Table of Contents
Against the background of problems in the global economy, people do not trust fiat currencies and are looking for new options for storing and accumulating capital. Virtual assets can replace conventional money in all spheres, including trade and investment. The advantages and disadvantages of cryptocurrency are highlighted. By understanding the mechanisms that underlie coins and tokens, it is possible to find assets for different purposes: both trading and investing.
The main advantages of cryptocurrencies
Interest in virtual assets shows the level of capitalization. In November 2021, the volume of all coins and tokens was about $3 trillion with the price of bitcoin and altcoins peaking. The exchange rate has changed and market capitalization has fallen, is at the level of the developed world.
Virtual assets are based on blockchain, a decentralized distributed network. There is no regulator who manages the rate, issuance, sets the rules. All transactions are stored in the blockchain, everyone can see any information (except personal). The work of the system is controlled by users themselves – miners, validators and other participants (depending on the validation algorithm).
The benefits of cryptocurrency appeal to people. Some traditional banks and state governments have adopted virtual money. The main advantages are:
- Low price of translations.
- Inflation immunity in the traditional sense of fiat currencies.
- Alternative to gold (for bitcoin).
- Great opportunities for investment.
- Other functions that traditional monetary units do not have.
Many advantages of virtual assets are based on comparisons with fiat. For now, digital coins cannot displace traditional money from circulation and replace it as the main means of payment. However, in some areas, they have already proven to be better than fiat.
Decentralization
Financial systems around the world control money. These are special organizations and structures (banks, credit institutions). This approach increases the cost of service and complicates many processes. Trust in the actions of the regulator is at a low level. This is especially noticeable against the background of countries with poorly developed economies and high inflation.
Cryptocurrency is based on a blockchain, the network is controlled by the participants themselves. To do this, there are consensus validation mechanisms – PoW, PoS and others are among the popular ones. Miners or validators (depending on the algorithm) check transactions and create new blocks. For this they receive a fee, the amount of which depends on the network, the operation.
Decentralization is an advantage, different from the accepted norms and rules. This fact prevents digital assets from being recognized. People don’t understand why no one controls blockchain.
Decentralization is a new format of money security. No one can steal the transfer, send it to another account, as sometimes happens in conventional banks. Fraudsters exist in the digital world as well, but their methods are different: people install fake applications themselves, transfer private keys, and send coins. In blockchain, no outsider can send a transfer to another wallet. The system is secure, despite the absence of regulators – central banks, regulatory agencies.
There are the following centralized job sites:
- Exchange Services.
- Credit platforms and others.
Decentralized analogues of trading exchanges are developing. They represent the next stage in the development of the digital market.
Anonymity
No personal information is needed for transactions. To transfer coins to another user, it is enough to know the wallet address and private keys to access the assets. The owner’s name, personal information, and other details are not displayed. In this regard, the cryptocurrency is anonymous.
Transaction data is online. Anyone can see all the information about the movement of funds at the address of the wallet. There are free services for this. There is no specific data about the owner of the purse, but it is realistic to find it. For example, if the user specifies information about himself and pays in coins, it is possible to link these 2 events and uncover the person.
All centralized trading platforms require registration and full verification. Information about the user of digital assets, including personal information, is available.
Anonymity is both the pros and cons of cryptocurrency. Coins are believed to be untraceable. This is what makes digital currency attractive to fraudsters.
With the increasing digitalization of the environment and the emergence of new payment systems, it is becoming difficult to sort out…
Investors’ interest in blockchain is constantly growing. To get income from investing in digital assets…
Cheap transfers worldwide
Cryptocurrency capabilities are independent of country, distance, or other factors. Making a transaction and sending coins to a user in another country is easy. The fee is not determined by the amount of transfer and other factors that usually affect the cost of traditional cross-border bank transfers.
Transactions are handled by miners or validators (other participants, depending on the validation algorithm). They receive a reward for their work, which is paid by the users who make the transfer. Its size is determined by the following factors:
- Transaction weight.
- Network load.
- Volume of other operations.
You can control the size of the transfer fee. Its size determines the speed of the transaction.
The composition and amount of the fee depend on the network. Popular projects provide a favorable transfer of a large amount of money to another country compared to traditional systems.
No inflation
The financial market is characterized by different indicators. Inflation is the process of devaluation of monetary assets, the growth of prices with a fall in purchasing power. These are features of the economy, without which there is no development. The process differs in the rate of growth:
| Inflation | Value, % per year |
| Low | Up to 6 |
| Moderate | 6 to 10 |
| High | From 10 to 100 |
| Hyperinflation | Over 100 |
Low inflation of about 6% per year ensures the development of the economy. This is the level that all countries in the world strive to maintain. The other indicators have a negative status.
Among the factors affecting inflation is the weakening of the fiat currency of a particular country. An increase in the money supply is also important. The issue of fiat currency is not limited by anything, except the desire of the regulator or the government of the country.
Cryptocurrency is not as prone to inflation. Many projects have limited issuance, which positively affects the exchange rate of assets. For example, Satoshi Nakamoto limited the maximum number of bitcoins at 21 million. At the end of 2021, almost 90% of coins were mined, some of which are permanently blocked in forgotten wallets.
Despite the presence of inflationary processes to which crypto-assets are subject, the level of decline in purchasing power is less than that of fiat currencies.
Digital Gold
Precious metals are stable investment instruments. Gold continues to be the primary means of preservation. Its price is rising. This is what attracts investors to the metal.
Bitcoin is often compared to precious metals, called digital gold. The currency is gradually increasing in value. Even if the rate falls, it won’t last long. Unlike physical gold, cryptocurrency does not require large storage costs. Metals take a long way to the bank.
According to experts, bitcoin is no longer a speculative tool, but a means for savings. Etherium is called digital silver.
