The Basics of Cryptocurrency: Disadvantages of Cryptocurrency

You can not have a complete guide to cryptocurrencies without covering the inevitable disadvantages of cryptocurrency. While there are several disadvantages to using cryptocurrencies, these issues are decreasing every day:

1. Lack of Regulation Facilitates Activity on Black Market

Presumably, one of the biggest drawbacks and regulatory concerns surrounding cryptocurrency is its ability to facilitate unlawful activity. There are many grey and black market online transactions which are denominated in Bitcoin and other cryptocurrencies. For example, the infamous “dark web” marketplace Silk Road used Bitcoin, facilitating illegal drug purchases and other illicit activities before it was shut down in 2014. Also, cryptocurrencies are increasingly popular tools for money laundering. They funnel illicitly obtained money through a “clean” intermediary, which conceals its source.

Those strengths that make cryptocurrencies difficult for governments to seize and track, they are what allow criminals to operate with relative ease.

2. Potential for Tax Evasion in Some Jurisdictions

Since national governments do not regulate cryptocurrencies, the cryptocurrencies usually exist outside their direct control, and naturally, attract tax evaders. There are many small employers who pay employees in Bitcoin and other cryptocurrencies. They do this to avoid liability for payroll taxes and to help their workers avoid income tax liability. With online sellers, they often accept cryptocurrencies to try to avoid sales and income tax liability.

3. Potential for Financial Loss Because of Data Loss

The early cryptocurrency proponents believed that, if adequately secured, digital alternative-currencies promised that they would support a decisive moving away from physical cash, which they hold as imperfect and inherently risky. Assuming an almost uncrackable source code, impenetrable authentication protocols (keys) and adequate hacking defences (which Mt. Gox lacked), it is safer to store money in the cloud or even a physical data storage device than in a purse or your back pocket.

However, all this is assuming that cryptocurrency users take proper and adequate precautions to avoid data loss. For example, the users who store their private keys on single physical storage devices, if their device is lost or stolen, will suffer irreversible financial harm. Even those who store their data with a single cloud service, if the server is physically damaged or disconnected from the internet, can face loss.

4. Potential for High Price Volatility and Manipulation

Many cryptocurrencies have few outstanding units that are concentrated in a handful of individuals’ (often the creators of the currencies and close associates) hands. These holders effectively control the supplies of the currencies, making them susceptible to wild value swings and outright manipulation.

5. Often not Exchangeable for Fiat Currency

Generally, only the most popular cryptocurrencies, the ones with the highest market capitalization, in dollar terms, have dedicated online exchanges permitting direct exchange for fiat currency. The rest of the cryptocurrencies do not have dedicated online exchanges. Therefore, they are not directly exchangeable for fiat currencies. Instead, users need to convert them into more commonly used cryptocurrencies, like Bitcoin, before the fiat currency conversion. This suppresses demand for, and therefore the value of, some lesser-used cryptocurrencies.

6. Limited to No Facility for Refunds or Chargebacks

Although cryptocurrency miners have the role as quasi-intermediaries for cryptocurrency transactions, they aren’t responsible for arbitrating disputes between the transacting parties. The idea of such an arbitrator violates the decentralizing impulse of modern cryptocurrency philosophy’s core. What this means is that you don’t have anyone to appeal to if you are cheated in a cryptocurrency transaction. An example is paying up front for an item you never receive. Though there are some newer cryptocurrencies which attempt to address the issue surround chargebacks/refunds, the solutions remain incomplete and mostly unproven.

By contrast, traditional payment processors like MasterCard, Visa, and PayPal often step in to help to resolve buyer-seller disputes. Their chargeback, or refund, policies are designed specifically for preventing seller fraud.