Digital currencies are new for a lot of people, so most of them think that using digital currency is hard, and they cannot understand the transactions in the crypto world. The thought is generally based on the cons of digital currencies, but there are important pros of them.
We must use money to buy anything, as you know. For instance, you cannot go shopping or eat your favorite food in a fancy restaurant without money. Hence, we can say that money is an important part of our lives.
You can think that digital currency is similar to common money. The main difference between digital currency and money which is used each day is that we can hold money with our hands while digital currencies are found in a virtual environment. Because of this situation, we can say that digital currency is the electronic version of everyday money.
Digital currency consists of three different types: cryptocurrency, stablecoin, and central bank digital currency. Before explaining the pros and cons of digital currencies, we want to introduce these different types of currencies.
Cryptocurrency or digital currency is an alternative way for payments. The payment product is created by using encryption algorithms, and crypto transactions and records are maintained by a decentralized system. Hence, there is no centralization for cryptocurrencies.
Bitcoin, Ethereum, BNB, XRP, and Cardano are popular cryptocurrency examples. If you want to do your payments and make investments with these currencies, you should have a crypto wallet.
Stablecoin is a kind of cryptocurrency, and its value is pegged to a reference asset, like exchange-traded commodities, fiat money, and another cryptocurrency.
Tether, USD Coin, and Dai are popular examples of stablecoin. These assets are pegged to the US dollar to maintain their stability.
Central Bank Digital Currency (CBDC)
In the last months, we encountered various countries entering the crypto world, and some of them planned to create a CBDC.
CBDC is a digital currency managed by countries’ central banks. For example, the Central Bank of the Republic of Turkey started to test its CBDC called Digital Lira (Lira is the unit of money that is used in Turkey).
Both cryptocurrencies and CBDCs are digital, but there is a big difference between them: CBDCs are centralized because they are backed by countries’ central banks/governments while cryptocurrencies have a decentralized structure.
The Advantages of Digital Currencies
Fast Transfers and Short Transaction Times
Making payments with everyday money can sometimes be hard because the process is long. On the other hand, digital currencies provide us with the chance to complete payments and transactions within seconds!
Traditional payment methods, such as banks, have a centralized structure, so people need intermediaries for these methods. In other words, centralization makes transaction times long.
On the other hand, digital currencies are generally found on the same network, and they do not require an intermediary, so transfers/payments become faster.
If you want to send money from your country to another country via physical or fiat currencies, you must be prepared to sacrifice an important amount of transaction cost. When we examine digital currencies, the circumstance is different.
Digital currencies present direct interactions on the same network, and the transaction costs for digital currencies are cheaper than the costs of traditional payment methods.
Effective Government Payments
As you know, lots of countries give maternity pay, unemployment pay, retirement pension, and so on. These payments are very important for citizens, and they must get these payments in a short time.
In the current situation around the world, citizens must have a debit card to get the necessary payment(s) from the government. On the other hand, for these payments, CBDC can be used because CBDC can be sent instantly. Also, citizens do not have to deal with getting a debit card or some banking processes if CBDCs are used.
More Secure Transactions
For traditional payment methods, people must share their personal information, so we can say that the security of traditional methods is not enough.
Digital currencies are decentralized, and there is no authority for payments with digital currencies. Moreover, these currencies are powered by blockchain technology which prevents the duplication of digital currencies. Thanks to the structure of digital currencies, transactions on crypto networks are more secure than transactions with fiat currency.
The Disadvantages of Digital Currencies
Fluctuations in the Market
Most of the investors in the crypto space think about price volatility. Hence, we can say that the fluctuations in the crypto market are a critical disadvantage of digital currencies.
Due to the decentralized structure, the prices and values of cryptocurrencies and stablecoins change suddenly. Also, we can sometimes encounter different market circumstances, like bear and bull markets.
On the other hand, the value of CBDCs is more stable than the value of cryptocurrencies and stablecoins. In other words, CBDCs are similar to traditional money in terms of price volatility.
Staying in Theory
The second disadvantage is depending on CBDCs more. A lot of countries made announcements about their CBDCs, but we cannot encounter a real CBDC at the moment.
Some testing processes for CBDC are maintained in different countries, but the progress in this type of digital currency is very slow. For example, the UK announced the digital pound, but the digital currency will be released later this decade; the time period is too long!
Due to the slow progress of the launch of CBDCs, most of the digital currency stays in theory.
Difficulty in Changing Routine
People are accustomed to the usage of physical wallets, and they know spending fiat money. Hence, we can say that people have a routine about money, and the ‘digital currency’ notion is very new for a lot of people.
To spend and invest in digital currencies, people should know the usage of crypto wallets, and they should learn to conduct research into the crypto market to find a proper digital currency.
Because of these necessities, people should change their routines about money, and adopting cryptocurrencies or other types of digital currency is not easy.
For example, old people can have difficulty in the crypto market because digital currencies depend on technology, and most old people meet technology later. On the other hand, there are some old people who have a huge interest and attention toward cryptocurrencies, NFTs, and Metaverse, like Anthony Hopkins!
Many Options in the Market
There are various cryptocurrencies and stablecoins, so people are confused about their investments. In other words, they cannot decide the cryptocurrency/stablecoin that they should invest in.
Lots of options in restaurants and cafes can be good, but the rise in the number of options is not a great action in the crypto market. Due to indecision about crypto investments, people can select false digital currencies and lose their investments.
The three types of digital currency that are cryptocurrency, stablecoin, and CBDC have both advantages and disadvantages. Due to this situation, people who want to make investments in the crypto world should conduct regular research into digital currencies.