If you've been following technology trends over the past year or so, you've probably heard a lot about cryptocurrencies and the underlying blockchain they run on. Some analysts seem convinced that these virtual currencies will become the standardized medium of international exchange, while others decry the number of people willingly buying into a Ponzi scheme. Who is right?
The truth is that both sides bring reasonable arguments to the table. This article will highlight some of the biggest advantages and disadvantages of digital money systems with as little bias as possible, allowing readers to decide for themselves whether the fledgling technology represents the future of innovation or another passing fad. Let's get started!
Advocating for Crypto
Supporters of crypto tokens such as Bitcoin argue that they allow for a truly free market. Major governments manipulate inflation and exchange rates in their own national interest, while residents of poorer countries such as Bangladesh and Cuba may lack access to reliable currency at all. A universally-accepted crypto token would allow true global competition between people and products around the world, something that cannot currently take place in the global economy.
Likewise, the crypto community is free to choose how much each token is worth without any input from a centralized agency such as the American Federal Reserve. The quantity of nearly every cryptocurrency is revealed at release, with reference sites such as CoinMarketCap.com available to investors interested in either a token's current or future circulation. This controls for inflation, allowing the traditional market forces of supply and demand to dictate value.
Cryptocurrency advocates are also quick to cite the superiority of the blockchain to online banking. If you don't know, the blockchain is a public ledger that keeps track of every transaction in a given coin's history. For example, if Jessica gives Jaden 10 Bitcoin, that transaction is public information that anybody can look up at any time. This structure allows individual tokens to be traced through every account that they have ever been in, making it very difficult for hackers to inject unauthorized coins into the digital economy.
At the same time, the blockchain does not contain the information required to access all of the accounts on the ledger. This means that identity thieves have no centralized hub to attack, making it much more challenging to gain access to multiple accounts than it would be with a traditional financial giant like Visa or Chase Bank. These two features, plus the fact that volunteer "miners" independently verify the validity of every processing transaction, lead supporters to conclude that the blockchain is unhackable.
Finally, cryptocurrency advocates note the potential of blockchain to revolutionize the global economy. For example, some tokens such as Ethereum have programmable blockchains that allow for the execution of so-called "smart contracts," or contracts that automatically provide payment once the prescribed conditions are met. A wholesaler could be paid upon delivery of goods, or a birthday gift could be sent months in advance and received on the appropriate date.
Likewise, the blockchain is capable of processing far smaller transactions than other financial systems. It is possible to send a Satoshi (0.00000001 BTC) on Bitcoin's network, allowing for the potential monetization of products and services that are worth less than 0.01 USD. This could open up a brand new business ecosystem where microtransactions are the order of the day.
The Case Against Cryptocurrency
Opponents of crypto tokens argue that the emerging technology is nowhere near as practical as its advocates would have you believe. First of all, why do digital tokens have value at all? They aren't backed by a major world power like the United States, nor do they have a near-universal tradition of being valuable like precious metals. They aren't tangible, so they serve no practical purpose the way commodities like rice or oil do. You're left at the mercy of other crypto enthusiasts to determine the value of your asset.
The variance of each token's value can also make it difficult for businesses to accept. For instance, it is entirely possible for a Bitcoin to be worth $10,500 today but $8,000 or $12,000 tomorrow. Short of updating your prices in real time, how can any company function when the effective cost of a product priced at one Bitcoin can vary so dramatically?
Crypto transactions are also slower to process than other payment methods. Miners can process anywhere from 3-7 transactions per second on Bitcoin's network, depending on volume and the number of resources available. They are also paid according to the demand for their services, leading to processing charges of up to $25 per transaction during peak periods. In contrast, Visa can process 24,000 transactions per second at a negligible cost. Which strikes you as the more reliable option?
Furthermore, while the blockchain is deemed "unhackable" commonly used exchanges are not. For example, a popular exchange called Mt. Gox revealed that hackers had siphoned off $473 million in digital assets over a period of years back in 2014. Unlike traditional banks, Mt.Gox lacked any kind of insurance, forcing the company to attempt to make their customers whole again. They lacked the resources to do it, ultimately declaring bankruptcy and leaving many crypto investors with a total loss.
The general public is still fairly ignorant of the particulars of the virtual currency space, allowing hackers to rip off novices. A company called BitConnect purported to facilitate cryptocurrency purchases, but in reality was a Ponzi scheme designed for the profit of a few at the expense of the many. It was exposed in 2017, with the masterminds facing prosecution for their transgressions.
Crypto "experts" can also purchase a cheap coin before hyping it up in the media, selling theirs to those following their advice at a substantial profit. This isn't technically illegal as cryptocurrencies are not subject to insider trading laws (or regulation of any kind), but most would agree that it represents unscrupulous behavior.
The Final Word
Cryptocurrencies offer several features that make them intriguing as the possible future of international exchange, but they also face practical challenges that may make it difficult for them to realize their potential. Do you think that developers will be able to solve its issues, or will they prove insurmountable in the near term?