Legal & Economic Issues
- Is Bitcoin legal?
- Crypto taxes explained (U.S. specific)
- Is cryptocurrency regulated by consumer protection?
- What are the advantages of cryptocurrency?
- What are the limitations of cryptocurrency and the blockchain?
- Is Bitcoin a bubble? Is it too late to invest?
- Is Bitcoin a Ponzi scheme?
- Thoughts on BitConnect, USI-Tech, and similar programs
What Are the Advantages of Cryptocurrency?
Due to the numerous advantages of cryptocurrency like Bitcoin over other modes of payment, we’re pretty sure crypto is here to stay. Consider that cryptocurrency is just the next generation of payment systems — just like credit cards where when they were created. Think of all of the benefits we gained by adopting credit cards. Well, cryptocurrency offers the same potential to leapfrog current payment methods. Let’s take a look at some of the advantages of cryptocurrency. While this is not an exhaustive list, it should be enough to make you curious enough to learn more.
What is Money?
Let’s take a step back for a minute and talk about the origin and definition of money. Money is anything that can be used as a medium of exchange, store of value and unit of account which can be used to buy or sell goods or services from or to anyone that accepts its value as money. Many things can be and have been used as valid money, including shells, stones, and feathers in prehistoric societies.
Societies started using different mediums of exchange 6000 to 9000 years ago as a form of money instead of the impractical barter trading (insert the classic 1-cow-for-3-chickens trade example here.) Traders needed to use something scarce and with intrinsic value and, eventually, about 3000 years ago, people started to use gold and silver as their primary forms of money. Gold and silver worked as excellent stores of value because it was rare and labor-intensive to mine.
Advanced societies started to develop systems of money within their societies or nations, which lead to recognizable, standardized units (coins) that represented the intrinsic value of what it was made of. Currency was born as the medium of exchange and unit of account that is used in a system of money usually within a society or nation. Therefore, currency can be money, but money doesn’t necessarily have to be a currency. For example, a gold coin can be a currency and used as money. However, the same weight of gold (not minted as a coin) can be used as money to store or exchange for goods or services but isn’t a currency in that shape or form.
Governments then started issuing representative currencies — paper money — as claim checks against gold and silver that was deposited or held in the treasury. Currency back then — including the US Dollar — was “as good as gold” because you could always turn it into gold. However one would have to trust the government to actually hold enough gold in reserve to redeem the bank notes.
The next step in the development of money was the rise of computers that allowed banks and financial institutions to maintain ledgers with the amount of currency held in deposit. By inputting transactions in those ledgers, money could be transferred between accounts, without physically being moved. Currency could now be represented by digital figures in computers. (By the way, ledgers of accounts were also being used before the age of digital money or even before the age of currency; ancient societies already used ledger accounting thousands of years ago.)
Fast forward to the Nixon administration in 1971 and we are presented with a new monetary system — where US currency is no longer backed by gold or anything of (intrinsic) value. Enter the era of “fiat currency” — currency backed by nothing and is only money because the government decides it is. Now governments and central banks can create new currency without limit. If it’s not backed by an underlying asset, then what’s to stop governments from “printing” more?
Sound familiar? The fact that cryptocurrency is not backed by anything is one of the main arguments against its acceptance. However, unlike fiat currency, many digital currencies — such as Bitcoin — cannot be created out of thin air. Bitcoin uses cryptography to regulate the number of new coins available on the network and an effort in the form of computer calculations and using electricity (in case of Proof of Work) needs to be done to generate them. Similar to gold, this is referred to as “mining.” There is a set number of Bitcoins (21 million) that can ever be created. Therefore, Bitcoin, unlike fiat currency, is a scarce digital asset.
Deflationary Versus Inflationary
You are probably familiar with the concept that fiat currency is inflationary. “Inflationary” means its value decreases over time because the circulating supply grows faster than the demand for it (economic growth), thereby decreasing the purchasing power (value) of the currency.
