How Cryptocurrency is the Future of Money?

How we think of money has changed dramatically over the 5,000 years since the Mesopotamian shekel first appeared. Does the next phase in that progression include cryptocurrencies such as Bitcoin, Ethereum, Libra, and Dogecoin replacing paper money and electronic bank account? Constantly rising cryptocurrency prices, their use for illegal and unethical activities, their environmental effect, and the threat they represent to financial institutions are just some of the worries. How much do we know about the advantages and drawbacks of cryptocurrencies for users and society as a whole?

Decentralized Transactions

Following the financial crisis, there was a surge in interest in Bitcoin, which coincided with a period of low confidence in governments, central banks, and large private institutions. When a cryptography mailing list member posted a link to a nine-page proposal outlining the basics of Bitcoin in 2008, the cryptocurrency “revolution” was officially launched.

A key promise of Bitcoin was that it would create a medium of exchange that would enable two parties to conduct financial transactions through anonymous digital identities, rather than central banks currency or a trusted financial middleman such as a bank or credit card business.

Rather than trusting a public institution, Bitcoin relies on a consensus mechanism. All financial transactions are recorded on public ledgers accessible to the whole community of Bitcoin users, who may accept or reject a transaction if they believe it is authentic.

Non-regulated Currency

Cryptocurrencies are decentralized digital currencies or assets that exist outside of the power of governments and function independently of conventional financial institutions. Although precious metals no longer back traditional currencies, governments continue to encourage their usage by accepting them as a form of tax payment.

These currencies do not have to be physical bills or coins; there has been much interest in Central Bank Digital Currency (CBDC), which are digital replacements for actual currency bills and coins in recent years. CBDCs have been implemented or are currently being tested in five nations, with a further 81 countries studying the feasibility.  It can be used in digital wallets and payments to replace all physical cash via blockchain technology.

Unlike cryptocurrencies, which have no backing from any government but are created and governed by algorithms, CBDCs have the full faith and credit of the government behind them, which is a crucial distinction to keep in mind. As long as people have trust that other people will accept it as payment, a currency will continue to exist. This means that it must not decline fast (as in hyperinflation). When it comes to traditional currencies or CBDCs, faith in their viability is built on the backing of a government. Trust is built on its publicly viewable distributed ledger, which records the history of all of its crypto transactions when it comes to cryptocurrencies.

A New Alternatives for Fiat Currencies

The ability to acquire goods with money – to act as a medium of exchange – is a highly essential function of money. As a means of exchange, cryptocurrencies have shown to be a highly ineffective tool. An unstable currency will not be an appealing medium of exchange since the number of units of currency required to acquire a specific item will vary greatly depending on how unpredictable the currency’s value is.

A blog post published in 2008 by Satoshi Nakamoto first introduced cryptocurrency, focusing on the role of the medium of exchange and stating, “I’ve been working on a new electronic financial system that completely peers to peer and does not rely on any trusted third party.” However, the price of cryptocurrencies has been quite volatile. When looking at the price changes in Bitcoin over a year, the sharp swings may be much more severe than seems.

The price of Bitcoin, for example, fell by 30% in a single day in May 2021 before finishing the day down 12%. Because of these significant price swings, cryptocurrencies are an unattractive method of paying for products and services. In addition, cryptocurrencies are costly and time-consuming to use, and transactions are slowly verified when they are completed.

Involved with Illegal Activities

The use of cryptocurrencies like Bitcoin and Ethereum to buy unlawful or illegitimate products and services has increased but is now decreasing. The anonymity afforded to the buyer and seller by using pseudonyms is the primary reason for using the financial system in unlawful or criminal transactions.

People who use Bitcoin or Ethereum for a large number of transactions or transactions involving genuine products and services may be traced back to their identities. It’s tough to utilize new cryptocurrencies like Monero and Zcash because they feature complicated user interfaces that make them difficult to operate.

Disruptive of Natural Resources

With the way Bitcoin is set up, a significant quantity of power is required, which negatively impacts the environment. Cryptocurrency “mining” entails competing with other miners for the first solution to complex computational arithmetic problems using brute force computing power.

In order to validate a single Bitcoin transaction, it is estimated that the typical American house consumes the same amount of energy in one month. Only 0.4%  of the world’s total power use is accounted for by Bitcoin, while electricity expenditures account for 60 to 70% of all cryptocurrency costs.

Final Thoughts

Possibly not in the manner intended, the public’s attention has been drawn to cryptocurrencies. Their current form is not a sustainable means of exchanging goods and services, though. Anonymous transactions are tempting to criminals and smugglers, but this is not a good outcome from a social standpoint. In the current state of affairs, cryptocurrencies are mostly seen as a speculative asset but a very erratic one.

As it is now set up, the massive energy needs of cryptocurrency mining also raise questions about the impact on the environment. While technical advancements may make it easier to utilize central bank digital currencies for domestic and international payments, it is less evident that privately-issued cryptocurrencies may perform a meaningful function as a medium of exchange, as of such some online casinos have already started using that medium to keep up with the changes most Canadian $5 deposit casinos use this to attract their audience. 

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