of more than $2.60 for every $1 of U.S. currency. Because of the uncertainty of Brexit, one pound now equals just $1.28. Cryptocurrency avoids inflation or deflation because it operates separately from the traditional markets where transactions take place.
8. No one else has control over your money.
When you conduct transactions with cryptocurrency, then the only way that your funds can be accessed is by using your private key. That attribute is a cryptographic password that only you know. It is an advantage that means there are no corporations, governments, or banks that have the capability of freezing assets for some reason. If you can keep a portion of your wealth in a stable cryptocurrency, then there is a way to ensure your financial wellbeing in even the most uncertain times.
There are times when governments will declare bankruptcy or default on their loans. Banks can sometimes fail. Issues like what happened in Cyprus when seizures of assets occur are also possible in some places around the world. When you use cryptocurrency, you’re giving yourself an insurance policy against these actions.
9. Cryptocurrency prevents vendors from using your information.
Traditional transactions with debit or credit cards require you to provide identification to vendors that include your account information. You’re forced into a position where you must trust the company and individual with data that others could steal to use for their benefit. Thieves can take the information from the vendor when a data breach occurs and create long-term financial problems that are often costly to correct.
This issue occurs more frequently than many people realize. The 2014 Heartbleed bug allowed hackers to access information from hundreds of popular services, including Google, Facebook, and TurboTax. Cryptocurrencies give you another way to defend yourself.
10. Cryptocurrency encourages financial innovation.
New ideas are exciting, especially when looking at innovation in the financial industry. There are several features available with cryptocurrency that cannot take place with the traditional processes of fiat currency. Micro-payments are one of the most exciting options, allowing individuals to process transactions in small fractions of a coin instead of limiting the value to 1/100 as the minimum transaction.
When you consider the open-source nature of this technology, this advantage can apply to the extension of additional functionalities while writing APIs. Application-specific code can also work with the cryptocurrency networks to create useful results.
11. Transaction speeds are faster with cryptocurrencies.
The transaction speed of cryptocurrencies might not always be faster than a debit or credit card, but it is much quicker than money transfers or checks. Every transaction is final once it is recorded in the permanent transaction blockchain, which means vendors have more security against chargeback fees from dishonest customers. This advantage provides SMBs with an advantage of digital payment systems that often favor larger merchants in disputes, which often creates financial problems because some companies can lose their payment and product.
Cryptocurrencies ensure that there is transparency from start to finish, requiring the fraudulent use of a wallet to create similar circumstances. Since the encryption is almost impossible to break for the average person, there are fewer financial losses to worry about with this technology.
List of the Cons of Cryptocurrency
1. It is easier to go around the legal system with cryptocurrencies.
When transactions are secure and private without identifying features, then it is easier to exchange goods or services that the government classifies as illegal. The third parties that help people and businesses manage wallets or exchanges that involve cryptocurrency are not as secure as the blockchain itself, which can lead to identity theft issues or value loss. This combination of factors means that there are times when cash is still your best option for an in-person transaction if you must ensure that there is zero data exchanged about who you are or what you do.
2. Cryptocurrency is not always legal.
Most governments and banks accept cryptocurrency as a valid method of funding transactions, but there are some exceptions to that rule. Arun Jaitley, serving in the role of Finance Minister for India in 2018, declared that the government would do everything in its power to discontinue the use of Bitcoin and other cryptocurrencies. They do not recognize it as a legal tender. The central bank of India announced a ban on the purchase or sale of cryptocurrency for entities regulated by them the same year. Nepal has an outright ban on the technology. Several countries, such as Pakistan, have declared it to be illegal as well.
3. The value of cryptocurrency changes like stock equity.
The value of cryptocurrency changes more like stocks or mutual funds than traditional fiat currency. Since the laws that direct people on how to claim their value as taxable income are also uncertain in many jurisdictions, it is often unclear as to how much value Bitcoin or the other options have. That can confuse the government and individuals as to how much should be paid on them. Do you offer an amount based on the value when you obtained them, or is it their exact worth at the filing deadline?
The private nature of cryptocurrencies makes it easy enough to skirt around the existing tax laws anyway, so this disadvantage can be very complex in some regions of the world.
4. Only certain vendors tend to accept cryptocurrency for transactions.
Most vendors and businesses that accept cryptocurrency tend to be online-only businesses that offer a specific product or service. There are always specific exceptions to this disadvantage, like the several restaurants in New York City that accept the altcoin NYCoin for transactions. People can always convert their cryptocurrency into a traditional form of value to conduct businesses as needed, but the fluctuating cost of the final price means that the money saved sometimes in transaction costs can be negligible.
If you live in an urban center, then cryptocurrencies are a legitimate choice to consider. When your home is in a more rural location, then your better option is still a debit or credit card – or even cash in remote places.
5. Mining processes for cryptocurrencies are CPU intensive.
Cryptocurrency mining is still possible, but the proof-of-work systems show that it is an intensive process to support from the CPU. It requires an extraordinary level of resources that have no other purpose than to regulate encryption and coin creation. Most computers cannot do this work by themselves, so you would need to purchase a rig that could do the work for you. The equipment investment alone may require more than $5,000 in capital. Once you incorporate the utility expenses of mining, the value of the cryptocurrency you receive may not offset the cost to create it.
