Crypto evangelists envisage a world without fiat currency, where the likes of Bitcoin, Bitcoin Cash, Ethereum, and Litecoin reign as the global currencies of choice. Dirty regular cash gone, consigned to history, as with all the payment systems before it.
But despite the massive hype and news coverage cryptocurrencies get, global cryptocurrency adoption rates are still low. A lot of people, including myself, remain unconvinced that crypto is actually better than fiat—at least in its current state.
Are cryptocurrencies better than today’s cash and credit?
Does Crypto Give More Power to the People?
Crypto advocates often suggest that cryptocurrencies give more power to the individual, taking back financial control from major financial institutions. After all, fiat currency is created and held by institutions and banks who dictate the terms of lending, rates of interest, supply, and more. This makes it difficult to know how much money is in circulation, or the true value of the dollar in your hand.
When the global financial crisis of 2008 hit—which had no cause in regular individuals like you and me—central banks and federal reserves printed billions of dollars of currency and bailed out banking institutions. In that, fiat is an inflationary currency: the true value of a dollar only decreases as more of it comes into existence.
Central financial authorities can do whatever they want with your money because the individual is helpless against the might of the institution. You have no control over your bank. You can only choose which bank to store your money in.
Cryptocurrencies are decentralized, meaning there is no single central bank or institution dictating what you can or cannot do. Banks cannot take cryptocurrency from you, and you own the cryptocurrency outright. Transactions are confirmed by the overall mining community, creating new cryptocurrency in the process.
Furthermore, cryptocurrencies like Bitcoin are limited in supply. There are only 21 million Bitcoins total, and when the mining supply ends, there isn’t a magic re-up that replenishes the pool. (Although this does come with some of its own issues, which I’ll talk about later on in this article.)
1. Fiat Is Still More Secure Than Crypto
Cryptocurrencies are no safer than fiat currency. They’re just vulnerable to a different range of potential financial threats.
In 2017 and 2018 we saw a huge number of crypto-fraud incidents, and that trend didn’t change moving into 2019. On top of that, we’ve seen all kinds of cryptocurrency scams hit users, such as when Bitconnect revealed itself as an enormous Ponzi scheme and bolted with everyone’s money, or when Tokyo-based exchange Coincheck was victim to a $500 million NEM coin heist. And once the scam is complete, it is extremely difficult to replace or recover the funds.
The problem isn’t the cryptocurrencies. The underlying technology of cryptocurrency (blockchain) is actually secure. That’s why so many major industries are investigating blockchain implementation. In that sense, crypto is safe. So what’s the problem?
Vulnerable Crypto Exchanges
Cryptocurrency fails at the exchange level. While the number of cryptocurrency exchanges that fell victim to massive breaches is small, the results are often devastating—not only for the the exchange owners, but everyone trading on the exchange. The security offered by blockchain technology is useless if the exchanges are vulnerable to the same attacks as a regular bank.
In order to fight back against exchange breaches, some exchanges now tie accounts to real-world identities. Crypto held in an account cannot be sent without first being vetted. The process secures the cryptocurrency, but an unfortunate downside is that it reveals user identities and deteriorates the privacy of cryptocurrency. In that, users have to decide between protecting their cryptocurrency or protecting their identity.
Regardless, you should always move your cryptocurrency from an exchange to a cold offline storage wallet as soon as possible. See our article on the best cryptocurrency wallets to get started.
You Can Still Lose Your Crypto Wallet
When the price of Bitcoin ballooned to nearly $20,000 in late 2017, the media was awash with stories of individuals who had thrown away hard drives and flash drives containing thousands of—at the time—worthless Bitcoins.
Just as with fiat currency, you can physically lose cryptocurrency. But unlike fiat currency, you tend not have tens of thousands of dollars of currency in one place, at one time. And if you did, you’d probably notice, or it is secure, in a bank.
You secure a cryptocurrency wallet with a strong, unique password. You encrypt the drive for maximum security so that no one else can access your coins without the password, and if it does fall into the wrong hands, a malicious party won’t be able to hack their way into your crypto wallet. But if you ever lose the password, you can kiss your coins goodbye.
Crypto Market Manipulation
Bitcoin’s extraordinary rise to $20,000 came with suspicions. Was there market manipulation taking place behind the scenes?
A 66-page report from a research team at the University of Austin, Texas, certainly believe so. The Justice Department also agreed, and along with the Commodity Futures Trading Commission, launched an investigation into a prolonged series of order spoofing that drove the price of bitcoin up by thousands. The US Securities and Exchange Commission (SEC) also took note of the irregular trading patterns and launched its own investigation.
There’s very little monitoring of manipulative trading, spoofing and wash trading. It would be easy to spoof this market.
Bitcoin is slightly insulated from the effects of major investors manipulating the market. But it really is only slightly. Smaller altcoins have no chance of fighting back against market manipulation if a whale or group of powerful investors turn their attention to a single coin. The Bitcoin whales hold a collective $37.5 billion of cryptocurrency across a paltry 1,600 wallets.
So much for fairer models of wealth distribution and decentralization.
2. Cryptocurrencies Are Slower Than Visa
There’s another issue that cryptocurrency developers must workaround: the processing time of a crypto-transaction. Now, before people call me out, I know that some networks are faster than others, while some are notoriously slow. But in comparison with the Visa network, no matter how you call it, the most popular cryptocurrencies are deathly slow. The speed deficit translates to a major negative for advocates that would see cryptocurrency as the replacement for fiat.
Of course, if fiat currency ended tomorrow, cryptocurrency is all there would be. However, most cryptocurrency transaction processing networks would not and cannot cope with even the thought of that much demand.
Another issue for the slow crypto transaction is speed is scalability. For instance, Ethereum was one of the fastest cryptocurrency transaction processing networks. That was, until the advent of CryptoKitties, one of the first ever games built upon blockchain technology. Unfortunately, the sudden surge of transactions from CryptoKitties put unexpected pressure on the Ethereum network and slowed transaction processing to a crawl.
So, you see, even if the transaction speed is available, there is no guarantee that the specific crypto transaction processing network can handle a significant uptick in clientele or unexpected events.
3. Cryptocurrency Adoption Remains Low
At the current time, cryptocurrency adoption as a primary payment system remains low. The number of business that acccept Bitcoin as an official payment method is remains small. Adoption of other cryptocurrencies is equally patchy.
That’s not to say cryptocurrency adoption will remain low. According to Ryan Radloff, CEO of CoinShare, the number of locations accepting Bitcoin rose to over 14,000 in December 2018.
— Ryan Radloff 👩🚀 (@RyanRadloff) February 12, 2019
Cryptocurrencies Aren’t Ready to Take the Fiat Mantle—Yet
The mountain of issues facing cryptocurrencies in the quest to replace fiat currency is lengthy, but not insurmountable. The basic comparison of a bitcoin to a dollar shows that there is significant demand, and with a limited supply, that demand will only rise. However, you can immediately find five other things that a dollar does better than cryptocurrency at the current time.
Cryptocurrency will eventually replace fiat currency, that is without a doubt. It is going to be a long time before that day.
Want to learn more about cryptocurrency? Check out the Blocks Decoded Podcast for a handy block of crypto news, tips, and tricks every fortnight.