Investment opportunities
This is a significant advantage of cryptocurrency. The low entry threshold to the market allows anyone with access to the Internet and a small capital to work and make a profit. A potential investor must understand the peculiarities of the market, understand the mechanism of processes that exist in the digital world. However, this does not require licenses or courses. Knowledge can be obtained free of charge; many exchanges provide such information.
A low entry level is not always a good thing. One should not panic, invest for the long term and choose the asset to buy carefully. It is important to determine how to hold it and study the market.
New Opportunities
Digital money is an ecosystem of coins and tokens that contains many avenues for making money. Cryptocurrency acts as a means of payment, just like fiat. More and more merchants are offering customers the opportunity to pay for goods and services with coins. For example, Tesla accepts Dogecoin.
Other features:
- Trading tool for trading.
- A means to invest and save capital.
- A tool for making money by mining (no fiat currency).
- A means to generate income and so on.
The main disadvantages of cryptocurrencies
The digital market is still developing. Many problems are already a thing of the past. However, there are disadvantages that prevent virtual assets from taking the place of fiat money.
Volatility
The main problem with bitcoin and altcoins is sharp fluctuations in exchange rates. Volatility prevents coins from being invested. Newcomers to trading can lose money the first time the exchange rate drops.
The value of cryptocurrency is based on user trust. Coins are not secured by anything (except a separate category). Therefore, the price depends on external factors:
- News background.
- Actions of regulators in each country (prohibition, legalization).
- World events.
- Recognition by companies as a means of payment.
For trading, volatility is a positive phenomenon. The higher the risk, the higher the opportunity to make money. Requirements for the experience and knowledge of the trader grow. In general, volatility prevents coins from becoming a means of payment.
High commissions
In the formative years of the digital world, when there was no demand, the strain on the network allowed transactions to take place without much reward. At some points, the fees on popular networks reached values at which a transaction of a small amount was unprofitable.
Unlike traditional banks, Bitcoin’s fees do not change. You can’t pre-determine the fee or the time of the transaction. You can set your fee to the miners, but it takes longer than usual to complete the transaction.
In addition, there are commissions for the withdrawal of cryptocurrency into fiat through exchange services or trading platforms. This reduces the benefits of digital assets, making it unprofitable to use. Sometimes it is more convenient to store funds in koins, not to transfer them into fiat money.
The costs of an exchange transaction consist of several commissions:
- For entering currency into the service.
- For the purchase of coins or tokens.
- For the withdrawal of coins into fiat.
The user should calculate the costs of different ways to buy cryptocurrency. High fees are a disadvantage of cryptocurrencies.
The complexity of public perception
Bitcoin and other coins are incomprehensible to many people. People who have not encountered digital assets do not know what they are. The complexity of society’s perception is the reason for users’ mistrust. Cryptocurrency is not easy to access. It is necessary to have knowledge, to understand the nature of digital assets in order to apply coins. If traditional payment systems are used to, there are available mechanisms (cards, payment terminals, ATMs for cash), then with cryptocurrency is more complicated.
The strong growth of bitcoin makes users think it is a speculative asset. People think of cryptocurrency as a financial pyramid or a fraudulent scheme. There is no tangible collateral behind digital assets. Most do not understand how their price is formed. In this case, the rate of familiar to all fiat currencies is also formed under the influence of factors unknown to ordinary people. Just like virtual money, dollars, rubles, or euros are not backed by tangible assets.
Regulation
The different approach to cryptocurrencies in countries is a big problem for the development of digital assets. Decentralization and the absence of a single regulator is an advantage of cryptocurrency. However, its application at the state level requires recognition, the definition of the legal status. Without regulation, it is impossible to legally use virtual money. This is the main conflict of interest:
- Owners are attracted by decentralization and the absence of a supervisory body.
- Governments fear an unregulated system.
Therefore, countries around the world have different approaches to digital currency – from a complete ban to its use as a means of payment on a par with national money.
Cryptocurrency is banned in 10 countries, 107 states allow it in one form or another, and 135 have no government position. At the same time, in the U.S., the attitude to digital money varies from state to state. This is due to the large physical size of the country and a special structure with extensive rights of subjects.
The prosperity of shady businesses
According to the central banks of various countries, cryptocurrency attracts representatives of the criminal world. This is possible because of the lack of control and regulatory bodies, decentralization and anonymity of payments.
Bitcoin and some other coins became popular thanks to the “darknet. Coins are convenient for paying for drugs, weapons and other illegal items. Anonymity is the main quality of digital assets, which attracts criminals. Cryptocurrency mixers are used to hide the trail of transactions behind each coin.
Experts believe that bitcoin has given a boost to the black market. The possibility of control by law enforcement agencies is reduced, there is no need to mess with bank transfers, which are easy to trace. Everyone knows the Silk Road online market, where bitcoin was the main means of payment.
It is worth noting that criminals use many tools that are used for quite normal purposes (for example, conventional currency, cars, computers and other things). The situation with cryptocurrency is similar. In order to combat illicit trafficking of digital assets, it is necessary to adopt appropriate legislation.
Fraudsters
One of the disadvantages of cryptocurrency is the irreversibility of transactions. Transactions cannot be undone or corrected. No one will return coins obtained by criminal means.
There are many ways to deceive users. Most of them are based on people’s gullibility. Many believe in the huge interest rates, fast income, the absence of commissions at the exchange service. This serves as a lure for owners to transfer coins. It is impossible to undo such a transaction, even if it is proven that it occurred under the influence of fraudsters.
To protect yourself, you need to think about every lucrative offer, not to trust advertisements and promises of big profits. It is important to use reliable sites, check the address when going to third-party resources. It is necessary to install software from official sites of developers or app stores.
