Cryptocurrency is defined as a digital currency in which transactions are verified and records are maintained by a decentralised system using cryptography, rather than a centralised authority such as our everyday banks. It’s an ever expanding market, appealing to the public not only because of its decentralised system of transactions, but also its ‘foreignness’ within the financial sector. But will it be able to compete with the likes of our everyday banks?
What is the appeal of cryptocurrency and its advantages?
On one hand, many people agree that cryptocurrency's decentralised system is what drives its appeal. However, one could argue that its cryptocurrency's foreign and elusive charm is what sparks public intrigue. Individuals who have barely been exposed to this modernistic technology developing within the financial sector idolise it, viewing it as the future of financial transactions as we know it. Its modernistic charm combined with how little people know about how it functions is what bolsters the popularity of crypto, as many people don't know how cryptocurrency works, yet 'everyone' seems to invest in it. Furthermore, this induces this pressurised environment where people feel as if they are missing out on a golden opportunity to generate wealth, pushing many people to invest and buy cryptocurrency with little to no research in how it works.
Arguably, what people admire about crypto is its potential: its potential demand in the future, its potential to generate wealth and above all, its potential to revolutionise transactions as we know it. Moreover, cryptocurrency's decentralised transactions are catered to give individuals greater control over their own money. Previously, traditional currency relied on a central authority such as a bank or government to manage/ regulate transactions, which could involve banks hiding the fees of exchange rates or delaying payment processing to manipulate the exchange rate in their favour.
Not only does crypto not have any transaction fees and doesn’t delay international payments like a bank, cryptocurrency's decentralised transactions provide a public ledger called blockchain which eliminates the need for intermediaries. Additionally, although the blockchain records all transactions between users, it is anonymous regarding who is making the transaction, simultaneously providing both privacy and transparency at the same time.
Cryptocurrency can also propel the development of the financial market further, being used as a tool for financial inclusion. In many developing countries such as Micorenisa and Nauru, banking systems aren’t accessible to a large portion of the population, and with the introduction of cryptocurrency it allows unbanked countries to improve financial well-being and access the global economy.
Are there any disadvantages?
In contrast, rather than improving financial well-being, cryptocurrency can be a detriment to an individual’s finances. Cryptocurrencies are known to have extreme price volatility, which is only amplified by schemes such as pump and dumps (where buyers artificially inflate the value of a token by attracting a surplus of buyers, then selling the overvalued asset at a profit which removes the coin's liquidity therefore crashing the price). This makes it an unsuitable medium to invest large portions of money in and expect a return. Furthermore, cryptos value relies on people buying it continuously, reflecting the model of a pyramid scheme, as the asset’s value is only based on the demand for it, relying on people reeling in new buyers to keep cryptos value from fluctuating to become negative (where the asset will be worth less than nothing). When this occurs, the lack of a safety net that a third party such as a bank provides is gone, resulting in people being unable to recover from major financial losses.
Furthermore, the lack of intervention from banks worsens when cryptocurrency transactions cannot be reversed. Therefore, if an individual falls victim to a scam, or sends money to the wrong recipient, they won’t be able to claim any compensation/ cancel the transaction. In addition, although crypto can be seen as a progression towards a digitalised system of transactions, providing pseudonymity and privacy, this can come with downsides such as being used as a medium for illicit uses. Due to the lack of identity being associated with a transaction, crypto can be used as grounds for crimes such as money laundering and fraud, concerning law enforcement as they can only trace the payment back to a pseudonym, not an individual.
One can argue that it requires regulation, with the FCA stating that “firms wishing to promote crypto assets in the UK to retail consumers must, by law, be authorised or registered by the FCA, or have their marketing approved by an authorised firms” yet in some countries such as the US, private trading between private users STILL hasn’t been regulated.
What’s more, cryptocurrency platforms are relatively complex for the average user to navigate, which only worsens when congestion on crypto sites occurs, slowing down the transaction time and potentially crashing the site. The lack of user-friendly interface as well as the potential collapse of the site overall overcomplicates the experience and acts as a barrier to new buyers who would like to invest in coins such as Ethereum, Bitcoin etc. Moreover, this complicated interface can also hinder law enforcement when tracing transactions, further delaying justice and fostering crimes through cryptocurrency.
So…?
In conclusion, cryptocurrency’s potential is limitless, with the power to improve financial well being by revolutionising unbanked countries and including them within the global economy. Additionally, their accessible decentralised transactionality can provide a seamless experience for users. However, in order for crypto to compete with everyday banks, there needs to be tighter regulation. Cryptocurrencies must be able to provide some form of safety net when a user’s transactions are mishandled in order for the public to view them as a legitimised asset to invest in, which would also diminish the level of criminal activity associated with crypto, further enhancing crypto’s safety as a financial asset to invest in.
Alba is a sixth-form student currently studying Maths, Further Maths, Physics and Economics with a hope to pursue Economics at a degree level.