Cryptocurrencies have become a contested invention of the digital age due to their potential wealth-making allure and their fair share of criticisms. Of course, it is important to note that a cryptocurrency is a digital asset and a form of digital currency based on cryptography and a decentralized digital ledger called blockchain technology.
They are a feasible alternative to modern fiat currencies such as the United States dollar or the Chinese yuan because they share the can demonstrate the four major functions of money: as a medium of exchange, a unit of account, a store of value, and in several cases, a standard of deferred payment. Hence, due to these functions, they can also be considered assets.
Advantages: Pros of Cryptocurrencies
With the introduction of Bitcoin in 2009 and the subsequent emergence of so-called altcoins such as the Ether of the Ethereum blockchain platform and the Ada of the Cardano blockchain platform, among others, cryptocurrencies are starting to become an accepted mode of payment by several organizations, as well as a profit-making asset class.
Below are the specific advantages or benefits of this asset class:
• One of the advantages of cryptocurrencies is that they are a feasible and practical alternative to fiat currencies. As mentioned above, these digital assets can readily demonstrate the four major functions of money.
• They can also be considered as a true global medium of payment. Transactions such as payments for goods and services, fund transfer, and trading are borderless, as well as uninhibited by geopolitical and geophysical limitations.
• Another benefit is that they can facilitate electronic commerce and other digital transactions. Note that several merchants, online-enabled services, and digital applications have begun accepting crypto-coins and crypto-tokens.
• Decentralization is also a key advantage of cryptocurrencies. Through blockchain technology, these digital currencies can protect the public from issues and eventual failures in the current banking and financial systems.
• These digital currencies are also easier to implement and introduce due to the availability of technical details regarding blockchain implementation. They do not need a government mandate nor require to undergo bureaucratic processes.
• States or governments that are experiencing the drawbacks of destabilized legal tenders due to hyperinflation or problems in the monetary system can adopt a particular cryptocurrency as a medium of exchange and a stabilizing agent.
• Remember that they collectively represent an asset class. A lot of individuals and organizations have gained significant wealth either by buying and holding cryptocurrencies during their earlier phase or through trading.
Disadvantages: Cons of Cryptocurrencies
It is true that several cryptocurrencies have been recognized by several organizations and even governments as an acceptable medium of exchange. Furthermore, it is also true that a lot has made substantial wealth either through buy and hold investing or trading. However, despite their potentials, cryptocurrencies have notable drawbacks.
The following are the specific disadvantages and limitations:
• Technicality is a primary obstacle to the widespread adoption of cryptocurrencies. Remember that these assets are an invention of the digital age. They can be difficult to comprehend and appreciate for certain members of the population.
• Nonetheless, a key disadvantage of cryptocurrencies centers on acceptability. They are not widely recognized as a medium of payment. In several jurisdictions, such as China, their use has been banned and outlawed.
• Proof-of-work blockchain technology also suffers a key drawback: power consumption requirement. Note that the annual power consumption from Bitcoin mining and other related operations can be greater than the consumption of a particular country.
• It is important to note that the high power consumption requirement of blockchains based on proof-of-work has a considerable impact on the environment. The energy demand strains the available energy supply while producing externalities.
• Another problem centers on variations. Since the introduction of Bitcoin, several crypto-coins and crypto-tokens have been introduced. There are thousands of them in the market, thus making them as a whole non-universal.
• Buying these assets also comes with a risk. There are risks or uncertainties involved due to extreme market volatility, lack of legal acceptance, and susceptibility to speculation and bubble due to herding and hype, among others.
• Scams have also been built around these assets. As mentioned, because they are difficult to comprehend for some, a number of mal-intended individuals and groups have exploited the hype to lure in people through nefarious moneymaking schemes or investment scams.
There are individuals and organizations that have used these digital currencies for other criminal activities. Some have used them to launder money or as a means to hide illegally obtained wealth. Others have used them to transact in the black market.
FURTHER READINGS AND REFERENCES
- Baraniuk, C. 2019. “Bitcoin’s Energy Consumption ‘Equals that of Switzerland.” BBC. Available online
- Club House Conversations. 2021. “Andrew Ross Sorkin Interviews Bill Gates in Clubhouse.” YouTube. Available online
- Criddle, C. 2021. “Bitcoin Consumes ‘More Electricity than Argentina.” BBC. Available online
- Enoksen, F. A., Landsnes, Ch. J., Lučivjanská, K., and Molnár, P. 2020. “Understanding Risk of Bubbles in Cryptocurrencies.” Journal of Economic Behavior & Organization. 176: 129-144. DOI: 1016/j.jebo.2020.05.005