Advantages and Disadvantages of Cryptocurrency

[Olivia]

Cryptocurrencies were introduced with the intent to revolutionize financial infrastructure. As with every revolution, however, there are tradeoffs involved. At the current stage of development for cryptocurrencies, there are many differences between the theoretical ideal of a decentralized system with cryptocurrencies and its practical implementation.

Some advantages and disadvantages of cryptocurrencies are as follows.

Advantages

• Removes single points of failure
• Easier to transfer funds between parties
• Removes third parties
• Can be used to generate returns
• Remittances are streamlined

Disadvantages

• Transactions are pseudonymous
• Pseudonymity allows for criminal uses
• Have become highly centralized
• Expensive to participate in a network and earn
• Off-chain security issues
• Prices are very volatile

Advantages Explained

• Cryptocurrencies represent a new, decentralized paradigm for money. In this system, centralized intermediaries, such as banks and monetary institutions, are not necessary to enforce trust and police transactions between two parties. Thus, a system with cryptocurrencies eliminates the possibility of a single point of failure, such as a large bank, setting off a cascade of crises around the world, such as the one triggered in 2008 by the failure of institutions in the United States.
• Cryptocurrencies promise to make it easier to transfer funds directly between two parties without needing a trusted third party like a bank or a credit card company. Such decentralized transfers are secured by the use of public keys and private keys and different forms of incentive systems, such as proof of work or proof of stake.
• Because they do not use third-party intermediaries, cryptocurrency transfers between two transacting parties can be faster than standard money transfers. Flash loans in decentralized finance are an excellent example of such decentralized transfers. These loans, which are processed without backing collateral, can be executed within seconds and are used in trading.
• Cryptocurrency investments can generate profits. Cryptocurrency markets have skyrocketed in value over the past decade, at one point reaching almost $2 trillion. As of April 2023, Bitcoin was valued at more than $540 billion in crypto markets.13
• The remittance economy is testing one of cryptocurrency's most prominent use cases. Currently, cryptocurrencies such as Bitcoin serve as intermediate currencies to streamline money transfers across borders. Thus, a fiat currency is converted to Bitcoin (or another cryptocurrency), transferred across borders, and subsequently converted to the destination fiat currency. This method streamlines the money transfer process and makes it cheaper.

Disadvantages Explained

• Though they claim to be an anonymous form of transaction, cryptocurrencies are pseudonymous. They leave a digital trail that agencies like the Federal Bureau of Investigation (FBI) can investigate. This opens up the possibility that governments and authorities (and others) can track financial transactions.
• Cryptocurrencies have become a popular tool with criminals for nefarious activities such as money laundering and illicit purchases. The case of Dread Pirate Roberts, who ran a marketplace to sell drugs on the dark web, is already well known. Cryptocurrencies have also become a favorite of hackers who use them for ransomware activities.14
• In theory, cryptocurrencies are meant to be decentralized, their wealth distributed between many parties on a blockchain. In reality, ownership is highly concentrated. For example, just 100 addresses hold roughly 12% of circulating bitcoin and total value.15
• One of the conceits of cryptocurrencies is that anyone can mine them using a computer with an Internet connection. However, mining popular cryptocurrencies require considerable energy, sometimes as much energy as entire countries consume. The expensive energy costs and the unpredictability of mining have concentrated mining among large firms whose revenues run into billions of dollars. For example, only 98 (2%) of the 4,882 Bitcoin blocks opened from Dec. 29, 2022, to Jan. 29, 2023, were opened by unknown addresses—the other 98% were opened by mining pools.16
• Though cryptocurrency blockchains are highly secure, off-chain crypto-related key storage repositories, such as exchanges and wallets, can be hacked. Many cryptocurrency exchanges and wallets have been hacked over the years, sometimes resulting in millions of dollars worth of "coins" stolen.17
• Cryptocurrencies traded in public markets suffer from price volatility. For example, Bitcoin has experienced rapid surges and crashes in its value, climbing to nearly $65,000 in November 2021 before dropping to just over $20,000 a year and a half later.18 As a result, many people consider cryptocurrencies to be a short-lived fad or speculative bubble.