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These days, you can’t scroll more than a few times on your phone without seeing the word cryptocurrency pop up.
Crypto is everywhere.
As digital currency and tokens (hello, NFTs) become more popular, one thing is clear. Not only is cryptocurrency everywhere, but it’s also not going anywhere. The future of the global economy is certainly one that includes—if not depends on—cryptocurrencies.
Today, let’s learn a bit about the benefits of cryptocurrency and how it opens doors previously closed by legacy systems.
The Basics of Cryptocurrency
It’s easier to understand why cryptocurrency benefits us if we understand how it works.
Take a look at Bitcoin, for example.
Bitcoin is a decentralized digital currency that was created in 2009. Bitcoin is not a physical object and cannot be locked away in a physical safe. It was designed as an alternative to money and banking as we know it.
Bitcoin is ‘mined’ via a complex mathematical puzzle protecting the currency from being overproduced. After all, if anyone could create more Bitcoin, it would no longer hold any value. That’s why the US Government doesn’t just print more money when the economy is struggling and people are deep into debt.
There’s also a limited amount of Bitcoin that can be created. This hard cap of 21 million Bitcoin is a part of Bitcoin’s source code and is enforced within the network itself.
The complexity of the mining and ownership transferring process protects Bitcoin from fraudulent activity without the security power of a traditional bank. Meanwhile, its rarity is what helps it maintain value.
Because no central bank holds all of Bitcoin’s value, the currency can be defined as peer-to-peer. Bitcoin transfers ownership from one user to the next on a blockchain.
The blockchain is a system of ledgers that documents every time a user’s signature has been added to a Bitcoin token. It seems simple enough, but the blockchain is a wildly complex and exponentially growing database in practice. It might just be information storage, but the possibilities of what it can store are pretty exciting.
One day, we could see self-driving taxis operate on their own blockchain, which would require transferred funds to start the engine. We’re still far from that reality, but the point is that in the absence of a bank-backed debit card, the blockchain can power the services and technologies all around us.
If you want to go deeper into how the blockchain works, we have a beginner’s guide to the technology. See you on the other side.
The Benefits of Cryptocurrency
Now that you have a solid understanding of what crypto is and how it works, let’s talk about some of its benefits.
1. Genuine Privacy
Think about all of the information you’ve given to your bank. Your social security number, home address, email address, and cell phone number are all attached to your bank account.
It’s no wonder, then, that banks are frequent targets of cybersecurity attacks. Money may be valuable, but data is worth its weight in gold. The privacy that cryptocurrency offers cannot be matched by any other financial institution.
Transactions are pseudonymous. While the blockchain documents and identifies anyone involved in the transfer of crypto ownership, the ledger contains no personal information. It simply records the blockchain address of both the sender and the recipient.
These addresses generally are difficult to connect to a person, and people can have as many addresses as they like. That said, they’re not totally foolproof.
If a hacker could connect an address with a specific person, they could track that address’s activity on the blockchain relatively easily. Still, the absence of personal identifiable information makes crypto far more private than other currencies.
Of course, with this amount of privacy, there’s also a risk of being locked out of your digital wallet. Each wallet is connected to a seed phrase, which is a string of 12 to 24 unrelated words that you use as a master password for your wallet.
On the one hand, the seed phrase can help you access your crypto even if you delete or lose your wallet. You can recreate your wallet with your seed phrase alone or use your seed phrase to switch your crypto into a new wallet. However, anyone with your seed phrase can access your wallet, and if you lose your seed phrase, you lose access to your crypto for good.
2. Empowering the Unbanked
When you set up a bank account or credit card, you often need to go into a bank and be approved for one.
For many people, that is simply a mild inconvenience. For others, it represents a humiliating prospect.
Banking at large is built on a system of risk. If a bank classifies you as a risky candidate—for example, if you’re attached to a large sum of debt—they can prevent you from setting up an account.
This creates a population known as the unbanked who have never been able to set up a digital wallet through a traditional bank. Cryptocurrency offers a solution.
As most cryptocurrencies do not require a bank account or other hurdles like a government permissions system, the blockchain offers a game-changer for online payment accessibility.
You can use cryptocurrencies regardless of your existing debt, credit score, or other common “risks.” What’s more, there are no fees associated with Bitcoin wallets.
You can see this at work in countries with fraught governments. In El Salvador, for example, there are now more citizens using the country’s issued Bitcoin wallets than there are in El Salvador’s entire banking system. Bitcoin is actually minted legal tender there.
