What are the pros and cons of Cryptocurrency?
Like any disruptive technology ever developed, there are various benefits and disadvantages to them. Let's start with the benefits of cryptocurrencies.
By far the most important benefit of cryptocurrencies is their decentralized nature. This sets to remove intermediary institutions like banks from the equation when it comes to payment processing between the customer and supplier. Because of the secure nature of the blockchain, it is not necessary to have a "middle man" enforcing, tracking, and policing transactions like with traditional currencies. It also means there is not a single point of failure, such as a large central bank, which could mitigate against things like the 2008 banking crisis.
The next major benefit of cryptocurrencies is their ability to make fast and relatively cheap transfers between two parties. Since there is no intermediary processing data, transfers can be made very quickly and efficiently (although the time needed varies greatly). One example of this is something called "flash loans". These loans, in which capital is borrowed and repaid in one transaction, are processed without backing collateral, can be executed within seconds, and are used in trading.
For this same reason, cryptocurrencies offer amazing opportunities for the remittance economy. As Investopedia explains, "currently, cryptocurrencies such as Bitcoin serve as intermediate currencies to streamline money transfers across borders. Thus, a fiat currency is converted to Bitcoin (or another cryptocurrency), transferred across borders, and, subsequently, converted to the destination fiat currency. This method streamlines the money transfer process and makes it cheaper."
From an investor's point of view, cryptocurrencies offer an unprecedented opportunity to grow your investment in a relatively short period of time - albeit with a lot of risks. The valuation of many of the older and tested cryptocurrencies like Bitcoin, Ethereum, etc, have skyrocketed over the last decade or so. Only ten years ago, for example, Bitcoin was valued at a yearly average of $5.27. At the time of writing, a single Bitcoin is now worth in excess of $37,000, which is a 7000% increase in ten years! Very few other investments have that kind of growth potential.
But, it is important to note, that cryptocurrencies are one of the most volatile trading instruments around. This means that their value can change rapidly from minute to minute, hour to hour, day-to-day. An unprepared or inexperienced investor could make huge losses if they are not careful. For some sophisticated or experienced investors, however, cryptocurrencies volatility is another part of its appeal. Daily swings of several percent, often several times a day, offer a great opportunity to make regular buy-low-and-sell-high opportunities for day trading. This is incredibly risky, however.
All well and good, but these benefits all come with some potentially very serious trade-offs.
The first, and probably the most serious, at least for criminals and those hoping to use crypto to avoid paying taxes, is the fact that cryptocurrencies are not necessarily a truly anonymous form of transaction. They are, in fact, what is more correctly termed pseudo-anonymous. Since transactions leave a digital trail on the blockchain (which is an essential part of its function), this can be deciphered by agencies like the Federal Bureau of Investigation (FBI). This opens up the very real possibility that governments or public authorities could track the financial transactions of citizens on the blockchain. This would, however, require the authority to know your account's address.
Another of the main disadvantages, though one that is a consequence of their inherent profitability, is the fact that some of the most popular cryptocurrencies are primarily owned by relatively few people. This is in stark contrast to their image of being decentralized. In theory, cryptocurrencies should allow the distribution of coins between all parties on the blockchain, but, in reality, the lion's share is actually highly concentrated. A recent MIT study, for example, appears to suggest that 45% of all Bitcoins in existence are owned by as few as 11,000 investors.
Another apparent benefit of cryptocurrencies is that they can, in theory again, be mined by anyone with a computer. While this was certainly true in the very early days of cryptocurrencies like Bitcoin, today it takes a considerable amount of computing power and energy to do so profitably. Nowadays, only more professional operations are able to reliably mine cryptocurrencies, which attracts enormous capital and energy expenses. Again according to MIT, somewhere in the region of 10% of miners produce 90% of all new cryptocurrency units.
Mining is also very energy-intensive. As of 2021, Bitcoin mining alone used almost half a percent of all the electricity consumed in the world, a rate which has increased about tenfold in just the past five years. Most mining also occurs in places that rely on fossil fuels for electricity.
Another major problem is that while the actual blockchain itself is very secure, the wallets and exchanges typically used to hold and exchange them are not immune from hacking. Many of the most popular ones have been hacked in the past, resulting in millions of dollars worth of stolen crypto coins.
As we previously mentioned, for anyone looking to make a quick buck on cryptocurrencies, they are highly volatile. While this can be exploited to make some impressive gains, it can also result in massive losses for those investors who are not prepared. Bitcoin, for example, has experienced rapid surges and crashes in its value over the years. It climbed to a high of $17,738 in December 2017 before dropping to $7,575 in the following months.