On the other hand, cryptocurrency is deflationary, meaning the value of many coins increases over time. Since its creation in 2009, the value of Bitcoin, for example, has increased from zero to over $8,000 at the time of this article. (It’s all-time high was $17,900 in December 2017.) This increase is due to its rise in popularity, no doubt, but also to the fact that there are a finite number of Bitcoins that will ever be created. That number is 21 million. Therefore, merely holding or investing in Bitcoin — even without using it as a form of payment — can be beneficial.
Cryptocurrency as a Payment System
Cryptocurrency is digital cryptographic currency whose payment network facilitates the transmission of value from one person to another. So not only is cryptocurrency used as currency — duh — but it’s also a payment system. PayPal, for example, is a payment system, but it uses the dollar as its currency. The Bitcoin payment system, on the other hand, uses Bitcoin. Transactions are tracked on a digital ledger that is maintained by a distributed network instead of a bank.
This “peer-to-peer” aspect is similar to cash and vastly different from using credit card payment processors or remittance companies like Western Union to send payment. Now we can send money to anyone anywhere in the world who has the capability to accept it. And you don’t need a bank to confirm the transaction. Confirmation is done via the blockchain. How cool is that!
Quick Payment and Settlement
Because cryptocurrency payments are peer-to-peer, they are quick and easy to do since they don’t have to be routed through and wait for the approval of a third party. Sending a crypto payment is as easy as sending an email. You simply access your wallet or exchange, enter the receiver’s address and amount and press Send. The receiver gets his/her payment almost right away without having to wait for it to settle.
This is distinct from the current credit card settlement or international remittance process, for example, which is surprisingly complex. Check out this video (from 3:49 to 5:16) to see how the process works including authorization (4 steps), authentication (6 steps) and clearing and settlement (7 steps.) All of this takes about one week and requires a ton of fees to run. Crypto in comparison is practically instantaneous and very cheap. Intermediaries such as PayPal, Visa and banks would theoretically no longer be necessary for settling payments.
Censorship Resistant Value-Transfer
Another important benefit of cryptocurrency is that, for the most part, no one can prevent you from sending crypto to anyone you want. You don’t have to meet your bank’s KYC (“Know Your Customer”) requirements to send payment around the world and no government can stop you either. In this type of network, the user is in charge of his or her money. No wonder banks and many governments are scared!
Hedge Against Hyperinflation and Government Control
In the developing world, where over 2 billion people don’t have a bank account, the rise of cryptocurrency may be even more meaningful. First, cryptocurrency is a way to “bank the unbanked” — meaning it is a way to allow those who don’t have access to bank accounts a way to save and transfer money.
Second, crypto is a hedge against volatile, government-controlled fiat currency that is entrenched in political turmoil. Take a look at what’s happened in Zimbabwe (hyperinflation), Nigeria (currency controls) and Venezuela (hyperinflation) over the past few years where corruption has severely devalued the local currency. In 2016, the government of India declared that the 500 and 1000 rupee banknotes would be removed from the country’s financial system overnight. Citizens were caught off-guard completely with this demonstration of government control. Over in Greece, citizens faced an economic crisis starting in 2009 as a result of mounting government debt. The economy collapsed, banks closed, and people could not withdraw cash from banks, which basically meant nobody could do anything. The situation in Greece provides a perfect use case for cryptocurrency as a replacement for cash. In all cases, imagine how cryptocurrency could revolutionize these fragile economies, empowering citizens to better protect their wealth.
Cryptocurrency is built on a protocol called the blockchain which is often referred to as a “decentralized and distributed ledger.” The “decentralized” part means that no one person, entity, or central party controls it — it is controlled by the entire network and there is not a single, central point where it can be shut down. This is very different from fiat which is controlled and regulated by governments and central banks. Say goodbye to annoying “bank holidays” where everything shuts down right at the same time you’re trying to transact business. A decentralized network never closes nor is susceptible to a single point of failure. Just like the internet, it’s always open, leaving users always in control of their funds.