In Venezuela and Sub-Saharan Africa, Bitcoin and other cryptocurrencies have offered a means of getting around the government regulation of global trading because anyone can participate in cryptocurrency.
3. Banking Without Borders
Crypto is also an incredible workaround for international money transfers, which can be troublesome and time-consuming via traditional methods.
Crypto has no understanding of international borders. A token in India is worth the same amount as a token in America, and so on. Transferring crypto across borders is far faster and easier than sending cash, which often incurs fees and time-consuming permissions.
It’s worth noting that this may start to change as more governments are beginning to regulate how crypto is taxed. Still, the advantages compared to existing banks is clear. For one, the crypto market never closes, no matter where you are in the world.
Interestingly, a recent study revealed that people who travel are more likely to own cryptocurrency. Apparently, people who took at least five trips a year are 33% more likely to own Bitcoin, compared to the 16% of the general population that owns Bitcoin.
4. Serious Security
As mentioned, the blockchain protects cryptocurrencies from the many vulnerabilities of traditional banking. The bigger and more established the blockchain, the more impenetrable it becomes. That’s because it would require more and more computing power to compromise.
What’s more, cryptocurrency transactions are largely set in stone. You cannot reverse a cryptocurrency transaction like you can with traditional online banking. Once ownership is transferred, it’s finite. That is, until it’s moved again.
Even in the unlikely event that someone hacks into a blockchain and alters a block’s transaction history, that would only affect one copy of the ledger. Because blockchains use a distributed ledger system, every server on the network has a copy of every transaction within that block. This means that it’s very easy to identify a forged block and sniff out fraud.
5. Investment for the Future
It’s no secret that crypto has enjoyed a spectacular growth period. Cash is quite susceptible to inflation, in which the value of a dollar, say, decreases over time.
On the other hand, some cryptocurrencies have seen increases in the millions of percentage points over the last twelve years. Crypto’s value is influenced by other factors than stocks, bonds, and commodities, unlike cash.
For that reason, it makes for a sound investment, albeit slightly risky because of market fluctuations. At the very least, it’s a strong asset for diversifying your portfolio.
It’s unlikely that Bitcoin will reverse its strategy of keeping tokens sparse. This means the currency should retain much of its value over time, even as the exponential growth period of the last couple of years seems to be over.
6. Scarcity and Value
Part of what makes Bitcoin so valuable is its scarcity. Bitcoin has what’s known as a hard cap—only 21 million Bitcoin will exist, ever. Now, consider the 7.753 billion people in the world. Assuming everyone in the world wanted a bitcoin, the demand (7.753 billion people) will exceed the supply (21 million bitcoin).
Due to the COVID-19 pandemic, the U.S. Economy was forced to print money to help out those in need. While this was beneficial in the short term, we are now seeing prices inflating for houses, stocks, gas, food, and more.
While there is a popular meme asking why the U.S. doesn’t just “print more money” to address poverty and student loans — and while inflation can be beneficial — these repercussions of printing more money during the pandemic show why creating more of a currency isn’t always a good thing.
So, the fact that Bitcoin battles inflation by giving the people power and eliminates governments from printing more of it means Bitcoin can supposedly protect us from the negative repercussions of inflation.
This also solves a problem for countries with inflated currencies like Singapore, Switzerland, Taiwan, and Thailand, which have been known for manipulating their currencies. A decentralized currency puts the power in individuals’ hands instead of leaving them at the mercy of a corrupt treasury.
Last Thoughts on Crypto
It can be tempting to think about cryptocurrency as the saving grace for many, and it indeed offers opportunities to regular people who have previously had doors shut to them. That said, like any technology, Bitcoin is also flawed.
Remember how we mentioned that Bitcoin is mined via a complex mathematical puzzle? Well, that puzzle isn’t just a cute equation on a whiteboard; it is actually a highly-complicated algorithm that requires genuine energy to solve. Not just human energy — electricity.
A University of Cambridge analysis estimated that Bitcoin mining consumes 121.36 terawatt-hours a year. That’s more than all of Argentina consumes, or more than the consumption of Google, Apple, Facebook, and Microsoft combined.
That is a startling amount of energy consumption for something totally intangible. Recently, Bitcoin’s impact on the environment has come into the spotlight and received criticism.
While many people are working on reducing cryptocurrency’s footprint, it remains to be seen whether the technology can co-exist within an environmentally-conscious society.
Sources:
How Bitcoin Works | Investopedia
Bitcoin’s Impacts on Climate and the Environment | Columbia Climate School
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