Benefits of Cryptocurrency

Cryptocurrencies like Bitcoin (BTC) and Ethereum (ETH) are becoming more and more mainstream. Yet the complexity of the crypto world can feel intimidating to newcomers.

Many people are already investing in and actively using cryptocurrency. But why? What are the benefits of cryptocurrency? If you’re on the outside looking in, it can all be a bit confusing.

This guide will explore all the potential benefits of digital currencies. It will cover the two broad categories: The benefits of using cryptocurrency and the potential benefits of investing in crypto.

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What Is Cryptocurrency?

Cryptocurrency is a type of digital currency. The most popular include Bitcoin (BTC) and Ethereum (ETH), although there are thousands of other cryptocurrencies.

You can think of a cryptocurrency like any other currency. The difference is that crypto is digital and decentralized. “Decentralized” means that it is not backed by any central government or governing body — it is directly managed by the people who use the underlying technology rather than a government.

Cryptocurrencies are based on blockchain technology. Blockchain is a decentralized system that records every transaction made on the network. When someone sends Bitcoin to someone else, that record is recorded in the public blockchain — and verified independently by hundreds of participants.

This duplicate record-keeping helps keep crypto transactions secure, authentic, and transparent. Although each transaction is recorded, the identities of the individuals who participate in the transactions are kept private. In other words, anyone can see how much Bitcoin was sent, but they can’t see who was on either side of the transaction.

While technically intended to be a usable currency, most cryptocurrencies are primarily used as an investment vehicle. Investors buy crypto tokens like Bitcoin and Ether because they believe that their value will appreciate over time.

For more information, see our detailed introduction to cryptocurrency.

What Are the Main Benefits of Cryptocurrency?

Some of the main benefits of crypto come from its decentralized nature. Security is top-notch, and funds can be sent to virtually anywhere in the world without extensive waits or red tape.

Transactions can be made very quickly (even instantly), and you don’t have to wait several days for them to “settle.” Plus, money can be sent to anyone, regardless of their physical location or nationality.

Crypto transactions can also be low-cost, although this depends on many factors. Many networks charge transaction fees, which is a fee charged by the network in order to use it. In some cases, as with Ethereum, these fees can be high.

Users of cryptocurrencies also appreciate the anonymous nature of the transactions. Privacy is built into many blockchain networks.

For investors, crypto offers another set of potential benefits. It helps add diversification to balanced investment portfolios. Major tokens have historically offered very good returns, particularly for early investors (although your results may vary). Plus, it trades 24/7, making it highly liquid.

Benefits of Using Cryptocurrency

Cryptocurrency is just that — a currency. Technically, the underlying token of a given blockchain (Ether for Ethereum, for example) is designed to be used to pay for transaction costs on that particular blockchain. But tokens can also be used to buy goods and services.

The benefits of using cryptocurrency as an individual user include fast transaction times, security, privacy, and easy cross-border payments. Here’s what you need to know.

Security

Cryptocurrency networks are secured by what is known as cryptography — hence the name “cryptocurrency.” Crypto is inherently safe and secure as long as it’s used properly.

This decentralized network has inherently secure transactions because each transaction is verified by many different independent participants. If there is a mismatch in records, it is flagged. This prevents fraudulent transactions and spam from infiltrating blockchain networks.

With that said, crypto is only as secure as the user makes it. If a user gives up their private keys to a scammer or a third party, they could lose their assets.

Privacy

Crypto transactions on most networks are anonymous. Each user is assigned a unique public ID, which is typically a random series of letters and numbers. But this public address is not directly linked to the individual’s real information, so their privacy is protected.

The enhanced privacy of crypto is one reason that governments are increasingly interested in regulating it.

Fast settlement times

On many networks, crypto transactions are completed instantly — or in just a few seconds. Compare this to traditional bank transfers, which can take several days to “settle,” and it’s easy to see why transaction speed is a major plus of cryptocurrency.

Do note that with some cryptocurrencies, transactions can be somewhat delayed during times of high network usage.

Low costs

There will always be a small cost to transfer or use cryptocurrency. This may be referred to as the transaction fee or “gas” fee. The fee goes to the network and is distributed to the participants who help run the decentralized blockchain network.

Compared to traditional payment infrastructure, crypto can be low-cost — particularly when compared to traditional international payments.

However, there’s an exception here. As these currencies become more popular, fees have increased. For some networks, like the popular Ethereum network, fees can be very high during high usage hours. Many cryptocurrency developers are working on new ways to keep costs down.

Cross-border payments

Crypto enables simple and low-cost cross-border transactions.

Traditionally, to send money from country A to country B, you had to go through a third party like Western Union, or orchestrate an expensive international wire transfer from your bank.

