WHAT’S IN THIS REVIEW?
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How many dollars do you have in your wallet? What about coins? If you’re like me, you have to run to the ATM any time you need cash, or there’s a small stash of coins in your car. The reality, of course, is that most money in circulation is actually digital. Yet, sometimes it seems that very few people have thoroughly explored the implications of that fact.
Somewhere in your bank’s servers sit the digital bits that represent your checking account balance. Mostly, there are no paper bills or coins actually stored anywhere that represent your deposits. In fact, there are no commodities that back up your dollars either (i.e. gold or silver). The dollar is mainly a digital currency today. So, is it not reasonable to consider alternative currencies that may offer us better benefits?
Current State of the US Dollar
Before we talk about cryptocurrency, let’s stick with the dollar a little longer (I’ll refer to it as USD). Since its value hasn’t been tied to a commodity since 1971, the USD is considered a fiat currency, meaning that it only has value because Uncle Sam says so. Never mind that it has lost 98% of its value since 1913, and most of the money in existence today is pretty new. The Federal Reserve (USD’s controlling body made up of humans rather than transparent, open-source computer code as with crypto) inflates the USD (and thus taxes your savings) when it monetizes federal debt and increases banks’ loanable funds.
Moreover, former Fed Chairman, Alan Greenspan, even claimed in an article prior to his tenure that “[federal] deficit spending is simply a scheme for the confiscation of wealth.” If that’s true (he would be the expert after all), there’s been a lot of confiscation happening lately. Essentially, the USD offers a way by which people who already have a lot of USD can get access to cheap loans and then use that money to drive up asset prices, which they mostly own already (i.e. the rich get richer). It’s all a bit jarring when you first wrap your head around the state of USD. However, it also explains quite clearly why and how cryptocurrency started.
What Is Cryptocurrency
In the wake of the 2008 financial crisis, cryptocurrency emerged as a means for people to control their own money themselves, void of any bank or government manipulation. Without getting too technical, it’s a digital asset meant to be used as money and also tries to prevent the problems that come with a normal digital fiat currency like USD.
The governance of this currency is handled using open-source software and algorithms anyone can view. Changes in the supply of the monetary units (coins) across cryptos are also meant to be predictable (as compared to USD for example). And, the ledger that records transactions is managed by code and is very difficult to hack.
Coins are created in a process called mining that incentivizes the use of computing power to secure and complete transactions on a specific network. Like gold mining, real work goes into the production of a crypto coin (as compared to USD that’s printed from thin air). Finally, they use advanced cryptography (to varying degrees) to secure this entire process. The technical details of each implementation of a cryptocurrency can be found in their respective whitepapers, which we recommend perusing before starting any crypto trading.
Adoption Rate of Cryptocurrency
On the whole, there’s a lot of speculation around the efficacy of cryptocurrency. Can it replace USD? Or, will it inevitably fizzle out? A lot of this depends on user adoption. One significant blocker for this is price volatility, which occurs in large part due to people’s misunderstanding of the purpose of cryptocurrency (at least in essence).
Contrary to mainstream chatter on the subject, the intended use of crypto is as a stable currency, not an investment vehicle. Using crypto as a means to get rich quick is very risky, especially when a single tweet from Elon Musk can drive down the value of a coin overnight. Instead, cryptocurrency was created as an alternative money system that’s predictable. As more people come to trust and accept it as a form of payment for goods and services, the more stability and legitimacy (and thus value) it will hold. This, research suggests, is already underway.
In January 2021, global crypto trading grew to 106 million users, a 15.7% increase from the previous year. This spike in user adoption was largely driven by the huge growth in DeFi last summer, the massive inflation of the USD, and PayPal offering crypto services. Even more encouraging, as of June 2021, El Salvador became the first country in the world to make Bitcoin legal tender. Charlie Lee, a prominent crypto influencer, reflected on Bitcoin’s road to legitimacy, stating “it is the first time I got goosebumps from something happening in the space” in over ten years.
Looking further into the future, Deutsche Bank in Germany released its Imagine 2030 Report, where it predicts the number of crypto traders to surpass 200 million within a decade. From big corporations to individual thinkers, cryptocurrency is surely picking up steam.
Pros & Cons
Being realistic here, it’s important to keep in mind that there are always trade-offs. No one money system can solve all our economic problems. No single coin should be used to preserve one’s wealth. Rather, cryptocurrency comes with inherent benefits and limitations users must assess for themselves. After all, the technology was built with individual control at the forefront.
