Advantages and Disadvantages of Cryptocurrencies

Advantages

Cryptocurrencies promise to facilitate the direct transfer of money between two parties without the need for a trusted third party like a bank or credit card company. Instead, these transfers are secured through the use of public and private keys and various forms of incentive schemes such as proof of work or proof of stake.

In modern cryptocurrency systems, a user’s “wallet” or account address has a public key, while the private key is known only to the owner and is used to sign transactions. Money transfers are handled with minimal processing fees, allowing users to avoid the high fees that banks and financial institutions charge for wire transfers.

Disadvantages

The semi-anonymous nature of cryptocurrency transactions makes them susceptible to a number of illegal activities, such as money laundering and tax evasion. Proponents of cryptocurrencies, however, often place a high value on their anonymity, citing privacy benefits such as protecting whistleblowers or activists living under repressive governments. Some cryptocurrencies are more private than others.

Many experts see blockchain technology as having serious potential for applications such as online voting and crowdfunding, and major financial institutions such as JPMorgan Chase (JPM) see the potential to reduce transaction costs by streamlining payment processing. However, because cryptocurrencies are virtual and not stored in a central database, a digital cryptocurrency balance can be wiped out by the loss or destruction of a hard drive if there is no backup copy of the private key. At the same time, there is no central authority, government or company that has access to your money or personal data.