With crypto, a transaction costs the same regardless of whether you’re sending it to your neighbor or to a business on the other side of the globe. Plus, there’s no red tape or paperwork to fill out.

Benefits of Investing in Cryptocurrency

Investing in cryptocurrency offers several potential benefits — along with some unique risks. Some of the key benefits include diversification, a potential for high returns, and 24/7 trading access.

Diversification

Diversification is the concept of spreading out your investments across different asset classes — this reduces risk. Most investment experts agree that maintaining a diversified portfolio is key to long-term investing success.

To diversify a portfolio, investors should choose assets that move independently of one another. Having a mix of stocks, bonds, crypto, real estate, etc., can be beneficial.

Historically, cryptocurrency prices have moved fairly independently of the prices of other asset classes. Adding a small percentage of cryptocurrency to your overall portfolio can help you balance out long-term investing strategies.

Inflation protection

Many crypto experts argue that cryptocurrencies like Bitcoin and Ethereum may serve as a hedge against inflation.

The idea here is that there are a limited number of Bitcoins and Ether tokens in existence. As inflation increases, the value of a dollar decreases — making the price of one BTC or one ETH rise in dollar terms.

This is more theoretical than proven, however. Cryptocurrency has too short of a recorded history to really gauge whether or not it can be used as a long-term inflation hedge.

Potential for outsized returns

Cryptocurrency has delivered phenomenal returns in recent years. Whether this trend continues is difficult to predict, however.

The graph below shows the 5-year performance of Bitcoin (BTC) compared to the performance of the S&P 500 index fund (which is a collection of the 500 largest companies in America).

Over the last five years, Bitcoin has returned a massive 1,416%, compared to 67% for the S&P 500 index. That’s approximately 21x higher returns for BTC compared to the broad US stock market. And if you zoom out even further, the results are even more impressive for Bitcoin.

In other words, crypto has been a better investment than stocks over the past five years — although time will tell if this trend continues.

But cryptocurrency is also a highly volatile asset, and any potential returns will vary on market fluctuations, transaction costs, taxes, and other factors.

24/7 liquidity

Cryptocurrencies are highly liquid, which means that they are easy to exchange for dollars or other cryptocurrencies. In fact, crypto markets operate 24/7/365. Liquidity gives investors options and helps them make trades when and how they want to.

Other assets tend to be less liquid. Stocks, for example, only trade five days a week during normal trading hours. Assets like real estate are far less liquid, and could take weeks or even months to sell.

Is cryptocurrency a good investment?

Like any investment, the answer to this question depends on an individual’s plans, goals, and risk tolerance.

Looking at recent history, it’s very clear that some cryptocurrency tokens have been excellent investments at times. However, past returns do not predict future performance.

Ultimately, it’s up to each individual investor to decide whether cryptocurrency makes sense for their portfolio. If you have a small appetite for risk, you should keep crypto assets to a small percentage of your overall investment portfolio.

In other words, don’t just invest in crypto — invest in a variety of stocks, bonds, real estate, and maybe some cryptocurrency as well.

What Are Some of the Drawbacks of Cryptocurrency?

Cryptocurrency is not without unique risks and drawbacks. Here are some of the most important to be aware of:

Volatility: Volatility refers to how quickly an asset’s price can change. Crypto tends to be quite volatile, with large fluctuations in prices day-to-day and even hour-to-hour. This can be unnerving, but it’s less of a concern for long-term investors. Even long-term investors can be affected, however. So, if you believe you might panic sell during a market crash, keep in mind the increased volatility of crypto compared to traditional asset classes.

Regulation: Cryptocurrency is a relatively new asset, and it’s not yet very regulated. There is a risk that governments may step in to regulate or even ban cryptocurrencies, as has transpired in China. The potential for future regulation is a big question mark over the future of cryptocurrency.

Scams: There are many scams involving cryptocurrency. Investors must be careful to use reputable crypto exchanges and store their coins safely. There are also many “get rich quick” schemes promoting brand new or lesser-known cryptocurrencies to investors.

Storage: Cryptocurrency can’t typically be held in a traditional investment account (although this is starting to change with crypto ETFs). Instead, a crypto exchange account will be necessary. Investors must then decide whether to allow the exchange to serve as the custodian of their assets, or to store their crypto in a crypto wallet.

Keep in mind that “cryptocurrency” is a broad topic. There are thousands of cryptocurrencies. The main tokens, like BTC and ETH, have historically been relatively stable. Lesser-known coins, often called “altcoins,” carry much more risk.

You can think of the main currencies like Bitcoin and Ethereum as the “household names” of the stock market. They can certainly lose value, but they are unlikely to go away entirely. Altcoins are more like penny stocks, and their value can easily go to zero.

Conclusion

There are many cryptocurrency benefits to explore. And as with any asset class, the more investors understand about the underlying asset, the better they can make informed decisions.

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