Cryptocurrency has come a long way since it was first introduced in 2009. Since then, crypto has gained mainstream acceptance, and several types of cryptocurrencies have grown and flourished.
As interest in digital currencies continues to grow, you may be wondering whether it’s worth investing in these digital assets. Weighing the pros and cons of cryptocurrency will help you make an informed decision.
Before investing in cryptocurrency, it’s important to understand the positives and the negatives of digital currency.
All forms of cryptocurrency are built with security and privacy in mind. Think of it as a virtual form of cash. Purchases can be made with anonymity, so there’s less risk of identity theft.
Although transactions have no personally identifiable information, they are made public. Cryptocurrency transactions are stored on an open ledger, known as the blockchain. Anyone can view this data at any given time, but they won’t know the identities of the people behind these transactions.
Low Transaction Costs
Compared to other digital payment options, like Stripe or PayPal, cryptocurrencies have lower transaction costs. Some coins don’t even charge a fee to finalize the transaction.
When cryptocurrency is sent from one address to another, the user may have to pay a network transaction fee. The actual fee will depend on the network that’s being used, and it will either be added to the value of the crypto or subtracted from the end cryptocurrency.
Some networks have no transaction fees, but for those that do, the fee is normally lower than other payment options.
Free of Geopolitical Impact
When weighing the advantages and disadvantages of cryptocurrency, one major benefit is that digital currency is free of geopolitical impact.
Cryptocurrencies are decentralized, so they are less affected by political influence. Because they operate independently of traditional markets, they are also immune to inflation or deflation.
Cryptocurrencies aren’t tied to one particular country or group of countries, so they are not impacted by policymaking, natural disasters, conflicts and other events that would negatively impact traditional currencies.
When you make a purchase with a traditional debit or credit card, you provide identification, including your name and account information. Most people don’t think twice about this exchange, but it puts your personal information at risk.
Hackers and thieves can gain access to your information when data breaches occur. Identity theft is a growing problem. In 2018, 14.4 million Americans alone were victims of identity theft, and more than 3 million were still held responsible for some of the liability of the fraud.
Data breaches happen on a regular basis, and you may not always be made aware of the incident.
Cryptocurrencies give you a way to protect your identity. All transactions are anonymous. The transaction itself is visible on the open ledger, but no identifiable information is included.
A New Way to Make Payments
Cryptocurrency provides consumers with another option for making payments. Many consumers don’t have access to credit or debit cards. Location constraints may make it difficult for buyers in some countries to make payments via credit card.
Cryptocurrency is legal in most parts of the world, and it provides a borderless method of paying for goods or services.
Tax Laws are Tricky
Cryptocurrency is volatile, so its value is constantly changing. To make things even more complicated, the laws on how to claim digital currency as taxable income are often vague and unclear.
Without a clearly defined way to value the coins, it’s difficult to determine how much taxes should be paid on them. For governments and cryptocurrency holders, these unclear laws can make tax filing challenging and complicated.
Only Accepted by Certain Vendors
Although cryptocurrency is gaining mainstream acceptance, it is still only accepted by certain vendors. Currently, digital currencies are not as widely accepted as Visa, Mastercard or other major credit cards.
Having a limited selection of vendors is a major disadvantage of cryptocurrency, but as it continues to gain mainstream acceptance, the list of participating vendors will grow. Major brands like Starbucks and Whole Foods recently began accepting cryptocurrency as payment for their products.
Cryptocurrency can be converted to cash, but that defeats the purpose of this decentralized, anonymous currency.
Transaction Fees Fluctuate
Fees fluctuate depending on the market demand and network capacity. The average transaction fee on the Bitcoin network, for example, has been steadily increasing because the cryptocurrency is becoming a scarce resource. The way in which transaction fees are calculated is also a disadvantage. The more you pay, the quicker your transaction is processed. People paying higher network fees jump the queue, and those paying lower fees are deprioritized.
Fees fluctuate depending on the market demand and network capacity. The average transaction fee on the Bitcoin network, for example, has been steadily increasing because the cryptocurrency is becoming a scarce resource.
The way in which transaction fees are calculated is also a disadvantage. The more you pay, the quicker your transaction is processed. People paying higher network fees jump the queue, and those paying lower fees are deprioritized.