Recent estimates suggest that over 300 million users invest in cryptocurrency. Businesses are not left out either, with over 18,000 businesses as active investors.
A cryptocurrency is a digital form of money that operates via encrypted technology and is backed by real value. It is characterized by anonymity, security, and transparent transactions. In other words, the concept serves much of the needs of users today, which banking systems might have a hard time fulfilling. Primarily, the function of blockchain technology is to facilitate a web of decentralized finance that would drag away the monopoly of centralized financial institutions like banks and financial technologies.
In a way, cryptocurrency is considered the perfect substitute for traditional finance. It is speculated that blockchain technology would erode the strength of banking just like the latter did to the trade and barter system.
Understanding Cryptocurrency as a Financial System
The attention accorded to blockchain technology indicates that it is gradually becoming a fair alternative to conventional banking. This speculation is proved as several institutional entities continue to adopt it. Earlier in 2021, the automobile manufacturing firm Tesla adopted Bitcoin as a payment method to purchase its products. Beyond this, other spheres of the blockchain have been incorporated as useful mediums, even in sports and games.
The banking system that we use is presided over by central authorities and regulations. This governance emanates from the government, the Central Banks, the governing body of commercial financial institutions, and the users. In essence, the process of its operations is prone to sluggish and costly consequences. It takes quite a lot to maintain the luxurious structure of traditional financial services. These services are often rendered without paying much attention to privacy, ease, and security.
On the other hand, blockchain technology incorporates the features that are lacking in the traditional finance industry. One of the most notable features is the anonymity application and the near-instant facilitation of cross-border payments. This is what a couple of institutional investors are capitalizing on in the blockchain sphere. With the speed of cross-border transactions without the need for third-party or centralized intermediaries, global trade has taken on a more approachable outlook.
Of course, the reality of blockchain technology is encouraging the banking sector to incorporate more fluid technologies and flexibilities. However, the use case of blockchain technology would always supersede. Unless in some way, the traditional finance industry integrates blockchain technology into its infrastructure.
Pros and Cons of a Financialized Crypto System
Although the overall appearance of crypto in the financial sphere looks optimistic, there are factors to consider that could change the entire perspective in the financial system. However, before we delve into that, let’s examine the positives of financialized crypto.
One of the most important advantages lies in the concept of peer-to-peer networking that is integrated into blockchain technology. The foundation of cryptocurrencies is decentralized. Almost all crypto assets incorporate a decentralized ledger system that encourages connected parties to conduct transactions without an intermediary as stated earlier.
Aside from this, they are also able to conduct seamless cross-border transactions with reduced fees which are not often obtainable in traditional systems. These transactions often execute within a minute and, in most cases, seconds. Blockchains like Cardano and Litecoin are renowned for their scalability and reduced transaction fees. Security is an additional advantage; users would no longer be prone to random hacks as often experienced in the traditional finance industry. Hackers who intend to take over the cryptocurrency wallet of any user would have to do a lot of work as transactions are encrypted and secured by the blockchain.
The major disadvantage of financialized crypto would be the concern of volatility which is often evident in conventional assets like Bitcoin and Ethereum. However, this issue is being countered by the availability of stablecoins which are fiat-pegged cryptocurrencies in the blockchain. Other rising issues would be connected to the need for knowledge about the working of cryptocurrencies.
To settle this, thousands of articles and videos online explain the concept of digital currencies and offer new investors the necessary information to begin their journey.
Thankfully, the advent of cryptocurrencies is gradually instigating a revolutionary change in the wheel of global finance. While this change might take a while to happen, it is still inevitable.
Several digital currencies are gearing to attract institutional adoption. In the same vein, governments and central banks are considered Central Bank Digital Currencies (CBDCs) as a means to digitalize transactions and encourage decentralism. However, a government like El Salvador has taken the bold stride to adopt Bitcoin as a legal tender.