The world of finance has evolved drastically over the 21st century. In many countries, you can manage your money without having a traditional bank account. And when traveling abroad, you can even bypass those pesky foreign transaction card fees.
But arguably, one of the most significant financial disruptions in recent years is cryptocurrency—especially when it comes to cryptocurrency transactions.
Beyond paying for goods and services in currencies stemming from this, you can also trade them and more. So, what are cryptocurrency transactions? And what are the pros and cons of using these? Let’s take a look and find out.
What Is a Cryptocurrency?
Cryptocurrencies are a type of decentralized finance that isn’t reliant on central banks, governments, or other intermediaries. Cryptocurrencies, including Bitcoin and Ethereum, fall under this category.
Solutions of this kind originated in 2009 with the launch of Bitcoin. Decentralized finance is deregulated, and no currency is tied to a particular market.
Cryptocurrency differs from most currencies, such as the US dollar or euro, which centralized institutions manage. These institutions typically control how much of it is circulated. Currencies of this kind are called fiat currencies.
How Do Cryptocurrency Transactions Work?
Understanding how cryptocurrency works might seem overwhelming. Don’t worry, though, because the concept is pretty simple.
Cryptocurrency transactions are peer-to-peer (P2P). Instead of going through a bank, blockchain technology processes your transactions.
When carrying out blockchain-based transactions, users need to meet conditions set in “smart contracts.” These contracts are the same for everyone using the network and work based on users agreeing to its terms. You cannot alter a smart contract once it has commenced.
As a side note, it’s worth remembering that all smart contracts are visible to the public. So, you can check these before using a network.
Transactions made using cryptocurrencies differ compared to currencies you’re more used to using. For example, when you spend or send money using pounds, dollars, euros, and so on, the central institution will have considerable control over the transfer compared to crypto.
The 3 Benefits of Cryptocurrency Transactions
So, now you know a bit about what cryptocurrency transactions are and how they work. You’ve also got a rough idea of how these work and the ways that they differ from more traditional currencies.
All of this begs the question: what are the most significant benefits of using cryptocurrency transactions?
Below are the three main pros.
1. Security
For the most part, you won’t have many security-related concerns when making a cryptocurrency transaction. You don’t need to share sensitive information, such as your bank details or address.
It’s also worth remembering that the blockchain technologies that crypto runs on are distributed across multiple digital areas. While systems aren’t 100 percent foolproof, a hacker would have a tough time completing his task.
Fast, Borderless Transactions
Even within traditional currencies, the financial space is moving toward speed and convenience. And that’s no different in decentralized finance.
Cryptocurrency transactions typically take little time to complete (though this does vary with network capacity and use). Moreover, the geolocation of you or your recipient doesn't matter. Crypto transactions are cross-border, and all are sent via the internet without a central processing bank controlling your finances.
Alongside faster transactions, you might also find that the fees associated with sending money through these forms aren’t as high.
Transparency
Cryptocurrency transactions operate primarily on trust. Besides the smart contract, users can contribute to the building of decentralized finance infrastructures.
When it comes to transparency, another benefit is that users have control over the money they send and receive. Cryptocurrency decentralizes power from traditional financial institutions, allowing users a complete picture of their transactions.
The 3 Drawbacks of Cryptocurrency Transactions
Despite the benefits of exploring your financial options away from traditional currencies, it’s also a good idea to consider the other side of the coin.
Like with all forms of financial technology, cryptocurrency has some cons that you should keep in mind. Three of the main ones are below.
1. Volatility
Cryptocurrencies are known for their volatility. There are numerous reasons why this happens, including:
- The daily development of new cryptocurrencies.
- The ability to buy and sell currencies fast (along with the speculation that comes with it).
- The fact that cryptocurrencies are deregulated.
When trading or using currencies that run on blockchain technology, it’s important to remember that their value could change drastically. So, it’s essential to do your prior research and keep an eye on market trends.
2. Scams
While cryptocurrencies aren’t a scam in and of themselves, unsavory activity occurs on these platforms. You might run into a variety of these, such as:
- Fake websites and apps
- Malware and mining scams
- Pyramid schemes
Most of the time, you can spot a scam quite easily. And in many cases, your gut will tell you if something’s wrong. Listen to it, and don’t feel like you need to do anything that seems strange.
Not as Widespread as Centralized Finance
Despite the astronomical growth of decentralized finance and cryptocurrencies in general throughout the late 2010s and early 2020s, it’s still nowhere near as widely adopted as traditional finance solutions. While some online stores accept cryptocurrencies, for example, you’ll still need to use standard money for most of them.
Since your options for using crypto are limited at the time of writing, abandoning legal tender will severely limit your options.
Will Cryptocurrencies Ever Take Over From Traditional Currencies?
Attitudes toward decentralized finance are becoming more positive in many parts of the world. In 2021, for example, El Salvador became the first country to adopt Bitcoin as legal tender alongside its primary currency—the US dollar.
At the same time, it’s important to think logically about whether or not cryptocurrencies will ever overtake their traditional counterparts. Doing so would reset our relationship with money, so it almost certainly won’t happen soon.
The volatility of cryptocurrency will also stop it from replacing fiat currencies. While centralized institutions are annoying for some, they help to ensure that money keeps its value. In this respect, cryptocurrencies might benefit from some form of regulation if they were to compete.
Another thing worth remembering is that fiat currencies aren’t just a means of paying. For many countries, they also serve as a form of national identity. So, efforts to remove this in favor of global digital currencies might well be met with resistance. It is no surprise that many see Bitcoin and other cryptocurrencies as their identity, switching their allegiance.
Cryptocurrency Transactions Are the Future, but They Also Aren’t
Crypto transactions have grown significantly in the 21st century and are widely accepted as genuine. But despite the strides taken, crypto has a long way to go if it wants to compete with fiat currency.
No matter how wide cryptocurrency adoption becomes, it probably won’t ever overtake fiat currencies. In the end, the solution is to give users the option of both—rather than one or the other.