Below are the key advantages and disadvantages of cryptocurrency still wildly up for debate:
- No negative balances – Unlike the USD, you can’t spend crypto coins you don’t have. Some view this as a con, but most will agree this helps prevent reckless spending and inflation.
- Backed by 100% reserves – Thanks to fractional reserves, it’s nearly impossible to stop by your bank and withdraw all your money at once. By comparison, all crypto coins in your wallet are yours to spend, transfer, and travel with as you want without limitation.
- Security – The sophistication of cryptography makes it harder to hack an entire blockchain than it is to hack a centralized server (i.e. a bank), making it safer in many ways than fiat currencies. Moreover, paired with a trustworthy VPN like NordVPN, your transactions can be much harder to link back to you. This is because a crypto VPN anonymizes your IP address and secures your data.
- Promotes a global economy – Crypto trading removes a lot of the regulatory hurdles governments impose on trade between countries, which helps to facilitate more voluntary exchange across borders. For example, you don’t have to deal with currency exchanges when you travel. You can also avoid many of the outlandish tariffs and transaction fees involved with sending money internationally.
- Very convenient – Digital wallets first started the steady move away from physical money, allowing people to pay on the go with a tap of their phone. However, even that is limited to accepting vendors and country restrictions. Cryptocurrency goes a step further as a borderless currency you can take anywhere in the world. Users also no longer need to lug around their wallets or precious metals when out and about.
- Flexibility – With crypto, you have incredible flexibility in how you use your money since different cryptocurrencies exist for different purposes. For example, Bitcoin is largely used for big transactions, Cardano is popular for its low transaction fees, and Monero beats them all for privacy.
- Decentralized – Probably the most important feature of cryptocurrency is its decentralization. Unlike the USD (which is controlled by a single body), crypto is not controlled by any central authority. Non-scammy coins operate using open-source code that’s transparent.
- Energy consumption – As cryptos scale, the computing power to mine coins can become extremely high due to the complexity of the process. For miners to earn a coin, they have to solve a numerical puzzle that has a 64-digit hexadecimal solution known as a hash before anyone else. This requires a lot of electricity. For example, Bitcoin mining uses so much energy that, if Bitcoin were a country, it would rank #29 out of 196 countries for energy consumption.
- Price volatility – We touched on this briefly above, but it essentially is what it sounds like. The fluctuation of crypto prices can be dramatic. However, a lot of that has to do with how people are using it as an investment tool rather than a stable currency. The financial advising group, Motley Fool, concurs that cryptocurrencies always end up bouncing back, even after huge losses in 80-95% of cryptocurrency pricing value.
- Ponzi schemes – All you have to do is Google “Bitconnect” to understand how crypto can be used to scam people out of money. Get rich quick schemes never last, and unfortunately, the speculation around cryptocurrency makes it ripe for bad actors. This is why it’s crucial to always, always, always read the whitepapers of any crypto you’re interested in before buying.
- Ransom threats – Because of its discretionary nature, cryptocurrency is an optimal payment method for criminals these days. It’s private and unregulated, which is why hackers today request crypto as payment during a ransomware attack. Once a business or individual transfers funds, it’s nearly impossible to get it back.
- Government regulation – Wherever there’s money to be had, governments soon follow. Right now, there’s very little government oversight. This is a con for newbies unsure of the technology and a pro for individuals who want more control over their savings. However, government regulation may be necessary for the masses to trust and adopt it as a form of money.
- Visible account balances – Most cryptocurrencies (e.g. Bitcoin) openly display users’ account numbers and transaction amounts on the blockchain. There are certainly no names associated with them. Yet, if a criminal or someone within your circle were able to connect the dots, you could be at risk of a ransom threat.
Overall, I think we’re a few decades out from really knowing if cryptocurrency will survive its tumultuous start. However, if the convenience of using fiat over crypto becomes negligible, fiat currency usage could very well diminish. The reason we use money is to make trading efficient. So, whatever currency proves to be the most valuable in that sense will win in the long run.
If people realize the limitations of USD as a currency and see how crypto can decentralize the geographical monopolies on money and facilitate better international trade, it could be that cryptos become the best currencies out there. Only time will tell. Though, as with most technology, criticism is at its highest when something is about to take off. After all, lots of people said the internet would die in the basement where it started, too, yet look at it now.