There’s a constant stream of news about cryptocurrencies, and it can be challenging to get to grips with whether these virtual tokens are worth investing in or whether their drawbacks outweigh their advantages.
The advantages of cryptocurrencies
Cryptocurrencies typically operate using blockchain technology or some type of decentralized public ledger that safely stores and scrutinizes information about transactions.
The cryptocurrency Ethereum, for example, uses a programmable blockchain technology that enables “smart contacts” to be created which then distributes funds automatically once all prescribed conditions have been satisfied. This means that a retailer doesn’t have to pay for any goods before they arrive in the shop, but the supplier is assured that payment will be made once the goods reach their destination. Therefore, both parties don’t have to take out insurance to cover the risk of a default on the transaction.
Another example of how blockchain technology can be used effectively is to consider a dying parent who knows that the beneficiaries will argue over the estate, which could lead to protracted legal battles. If the assets could be divided according to a programmable blockchain, and each beneficiary gets notified of what they will receive, then the deceased’s wishes will be honoured.
Security benefits of cryptocurrencies
Because traditional banks store large amounts of money centrally, this means that they are targeted by hackers who can potentially access hundreds of thousands of accounts in one cyber attack. Moreover, if individuals store their passwords and token keys securely, it provides more security than storing money in a traditional bank account.
It’s practically impossible for anyone to hack into the blockchain itself. It would take a massive amount of coordination to compromise the system at various points to get around the blockchain security checks. The nature of blockchain means that powerful computers verify transactions and the correct source of funds, all while being performed publicly.
Cryptocurrencies help create a decentralized, free market
Compared to traditional currencies, cryptocurrencies create a fairer and more equal playing field. For example, developed countries with established currencies and financial systems can easily engage in international trade, but some developing nations may face many obstacles in making similar types of trades.
While governments or regulatory agencies back traditional currencies, cryptocurrencies are backed by their community of users. So one Bitcoin is always worth one BTC no matter where you live in the world. This allows everyone to compete on equal terms. And because there’s no centralized authority with control over the currency, there’s no need for interest and inflation control.
The disadvantages of cryptocurrencies
Price volatility and uncertainty around their value
Because cryptocurrencies don’t have any government backing or intrinsic worth, they may be susceptible to becoming worthless. This can happen if market forces determine that there’s little to no value in the currency. That also means that there can be big price swings as its perceived value changes.
Losing your key means losing your crypto coins
Because there’s so much security around cryptocurrencies, through the use of untraceable source codes and authentication protocols, if you lose your private key to your crypto wallet, you won’t be able to retrieve it. In a traditional bank that stores your information on a profile, losing your credit card is easily remedied as you can get a new card issued to access your funds. If you’re locked out of your crypto wallet, however, your money becomes inaccessible, which can result in huge financial losses.
Funding illegal transactions
Because there are so much privacy and security attached to cryptocurrencies, governments can’t easily monitor and track transactions. This means that illegal transactions can take place and won’t be easily traced – for example, buying drugs online. Furthermore, people can use cryptocurrencies to launder and ‘clean’ their money to hide the source of the funds.