There are a number of advantages and disadvantages when it comes to crypto. This lesson will be dealing with the advantages to cryptocurrency.
1. Built-in Scarcity May Support Value
Since most cryptocurrencies are hardwired for scarcity, the source code for them specifies exactly how many units can ever exist. Hence, cryptocurrencies are more similar to precious metals than to fiat currencies. Like precious metals, cryptocurrencies may offer inflation protection which is unavailable to those who use fiat currencies.
2. Loosening of Government Currency Monopolies
Cryptocurrencies offer a means of exchange that is reliable, outside the direct control of national banks, such as the European Central Bank and the U.S. Federal Reserve. This reliable means of exchange is particularly attractive those who worry that quantitative easing (central banks’ “printing money” through purchasing government bonds) and other forms of loose monetary policy, like inter-bank lending rates that are near-zero, will lead to long-term economic instability.
Eventually, many economists and political scientists anticipate that world governments to co-opt cryptocurrency, or at least to incorporate the aspects of cryptocurrency (like authentication protocols and built-in scarcity) into fiat currencies. It could potentially satisfy some of the cryptocurrency proponents’ worries regarding fiat currencies’ inflationary nature and the inherent insecurity of actual cash.
3. Self-Policing, Self-Interest Communities
Mining is a built-in policing mechanism and quality control for cryptocurrencies. Since miners are paid for their efforts, they have a financial stake in keeping accurate, up-to-date transaction records. This, then, secures the system’s integrity and the value of the currency.
4. Strong Privacy Protections
Principal concerns for early proponents of cryptocurrency were privacy and anonymity. These remain concerns today as well. Many cryptocurrency users employ pseudonyms that aren’t connected to any accounts, information, or stored data that could identify them. While it is possible for sophisticated community members to deduce the identities of the users, newer cryptocurrencies (post-Bitcoin) have extra protections that make it a lot more difficult.
5. Tougher for Governments to Exact Financial Retribution
When citizens in authoritarian countries run afoul of their governments, these governments can freeze or seize their domestic bank accounts easily, or they can reverse the transactions made in local currency. With cryptocurrencies, that is not possible because of its decentralized nature. The funds and transaction records are stored in numerous locations around the world. This effectively prevents state seizure. It’s a slight oversimplification, but by using cryptocurrency, it is like having access to a theoretically unlimited amount of offshore bank accounts.
6. Usually Cheaper Than Traditional Electronic Transactions
The concepts of private keys, block keys, and wallets help to effectively solve the problem of double-spending. This ensures that tech-savvy crooks who are capable of duplicating digital funds do not abuse new cryptocurrencies. The security features of cryptocurrencies also eliminate the need for a third-party payment processor, like PayPal or Visa, for authenticating and verifying every electronic financial transaction.
In turn, this removes the need for mandatory transaction fees to support the work of the payment processors. The miners, who are the cryptocurrency equivalent of payment processors, earn new currency units for their work in addition to optional transaction fees. Generally, the transaction fees for cryptocurrency are less than 1% of the transaction value. With credit card payment processors and Paypal, the transaction fees are 1.5% to 3%.
7. Fewer Costs and Barriers to International Transactions
When it comes to international transactions, cryptocurrencies do not treat them any differently than domestic transactions. Either, transactions are free, or they come with a nominal transaction fee, no matter the location of the sender and recipient. It is a huge advantage relative to international transactions involving fiat currency. The fiat currencies almost always have some special fees that do not apply to domestic transactions, like fees for international credit cards or ATMs. Direct international money transfers can be very expensive. They can have fees that sometimes exceed 10% or 15% of the transferred amount.
Next, we will move onto the disadvantages.
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