What the pros and cons of cryptocurrency? We look at cryptocurrency pros and cons to find out the benefits and drawbacks of digital currencies like bitcoin.
The bottom line: Lots of advocates of Cryptocurrency will tell you that it is the best financial system ever invented and that it has no faults. On the other hand, some people will point to examples such as the illegal deep-web market Silk Road to try and convince you that it is just a tool for crime. Techies love it – the DEA hates it – lawmakers are confused by it… but you’ll need to form your own opinion. Below you’ll find an evolving list of Cryptocurrency pros and cons to help you understand what all the fuss is about.
CryptoCurrency Pros and Cons List
Below is a side-by-side comparison of cryptocurrency pros and cons, below the table you will find a detailed discussion on each perk and pitfall.
|Cryptocurrency Pros||Cryptocurrency Cons|
|Most cryptocurrencies are built from the bottom up with security and privacy in mind. This means users can expect transactions to be private and secure despite non-identifying transaction data being public.||Secure and private transactions can lead to making it easier for people to skirt the law. Third parties involved in cryptocurrency, like those who produce wallets and exchanges, don’t always have the same level of security as a coin’s network itself.|
|Cryptocurrency is legal and, if it is claimed correctly for tax purposes, opens up another avenue for transactions.||The value of cryptocurrency changes and laws on how to claim them as taxable income are fuzzy. It can be unclear as to how much value the coins have and thus can confuse what taxes should be paid on them. Should you pay based on what they were worth when you got them, or what they are worth when you file? There are answers to these tax questions, but it is complicated! Also the private nature of transactions can make avoiding paying the proper taxes easy.|
|Cryptocurrency has low transaction costs compared to other digital payment methods like PayPal.||Cryptocurrency is only accepted by certain vendors. Between that and fluctuating prices the money saved in transaction costs could be negligible.|
|Through the process of mining (securing cryptocurrency transactions) anyone with access to a computer and the internet can make money mining coins.||Cryptocurrency mining (at least in proof-of-work systems) is a CPU intensive process that requires an extraordinary amount of resources for no purpose beyond regulating coin creation and encryption.|
|Since the cryptocurrency market is volatile it can be a high reward (albeit high risk) investment.||The cryptocurrency market is volatile, the value of coins can change wildly in a short amount of time. In 2014 the value of bitcoin ranged between about $30 and $1000!|
|Cryptocurrency makes trading anywhere in the world easy. It’s a decentralized currency. This opens up financial options for people in countries that don’t have access to financial services.||The coin you trade for a legal thing today can be used to fund awfully illegal things tomorrow. The notorious Silk Road allowed for illegal blackmarket transactions. While all currency runs this risk, cryptocurrency makes this sort of thing easier to pull off.|
|Cryptocurrency is decentralized, meaning it can’t be deflated or inflated due to the choices of a central government.||Not having a central bank control cryptocurrency adds to its volatility as no central force can step in to correct the markets (although this can differ by coin).|
|Transactions are quick, permanent, and hard to fake, this eliminates a lot of the fraud issues banks deal with.||If something goes wrong with a transaction or if a coin is lost there is no way to recover it. If someone does steal coins there is no way to rectify the issue.|
|There is no other entity else that controls your money or its value.||There is no way to recover coins if they are lost and there is no system in place to protect the value of your coin.|
|Cryptocurrency isn’t inflationary. With coins like bitcoin there is a set amount that will ever be created.||Any given cryptocurrency lacks the flexibility of centralized currency due to its non-inflationary nature.|
|Cryptocurrency is transparent despite its privacy features. This is called being pseudo-anonymous. This transparency helps build security and trust and creates a level playing field.||Some privacy coins aside, cryptocurrency is not totally anonymous in most cases. The public ledger system might provide others insight into previously unknown economic activity.|
|Cryptocurrency was designed from the bottom up to be a secure system. In the history of Bitcoin there has never been a successful hack of the Bitcoin network. This can in part be attributed to Satoshi’s focus on this problem from the get go. For example, a major feature of the Bitcoin network is how the system prevents double spend attacks .||Cryptocurrency is software based. Software in general can be hacked and have bugs, and blockchain-based networks have some theoretical vulnerabilities (51% attacks are theoretical threat for example). Although Bitcoin’s network has never been hacked, in large part due to its design, exchanges, wallet software, other cryptos, etc can be subject to hacks and bugs in practice and in theory.|
There are lots of truly great things about CryptoCurrency. Believe it or not, the developers and designers of systems such as the Bitcoin Network intentionally built properties into their systems that have made cryptocurrency a competitive alternative financial systems (i.e. banks, Electronic Payment Systems like PayPall, credit cards, and nation-issued currencies).
