Advantages of Cryptocurrency
The rapid wide spread of Cryptocurrencies are due to the fact that they are easy to use, transfer, store and trade, and also cryptocurrencies are more secure and fast. Many believe that cryptocurrencies fulfil the weaknesses of current monetary system and they are the better digitalised version of fiat currencies. Cryptocurrencies are bringing evolutionary changes in the payment system and they could potentially change the way we use, keep and spend money in the future.
Therefore, in this topic we are going to cover the fundamental advantages of cryptocurrencies.
Easily accessible to everyone
It cannot be ignored that the bias regulatory system placed in the core of the banking structure in the current monetary system is one of the main reason behind the 1.7 billion unbaked people in the world. In the current monetary system convenience and the accessibility has been sacrificed to the bias and discriminatory policies many banks have adopted to conduct KYC (Know Your Customer) and background check of their clients.
Such measures not only have affected many individuals across the world but also have impacted the world’s economy negatively as a whole since many individuals are unable to have access to the basic banking services, therefore there are not participating in the global economy.
The banks and financial institutions can easily deny offering their services to individuals that they consider high risk simply because of the place of their birth, nationality and other discriminatory measures. Unfortunately there are no effective policies by the governments in place to prevent and fix these discriminatory measures and one-fit-all policies in order to promote equal opportunities for everyone.
But fortunately, cryptocurrencies can be a solution to this. Cryptocurrencies are structured by nature to be accessible to everyone. Although recently the government has forced crypto exchanges to verify and conduct basic KYC procedures of their customers when buying cryptocurrencies from them. But still it is way more accessible to everyone compared to opening a simple bank account. In fact, anyone can create an infinite number of wallets without reference to the name, address or any other information.
The current monetary system is centralised, fiat currencies that we are using today are centralised and they are controlled, regulated and backed by the government and the central bank. This makes their value heavily dependent on the performance of the specific country in terms of economical, political, social and even environmental and also on the decisions made by the government and the central bank. For instance a fiat currency can be weak and unstable like Vietnamese Dong or Indonesian Rupiah and another can be stable and strong like US dollar. Therefore, decisions made by the government and the central banks and their willingness to honour the obligation can affect the value of a country’s currency negatively or positively. Furthermore, since it is heavily controlled and centralised, the bank is free to adjust the worth of its value to meet certain funding obligations or economical goals and this may not be at the best interest of the consumers. In other words, the value of the money in your pocket will be always controlled by the central authorities.
On the other hand, cryptocurrencies are decentralised, using the cryptography and distributed algorithms cryptocurrencies offer a fully decentralised setting that eliminates the need of central authority. The network is distributed to all participants, each computer mining nodes is a member of this system. This means that the central authority has no power to dictate rules for the owners of cryptocurrencies. And even if some part of the network goes offline, the payment system will continue to operate smoothly. The value of the cryptocurrency (Coin) is determined purely on the current demand of the coin without a central authority having any sort of influence over it. In other words, the value is conveyed by a cryptocurrency is fully in the possession of the end consumer and nobody has the ability to change it artificially. In addition, using cryptography and distributed algorithms, cryptocurrencies offer a fully decentralised setting where no single entity can monitor or block the transfer of funds.
In the current system there are many requirements and procedures exist in order for a person to conduct a transaction or a simple transfer of money. First the bank has to be in operation, the transaction cannot be done on weekends and public holidays. The receiver location should meet the regulatory standards of the banks, the transaction cannot be done if the receiver is located in the high risk jurisdiction (Refer to FATF website for the list of high risk jurisdictions). Often, documents are needed for a pre-approval by the bank specially if the amount is substantial. High frequency transactions could be red flagged by the bank internal risk assessment system, which could lead to the interrogation of the client by the bank and potentially termination of the service by the bank. Therefore, sometimes a simple cross border transaction can take up to 10 days to be delivered by the beneficiary bank to the receiver.
In contrast, as mentioned cryptocurrencies use cryptography and distributed algorithms, where no single entity can monitor or block the transfer of funds. Funds can be easily transferred from one person to another within a few seconds, 24 hours a day, 7 days a week (even on the Sunday evenings) anywhere in the world with zero restrictions. There is no limit on the amount, number and destination of the transactions. Transactions can be done without any hassle, coins cannot be faked, copied or spent twice by anyone. Cryptocurrencies give full freedom to the consumers to use, store, transfer and spend their wealth without any restrictions.
In order for the banks to offer their service to their clients, they need to collect substantial information from them. These information are collected in the bank database for KYC (Know your customer) and regulatory measures and often are used for marketing purposes. These sensitive information collected from customers can be sometimes lost, stolen or abused.
However, a blockchain based-cryptocurrency like Bitcoin is encrypted and decentralised, thus there is no middle man to control and process the transactions. The transactions are processed over a peer-to-peer network. Special users known as miners collect transactions and store them into blocks. These blocks are subsequently stored in a global public ledger of transactions known as blockchain. The public ledger is used as a record keeping system that maintains participants’ identities in a secure and anonymous form. The blockchain makes everything transparent since all the transactions conducted are stored in the blockchain and everyone can see them.
Low Operation Cost
Conducting a transaction or even maintaining an account with a bank can be costly. Banks charge transaction fees and commissions on almost every services they offer. In fact in many countries bank charge maintenance fee from their clients to keep their account running unless the client meet the minimum balance requirement imposed by the bank which can be high for many people.
However, cryptocurrencies transactions fees are significantly lower than banks and there is no maintenance fee on storing them. A small blockchain network fee is charged once a transaction is conducted to pay the minors to verify the transactions.
Inflation is simply a rise in the average price of goods and services in the macro-economy. Moreover, inflation is defined as a reduction in the purchasing power of a single unit of money over a certain time period. One of the main weaknesses of the current monetary system is inflation. In the simple words, inflation happens when banks print too much money to meet their national debt obligations or to achieve a certain financial goals. Increase in the supply of cash in the economy will result to a potential downward pressure on the value of the specific currency. An extremely high inflation rate is very likely to impact the country's exchange rates with other nations negatively. Zimbabwe is the classic example of hyperinflation which substantially led the country to stop printing its own currency and adopt US dollar.
However, Inflation does not apply to cryptocurrencies as their supply is limited. One of the stated benefits of the first cryptocurrency (Bitcoin) was that its supply was not under the control of any individual, entity, organisation or even government but rather was subject strictly to the predefined laws of mathematics and the limits of computing power. Bitcoin has limits built into its algorithm to control the maximum supply of bitcoins that can be mined which is capped at 21 million. Therefore, its value is purely driven by the demand and inflationary forces have no impact on its value.
Refer to the crypto market overview section for the detail on the price, supply cap, and the number of available coins of each cryptocurrencies.
To sum up, cryptocurrencies have a lot to offer, they are a solution to the weaknesses and the pitfalls of current monetary system. While many argue that the centralized and hierarchy nature of the current monetary system and the bias regulatory measures in place have impacted the economy negatively, specially when looking at global financial crisis that was started and triggered by banks and financial institutions. The role and effectiveness of cryptocurrencies to fulfill the weaknesses of current monetary system becomes significantly more apparent.