Cryptocurrencies are relatively new, which means many people are still uncertain whether or not to invest in them. This page will outline some of the key pros and cons of investing in and using cryptocurrencies.
Firstly, there are a number of advantages to using cryptocurrencies over traditional currencies.
Many cryptocurrencies are entirely decentralised, which means no central bank or company controls the currency, including the person or company that created it. In this sense, users are each individually entirely in control of their funds.
Since cryptocurrencies use a blockchain or public ledger system to register transactions, this ensures complete transparency; any user can verify a completed transaction and no person, organisation or government can manipulate the transaction history. At the same time, users do not have access to the personal information of other users, beyond a public address; this means users are protected against identity theft.
Untraceability of transactions
Since users simply use public addresses to carry out transactions, no organisation or government can know what any single user is or is not doing with his funds. This ensures complete privacy.
Faster and cheaper transactions
Because the currencies are operated online through a blockchain system, users never need to wait several days (or even hours) to carry out international transactions; it is easy to carry out international payments rapidly. Simultaneously, users can avoid the traditional international transaction fees carried out by banks, since most cryptocurrency payments can be carried out without or with very low fees.
Unlike with traditional currencies, of which the physical representations (such as banknotes) take up a lot of physical space, it is very possible to easily carry around huge amounts of cryptocurrencies, saved on a memory drive.
However, the cryptocurrency user must also take into account a number of disadvantages.
Since cryptocurrencies are relatively new, many people are either ignorant of them or do not trust them. This means that not every business or organisation will accept cryptocurrencies (or particular types of cryptocurrencies) as legal tender.
Cannot be recovered
Cryptocurrencies are decentralised, which means no central bank controls them; this is an advantage, but it also means that there is no mechanism in place to recover or be compensated for lost coins. Once lost, the coins remain lost and users have lost their funds.
This is an advantage, but also a downside, since it means that many criminals are drawn to cryptocurrencies to carry out their illegal business. This means that certain countries and governments might see cryptocurrencies as something connected to crime and attempt to ban them.
Cryptocurrencies are far more volatile than traditional currencies, which means coins held by users can quickly gain, but also quickly lose value. Between 2010 and 2014, for example, the annual year-to-year volatility of Bitcoin was over 100%, which is eighteen times greater than that of the US dollar.
Possibility of economic bubble
Some investors fear that cryptocurrencies are merely a new-fangled fad, which will eventually prove to be an economic bubble. This is a situation in which the price of a particular product or service sharply exceeds its intrinsic value, often due to the excessive optimism of initial investors and their belief in transformative technology, which leads the price to rise and rise until it inevitably collapses and leaves investors facing a loss of funds.