Because the cryptocurrency is decentralized and not controlled by a single entity, it is considered “trustless.” This means we don’t need trusted third parties to authenticate transactions for us; we don’t have to trust people we don’t know and hope they will operate in our best interest (which in many cases they do not.) The trust is built into the cryptography and into the distributed nature of the blockchain. The blockchain’s distributed or shared ledger means that many parties have copies of and access to the same information, which makes that information very difficult to fake. Before a transaction between two parties is confirmed, it must be validated by “miners” — computer nodes that solve complex algorithmic calculations. In exchange for their work, miners earn transaction fees and newly created coins.
Facilitates World Trade
Right now, international business struggles with payment systems. First, there is a myriad of exchange rates. Think of how much simpler buying and seller would be if everyone used Bitcoin or a handful of widely-accepted cryptocurrencies. Second, some countries are so laden with credit card transaction fraud that the cost to do business there is too high. As a result, those countries lose out on goods and services they might otherwise enjoy.
One of the advantages of cryptocurrency for merchants, for example, is that transactions are irreversible once confirmed by the network (the number of confirmations increases the reliability of the transaction not being reversed). This is a huge advantage over credit card transactions and fraud. Using Bitcoin or other cryptocurrencies results in more secure payments because buyers need to have money available upfront, so there’s no chance that transactions will be subsequently canceled or fraudulent. Escrow features or services enhance “trustless” trade for both buyer and seller.
Privacy and Anonymity
One of the primary reasons people are attracted to cryptocurrency is due to privacy concerns. Because it does not require banks, there isn’t a lot of KYC information one has to provide in order to hold or exchange it. Moreover, the use of crypto can be anonymous. While Bitcoin itself is not anonymous (because transactions are visible on a public blockchain), there are special privacy coins such as Dash, Zcash, and Monero that allow users to hide both their transaction and the identity associated with their accounts. Check out this article to learn more about privacy coins and how they work.
Of course, there are currently many disadvantages to using cryptocurrency. The most salient is the wild price fluctuations of most coins, Bitcoin in particular. At the end of 2017, Bitcoin took a 30% loss in one week. One week! Imagine if one of your blue-chip stocks did that. But this type of swing is, unfortunately, not uncommon for cryptocurrency for the time being. The wild swings are currently caused because relatively small amounts of money can move the price a lot. It is expected that when the total value and traded amount of certain cryptocurrencies increase, more money would be required to move the price and price swings should become less extreme. In the specific case of citizens in countries with failing currencies, they don’t experience the volatility of cryptocurrencies as something negative, because the long-term trend of the value of, for example, Bitcoin has been upwards, where the value of their national fiat currency only goes downwards.
Second, cryptocurrency has not reached mass adoption. Many people are not interested in it because they can’t spend it in everyday life. Not enough merchants accept crypto yet although the number increases daily.
Oh, and if you do hold your coins, keep in mind that you are the bank. This means that you will not be able to recover your user account if you lose your private key or when they get stolen. Nor will you be able to reverse a transaction sent to the wrong wallet or recipient. You will not have your bank there to bail you out. So a lot of the advantages from cryptocurrency also comes with the disadvantages that you and you alone are fully responsible for your money!
Cryptocurrency holding and investing is not for the faint of heart. At least not yet. But with all of the advantages of this payment system, we are confident that the good will outweigh the bad in the future. Technology is always getting better and better. Combined with increasing adoption and use cases, crypto will be here to stay.
This article was written to the best of our knowledge with the information available to us. We do not guarantee that every bit of information is completely accurate or up-to-date. Please use this information as a complement to your own research. Nothing we write in any of our articles is intended as investment advice nor as an endorsement to buy/sell/hold anything. Cryptocurrency investments are inherently risky so you should never invest more than you can afford to lose.