Low Transaction Costs
One of the most important pros of cryptocurrencies is that they generally have low transaction costs. Unlike other Electronic Payment Systems (like PayPal and money transfers with banks), which tend to have expensive fees, cryptocurrencies generally have very low transaction costs.
This means that it costs less to transfer money from one person to another. This means that merchants don’t have to account for added expenses, and can thus translate into lower prices for the customer. Also, this can be really important for immigrants who left their home country to find work and want to send remittances back to their families.
You can learn more about how people have take advantage of this pro (specifically with regards to Bitcoin) on our page about the Uses of Bitcoin.
Cryptocurrency Works to Combat Poverty and Oppression
Simply put, free and open access to basic financial services could really help those who are impoverished or oppressed.
Currently, many banks and financial institutions don’t serve poor, rural areas (especially in smaller countries). In 2011, the World Bank estimated that 64% of people living in developing countries lack accesses to basic financial services. Further, there are many people who are financially crippled by their governments’ devaluated currencies or frozen capital markets.
Bitcoin offers an alternative to the status quo that provides anyone with internet access with robust financial services. This is especially important for the impoverished and oppressed, as they often don’t have a viable alternative.
Cryptocurrency is a Stimulus for Financial Innovation
Cryptocurrency is new, and in the financial sector, new is exciting. The features of cryptocurrency that are not present in traditional financial systems – for example, its speed, its facilitation of “micro-payments”, its strictly digital nature, and its low transaction costs – will inevitably lead to exciting new business models, financial opportunities, and online business strategies.
On top of this, cryptocurrency’s open-source nature means that developers can extend functionalities by writing API’s and writing application-specific code to interact with cryptocurrency networks.
This trend will become more apparent over time as cryptocurrency becomes more widely used, but we’ve already begun to see exciting new cryptocurrency-driven developments in the free market. For specific examples and a look at recent cryptocurrency developments and applications, be sure to visit our page on CryptoCurrency Today.
Fast, Permanent Transactions
Cryptocurrency transactions generally process quicker than checks and bank-facilitated money transfers. Also, all transactions are final as soon as they are recorded in the permanent Transaction Block Chain (cryptocurrency’s “public ledger”). This means that vendors don’t need to worry about charge-back fees by dishonest customers (a serious issue with PayPal’s electronic payments system that can often financially hurt small vendors and favor larger merchants).
There are plenty of legitimate reasons why someone could want to keep their spending private. For example, consider spouses who are fleeing from abusive partners, people desiring controversial health services, and citizens of nations with volatile or oppressive governments. In these and other such situations, individuals’ safety, health, or even lives may depend on keeping their spending private.
You may not agree, but we CryptoCurrencyFacts believe that you don’t need to have a reason to want to keep your financial transactions private. Some people are ok with having third parties (specifically, advertisers, government agencies, financial institutions, and private corporations) keep detailed records of their spending and receiving, and others may not be. If you fall in the latter category, we don’t believe that you don’t owe an explanation or justification for not wanting others to keep records of your financial activity. Whatever your reasons for desiring privacy, cryptocurrency can provide it.
Keep in mind that we are careful to say “privacy” and not “anonymity”. cryptocurrencies are, by nature, public and open-source systems. Although your transactions are tied only to your “cryptocurrency Address”, detailed information on all of the transactions is available to onlookers via the cryptocurrency’s “public ledger”.
For a detailed discussion on the anonymity (or lack thereof) of CryptoCurrency, be sure to visit our page on Bitcoin Anonymity. Although the discussion is specifically directed at Bitcoin, the principles hold for CryptoCurrency in general.
