A cryptocurrency is a digital asset developed and used as a medium of exchange. Hence, it is also a type of digital currency and a form of electronic money, but it is specifically based on encryption technique or cryptography and decentralized control, as well as the concept of peer-to-peer electronic currency system.
Cryptography is used to secure transaction, control the creation of additional units, and authenticate transfers. Furthermore, decentralized control is possible using a distributed ledger technology, particularly through blockchain technology.
Note that there are different types of cryptocurrency such as Bitcoin and Litecoin, among others. Nevertheless, the encrypted and decentralized nature of cryptocurrencies has earned them considerable appeal. However, critics have noted associated drawbacks, limitations, and challenges.
The Pros: Advantages of Cryptocurrency
Decentralization is one of the purported advantages of cryptocurrency. Unlike traditional currencies based on fiat currency model such as the dollar of the United States or the euro of the European Union, there are no central banks tasked with the sole authority of controlling the use of money.
Supporters of cryptocurrencies have argued that centralizing the control over money gives that single authority substantial amount of power that can be abused. Note that central banks regularly adjust the value of the money through monetary policies to meet targets. This authority does not sit well with others.
The 2008 Financial Crisis in the U.S. and the Eurozone Crisis have also demonstrated the extent of the power of these central authorities. In Greece during the Eurozone Crisis, citizens were unable to withdraw and use their money after the Greek government locked down their assets to prevent bank overruns.
Other examples of the drawbacks of centralized currencies and thus, the advantages of decentralized money system such as cryptocurrency are the hyperinflation in Zimbabwe and the overall economic crisis in Venezuela. In both countries, prices of goods increased exponentially as their respective currencies lost their value partly because their governments increased the money supply in circulation.
Decentralization of currency has more specific benefits that in turn, translate further to the advantages of cryptocurrencies. Take note of the following
• Decentralized currencies protect individual users from bank failures and the collapse of the financial system, as well as from stringent bank policies and fees.
• A notable benefit of cryptocurrencies is that it is easy to implement and utilize, thus making them attractive to populations underserved by banks.
• Payments or fund transfers are also borderless and uninhibited. These make cryptocurrencies truly a global medium of payment.
• The fact that cryptocurrencies are borderless enables individuals and communities to participate in the global economy.
• Another advantage of cryptocurrency is that it facilitates electronic commerce while maintaining privacy and security through cryptography.
• In theory, cryptocurrencies and other decentralized currencies are not affected by inflation and deflation.
• Decentralization makes cryptocurrencies unaffected by foreign exchange rates. The value is almost always consistent across the globe.
• Countries experiencing destabilized fiat currencies can use cryptocurrencies both as a stabilizing agent and as an alternative medium of exchange.
The Cons: Disadvantages of Cryptocurrency
Critics and skeptics have also scrutinized both cryptocurrencies and decentralized currencies in general. One argument is that unlike gold and silver that had value due to their rarity and fiat money with value based on legality, cryptocurrencies essentially have nothing underwriting their value.
Below are more specific concerns over and criticisms against cryptocurrencies:
• Difficult to Understand: Digital technology serves as the general foundation of cryptocurrencies. However, this digital asset utilizes specific concepts in technology that can be complicated, thus hampering widespread adoption.
• Legality and Acceptability: Although it has gained mainstream appeal, cryptocurrencies are not still acceptable across the globe. Some countries have not legalized their use as a formal medium of exchange.
• Uncertainty: Uncertainty is a key disadvantage of cryptocurrency. There are several factors contributing 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. However, in practice, some cryptocurrencies, including Bitcoin, are too slow to operate and hence, sustain wide scale day-to-day operations and transactions.
• Power Consumption: Perhaps, a notable drawback of cryptocurrency is energy inefficiency. The combined energy consumption of computers and servers used to mine and run the system is comparable to one million transatlantic flights.
• Leanings Toward Scams: Certain individuals and groups have exploited the hype built around cryptocurrencies. New types of cryptocurrencies have surfaced, and others provide rewards for mining or blockchain participation. However, most of these are pure scams.