6. Extreme volatility can lead to massive wealth loss for some investors.
The volatility of cryptocurrency makes it one of the riskiest ventures in the history of humanity. Bitcoin’s value in 2014 is an excellent example of this disadvantage. During that year, the value of a single coin ranged between $30 to $1,000. If you bought low and sold high, then you would have built a lot of wealth in an extremely short time period. For the investors who got in near the higher point and saw the price drop, then there was the possibility of losing almost everything if they didn’t have enough diversification in their portfolio.
7. Individual transactions can lead to illegal activities.
Most people want to use cryptocurrencies for legal purposes. When you conduct a transaction to purchase something today, the recipient might use those funds for something illegal tomorrow. Blockchain makes it possible to track transactions based on the information shared, so there is a possibility that law enforcement traces could lead to you despite the private nature of the technology. This risk occurs with traditional transactions as well, but it is the anonymous nature that creates a unique disadvantage for some people to consider.
8. Cryptocurrencies do not have the influence of a central bank.
When a central bank operates in a national economy, then it can step in to correct the marketplace when capitalistic influences push it in the wrong direction. The lack of influence on cryptocurrencies means that the volatility of the free market system creates uncertainty instead of stability. Different coins experience unique results based on what happens in the economy, so the results of this disadvantage are variable. External factors can still influence inflation and deflation as well – just not to the same extent as it would be with government-backed currencies.
9. There is no inflationary value to cryptocurrency.
Inflation means there is an increase in the price of goods and services sold. What you could purchase with $1 in 1960 is very different than what it is today. Although cryptocurrency is free from political influences, it is also kept separate from economic ones. The value of what you hold only fluctuates because of trading activities and scarcity. The value of one Bitcoin would go down over time if it were stable because inflation does not impact it. That means your overall value naturally decreases when you place guarantees on it for its final value.
10. There are still vulnerabilities to consider with cryptocurrencies.
Even though cryptocurrencies are designed from the bottom up to provide better security, the software-based nature of its value shows that there are vulnerabilities to consider. Over half of the attacks are from theoretical threats, but that doesn’t change the fact that there are weak points in the system where your value and information are potentially vulnerable. You can hack software, bugs can be found, and the blockchain-based networks have exploitation points to consider.
Bitcoin’s network has never experienced a successful hack because of the initial focus on security, but there are exchanges, wallets, and design elements where value loss has happened in the past.
11. You do not have total anonymity with many cryptocurrencies.
There are privacy coins in the cryptocurrency industry that offer complete security and anonymity. When you look at the most popular coins that the average person would use for transactions, then your activities are not 100% anonymous. It is possible for the public ledger system to offer insights into a person’s spending habits or purchasing activities that would not be available in systems with less transparency. Those behaviors could create personal vulnerabilities that might lead to losses in other areas of one’s portfolio.
12. There is no way to recover lost cryptocurrency.
When you lose value in your bank account because of fraud or other illegal activities, then there are insurance policies and protections in place that reduce or eliminate your liability in this area. When fraudulent charges occur on your credit card, reporting it immediately quickly reduces your responsibility to manage that situation. Cryptocurrency has a different outcome. Because there is no system in place to protect the value of your coins, there isn’t a way to recover your wealth if something happens to the system or someone steals value out of the wallet. Cryptocurrency hasn’t reached mainstream economics yet to offer these protections, so you’re on your own to keep your value entirely protected.
13. It can be a challenging concept for some people.
One of the most significant obstacles to the large-scale adoption of cryptocurrency is that it is not easily understood. Almost everyone gets that a $20 bill offers that amount toward products, services, or debt reduction. Anyone who isn’t tech-savvy will look at the idea of a decentralized financial system and wonder how they can use it to their advantage. There is always a certain level of wariness with new financial ideas as well, which is why this issue will likely be the final hurdle that proponents must clear before there is wide-spread acceptance of this option.
Cryptocurrencies offer the world an opportunity to start fighting oppression and poverty because of its decentralized nature. It offers free and open access to core financial services for everyone. Since most banks or similar financial institutions do not serve the most rural areas of the world, this monetary option provides a new way to access needed goods and services.
The volatility of cryptocurrencies is what limits their potential in the current marketplace. When someone earns wages from their work efforts, then they require a specific level of certainty for the value of what they receive. If you earn $1,000 and it turns to $30 in 24 hours, then it is challenging to meet your basic needs.
The pros and cons of cryptocurrency suggest that this method of conducting transactions could be the foundation of how we all do business in the future. There are certainly some excellent investment opportunities to consider, but there are also challenges along the way.
Blog Post Author Credentials
Louise Gaille is the author of this post. She received her B.A. in Economics from the University of Washington. In addition to being a seasoned writer, Louise has almost a decade of experience in Banking and Finance. If you have any suggestions on how to make this post better, then go here to contact our team.