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Pros and cons of cryptocurrency
Cryptocurrency benefits include decentralization, lower transaction fees and inflation protection. But it also comes with some challenges.
Cryptocurrency has created a flurry of conversation and activity around the world, drawing investors and tech enthusiasts alike with its decentralized structure and potential for large returns on investments.
Cryptocurrency is a bank-independent digital currency that uses a decentralized technology called blockchain to record and verify transactions in a digital ledger. The transactions are facilitated by cryptography, and a virtual wallet is used for sending and receiving money to ensure the safety and anonymity of transactions.
Popular cryptocurrencies such as Bitcoin and Ethereum have developed as alternatives to established financial structures, promising decentralization, security and greater financial independence.
In addition to its widespread adoption, the digital landscape is witnessing an influx of new cryptocurrencies regularly. Since the launch of Bitcoin in 2009, more than 21,000 different cryptocurrencies have been created, according to Bankrate. However, as with any emerging technology, these digital currencies come with both benefits and challenges.
Cryptocurrency benefits
Even with the cryptocurrency crash of 2022, it is still a highly attractive investment for many business owners.
The following are the most common benefits of cryptocurrency:
Decentralization
The biggest advantage of cryptocurrency is that it's not owned by a single financial or government entity. This eradicates the monopoly of money and ensures cryptocurrency value isn't dictated by a central bank or authority.
Lower transaction fees
The fees for transacting in cryptocurrency are very nominal and sometimes zero. This is because third parties and intermediaries, such as VISA and PayPal, are eliminated in the process. Additionally, cross-border transactions using cryptocurrencies are accelerated without challenging foreign exchange procedures, increasing their efficiency and lowering their cost.
Inflation protection
Due to its limited supply, cryptocurrency is often seen as a way to protect against inflation. For example, the number of coins that can be minted for Bitcoin is capped at 21 million, after which no new coins will be released. Other cryptocurrencies also use techniques to limit supply and help protect against inflation. Theoretically, if demand for cryptocurrency grows, their values may too.
Potential for high returns
While cryptocurrencies come with potential risks, such as volatile market conditions and potential fraud, most cryptocurrency investments yield a high rate of return. According to reports in 2022, the size of the worldwide cryptocurrency market reached $4.67 billion and is forecasted to grow at a compound annual growth rate of 12.5% between 2023 and 2030.
Accessibility
Cryptocurrencies boost the accessibility of financial services as they operate on decentralized networks and can be accessed by anyone with an internet connection and crypto wallet. In contrast to typical bank accounts, opening a crypto wallet does not need identity verification, background checks or credit checks. Cryptocurrency can also make cross-border transactions easier and faster as it doesn't involve high fees, long processing times and intermediaries that typically come with traditional banking systems.
Transparency
While cryptocurrency transactions are anonymous, the data recorded on a public blockchain ledger, such as the Bitcoin and Ethereum blockchain, is publicly available for anyone to view. Every cryptocurrency user gets access to a public key, which can be used to identify an investor. This means that even though the investor names aren't shared, the transactions can still be tracked for transparency. Users may follow live transfers using the blockchain explorer on the cryptocurrency platform.
However, not all cryptocurrencies use public blockchain ledgers. There are also private and permissioned ledgers. Private ledgers are exclusively accessible to a specific group of users, while permissioned ledgers are a combination of public and private blockchains, granting access to anyone with permission from the administrators.
Cryptocurrency challenges
Despite numerous tales of cryptocurrency investments resulting in people becoming overnight millionaires, cryptocurrency also comes with its share of challenges.
The following are some common disadvantages of cryptocurrency:
Volatility
Cryptocurrency prices can often fluctuate. While this volatility can lead to quick profits, it can also cause significant financial losses for investors under certain circumstances, such as when the price of cryptocurrency dips suddenly. This unpredictability can be a risky investment choice, especially for individuals looking for steady returns.
Lack of regulation
Even though cryptocurrency is legal in many developed countries, it isn't legally regulated by central governments. This absence of control and regulation in the cryptocurrency market increases the risk of cryptocurrency scams and market manipulation. Until federal governments adopt and regulate cryptocurrencies in the same way that they do fiat currencies, such as the U.S. dollar, there will always be a higher risk associated with investing.
Security risks
Although blockchain technology offers a robust security architecture, security lapses and hacking attempts are on the rise in the cryptocurrency ecosystem. Cybercriminals have attacked cryptocurrency exchanges and digital wallets, causing significant financial losses for both people and businesses. Moreover, because Bitcoin transactions are irreversible, it's difficult to recover funds once they have been stolen.
Risk of losing coins
To access the virtual wallet where the cryptocurrency tokens are stored, several cryptocurrencies, including Bitcoin, require the owner to have possession of a private key. However, should a private key ever be lost or stolen, it is impossible to demonstrate another proof of ownership or to recover the cryptocurrency tokens.
Excessive cost of production
Depending on its type, mining cryptocurrency may require a large supply of electricity and other resources. For example, most Bitcoin-related costs are associated with the energy required to create the currency, according to Harvard Business Review. This increased power usage may result in local pollution, noise and other consequences -- such as increased greenhouse gas emissions -- for communities living near the mining sites.
No refund or cancellation
Cryptocurrency is nonrefundable. This means that it can't be refunded to the sender in cases where there is a disagreement between the parties involved or when money is inadvertently sent to the incorrect wallet. As such, people may use it to defraud others. Since there are no reimbursements, it's simple to fabricate one for a transaction where the products or services were never delivered.
The future of cryptocurrency
The price of Bitcoin surpassed $30,000 in April 2023, generating a frenzy of stories saying the crypto winter had finally ended. There have also been speculations that cryptocurrencies and IoT may support micropayments in the near future, letting enterprises share IoT data. Businesses, for example, might pay expert reviewers in cryptocurrency to provide honest and useful reviews of real-time IoT data products on decentralized data marketplaces. This would help IoT data buyers avoid low-quality or falsified data.
While the cryptocurrency market might be on an upward trajectory, the reality is that this market tends to be unpredictable. The best bet for cryptocurrency enthusiasts and investors is to build a strong and diversified portfolio that can withstand setbacks in the long run.