You’re the Only Person with Control Over your Money
The only way your money can be accessed is by your private key – essentially a cryptographic password that only you know. This means that no bank, corporation, or central government can freeze your assets. Keeping amount of savings in cryptocurrency can be a way to insure yourself financially. Even if your government defaulting on its loans or your bank fails, you will still have an unaffected backup pool of money to draw from.
Your Information Can’t Be Stolen from Vendors
When you use credit and debit cards to make purchases (especially online), you’re trusting the vendor with information that other people could use to steal from you. This means that, if your financial information is stolen from the vendor, your money will be at risk.
It’s interesting to note that this type of information theft occurs more than most people realize. A good example of this is the April 2014 “Heartbleed” bug in the openSSL cryptographic software. Hundreds of popular online services were hacked before the bug was disclosed, including big names like Facebook, Google, Instagram, Pinterest, Tumblr, Twitter, Yahoo, Yahoo Mail, Gmail, Dropbox, TurboTax, and GoDaddy.
CryptoCurrency is Not Inflationary
Since cryptocurrency is still an emerging technology, the value of the various digital currencies can be volatile (as discussed below), but the system was designed to not be inflationary in the long run.
There are many aspects of cryptocurrency which contribute to it’s non-inflationary nature:
- Each cryptocurrency has a finite, set limit on the total number of coins that will come into existence. For example, the total number of bitcoins that can ever come into existence is 21,000,000.
- There are controls and techniques in each cryptocurrency’s protocol that ensure that the process by which new coins come into existence is controlled and predictable over time. This means that we can accurately predict how much of a certain cryptocurrency will exist at any given time in the future.
- There is no money-issuing agency which can decide to mint more currency or enact fiscal policy that decreases the value of the currency.
Many people mistakenly think that cryptocurrency is too difficult a subject to learn and work with. The truth is, anyone can learn to use cryptocurrency. Even with no tech skills or knowhow, you can easily set up a wallet, get a bitcoin address, and start buying, spending, sending, and receiving cryptocurrencies like Bitcoin and Litecoin.
Don’t believe us? Try it! Visit our no-nonsense guide to mining cryptocurrency. We’ll have you Mining Litecoin in 15 Minutes.
As with any new technology, there are some negatives that need to be worked out. While the pros listed above are great, let’s take a bit of time to acknowledge the cons.
Right now, the values of most cryptocurrencies are volatile – they change frequently and sometimes by wide margins. This means that some people have made quite a bit of money when the price of a cryptocurrency (Bitcoin, for example) skyrocketed, and others have lost just as much when the price has crashed.
That being said, it’s likely that as cryptocurrency increases in popularity and more people use it, this volatility will level out. Many have theorized that this initial volatility is just “stress testing”, and thus that the fluctuations in value will gradually level out into stable-valued currencies.
Potential for Security Breaches
Because cryptocurrency is digital money with purchasing power, services working with it will need top-notch security to avoid digital breaches. Notice that the issue here isn’t as much with the cryptocurrency itself, but rather with the 3rd party companies working with cryptocurrency (such as online Wallet and Exchange services).
For more information on the security of cryptocurrency, see our page on Bitcoin Security. While the conversation there is Bitcoin-specific, the principles are relevant to all cryptocurrencies.
As with cash, the privacy afforded by cryptocurrency can be used both legitimately and for illicit purposes. For example, there have been serious concerns raised that Bitcoin opens opportunities for criminals to partake in illegal activities like money laundering, terrorist funding, and the exchange of illegal goods and services.
The most infamous example of this is Silk Road, the Deep Web marketplace which used the anonymizing TOR network and the Bitcoin payment system to allow for the peer-to-peer sale of illegal drugs and forged identity documents.
However, it’s worth noting that this in and of itself is not an issue that warrants writing off cryptocurrency altogether. To recommend that would be like recommending that we stop using cash because some criminals buy drugs with it. Further, since cryptocurrency is not, strictly-speaking, anonymous, the public ledger system might provide law enforcement agencies to gain insights into previously unknown criminal activity.
There’s a saying that you shouldn’t throw the baby out with the bathwater. Having discussed the Pros and Cons of Cryptocurrency, we think that it’s important to keep both sides of the story in mind when making judgements and forming opinions on cryptocurrency.