With the industrialization of technology, Cryptocurrencies are gradually reshaping the financial world. But what are their advantages and disadvantages? Should you invest in it?
If you have these questions at the back of your mind, then look no further as this guide aims to demystify cryptocurrencies so you can learn all you need to know about them.
Advantages of cryptocurrency
There are over 10,000 cryptocurrencies on other markets today with each having its features. But one thing they all have in common is the tendency to experience a quick rise and drop in worth.
Prices are determined by demands and their supply from miners. And this supply-demand dynamic usually brings hefty returns. For example, Ethereum’s price doubled from July 2021 to December 2021, leading to a huge financial gain for those who invested in it at the right time.
2. It is secure and private
Decentralization makes it very secure. Cryptocurrency operates with a decentralized data storage ledger otherwise known as Blockchain which is stored across several servers.
For instance, most traditional financial institutions store their customers’ data on a single server. Where this server gets manipulated, it makes it easy for customers’ funds to be tampered with.
But in the case of cryptocurrencies, no hacker can easily access all the computers that mine cryptocurrencies due to the blockchain being stored across several servers.
3. Cross-Border Payments
Cryptocurrencies are not limited to national borders. A person can send coins abroad to another person without any added difficulty. With traditional services, sending funds internationally usually takes time and heavy charges. In some cases, it might not be possible due to regulations between certain countries.
But then, with cryptocurrency, such isn’t possible as users can send and receive funds from anywhere in the world.
4. It has a quick and straightforward process
Cryptocurrency is an excellent mode of transaction. You may transact cryptocurrencies either internationally or domestically and be sure it would be finalized in seconds. This is because the verification wastes no time to process as there are not many barriers to cross.
5. Cost-effective mode of transaction
Transacting funds, especially internationally, attracts a lot of charges. But with cryptocurrency, the fees are usually less or zero sometimes. This is because it does not need third parties which usually charge payment processing fees.
6. Portfolio Diversification
Cryptocurrency is renowned for being a non-correlated asset class. Theoretically, crypto markets don’t need other markets to function and their price action is not determined by factors that affect stocks, bonds, and commodities.
So as regards diversification, Cryptocurrencies offer investors another option to use to grow their money outside of stocks or bonds. Crypto has potential returns for investors but is quite a high risk, too.
7. Exponential industry growth
The cryptocurrency industry is one of the fastest-growing markets ever, particularly since the industry started with bitcoin in 2009 with no value whatsoever. By 2013, cryptocurrency’s total market cap was about $1.6 billion. In 2022, the crypto industry has experienced a decline, but notwithstanding, as of September the market is worth over $930 billion.
So while the industry as a whole has witnessed exponential growth over the past decade, it also has its drought days.
Disadvantages of Cryptocurrency
1. Can be used for illegal transactions
Since cryptocurrency transactions are highly secure and private, no government can easily identify a user just by their wallet address or keep tabs on their data.
In the past, Bitcoin has been used as a mode of payment for a lot of illegal transactions such as buying drugs on the dark web.
Cryptocurrency is also used by people to convert their ill-gotten wealth, through a clean intermediary to hide its source.
2. Data losses can cause financial losses
The developers aimed to build source code that can be untraceable, powerful hacking defenses, and authentication Protocols that are impenetrable.
This was supposed to make keeping funds in cryptocurrencies safer than physical banks or bank vaults. But if a user does not have access to their private key anymore, then that’s the end as it cannot be retrieved from anywhere and the private key is needed for access.
This results in the loss of coins inside of it thereby leading to financial loss for the user.
3. Even though it’s not centralized, it’s still run by an organization
The fact that cryptocurrencies are decentralized is one of the things people know about them. But their creators and some organizations still control the flow and amount of some currencies on the market. The price of the coin can change a lot when it is in these hands. Even coins like Bitcoin, whose value doubled several times in 2017, can be manipulated in this way.
4. Mining has bad effects on the environment.
Mining cryptocurrencies takes a lot of computing power and electricity, so it uses a lot of energy. Bitcoin is the main cause of this. To mine Bitcoin, you need powerful computers and a lot of electricity. You can’t do it on a regular computer. Most Bitcoin miners are in places like China that get their electricity from coal. China’s carbon footprint has grown a lot because of this.
5. Hacks are possible.
Even though cryptocurrencies are very safe, exchanges are not. Most exchanges store information about a user’s wallet so that their user ID can work properly. Hackers can take this information and use it to get into a lot of accounts.
Once they get in, it’s easy for these hackers to move money out of those accounts. Some exchanges, like Bitfinex and Mt. Gox, have been hacked in the past few years, and Bitcoin worth millions of US dollars has been stolen. These days, most exchanges are very safe, but there is always a chance of another hack.
6. No refunds or cancellations.
If there is a disagreement between the parties or if someone sends money to the wrong wallet address by accident, the sender cannot get the coin back. Many people can use this to steal money from other people. Since there are no refunds, it’s easy to make one for a transaction where they never got the goods or services.