What Is The Disadvantage Of Cryptocurrency?
For years, cryptocurrency has been lauded for its innovative system and approach to how it deals with finances. In an era where everything is either digital or is transitioning to a digital format, the idea of digital cash seems like the natural progression from a traditional form of fiat money. Its convenience and transparency are among several advantages that attracted many investors to it.
However, in recent months, we have started to see a noticeable crack in this “ideal” alternative. The issues with cryptocurrency have not necessarily been concealed or hand-waved away, but they have rarely detracted from the benefits of digital cash. This dismissal has started to change and now more than ever are investors questioning the balance of the pros and cons.
This skepticism raises inquiries regarding the main disadvantage of cryptocurrency. On top of that, what is the solution?
The primary drawback(s)
There is an array of candidates for the main disadvantage of cryptocurrency. For instance, there is the matter of security. Cryptocurrencies, being a digital technology, will experience cybersecurity breaches. What’s more, hackers could get a hold of them. Numerous ICOs have been breached over the years, which in turn costs investors hundreds of millions of dollars.
Another is scalability issues, which is actually one of the biggest concerns regarding crypto. This refers to the Bitcoin network’s limited capability to manage vast amounts of transaction data on its platform within a short time span.
However, many can agree – both crypto detractors and supporters – that the primary disadvantage is its volatility; specifically concerning its price. The crypto market is infamous for its volatility, so investing in cryptocurrency without properly understanding the overall risk factor can be rather perilous. In fact, the volatile market is often the dealbreaker for those who are on the fence about investing in crypto.
A potential solution
Price volatility stemming from a severe lack of inherent value is a big dilemma. As such, there is a mad scramble to find a resolution. However, the solution may already exist. While price volatility is a major concern, overcoming it is possible by linking the value of the crypto directly to assets, both tangible and intangible. Put simply, the potential answer is asset-backed crypto.
As the name implies, asset-backed cryptocurrencies are crypto coins that contain a link to an economically valuable object. Put simply, this type of crypto is used for asset digitization, with the record being included on a blockchain.
Asset-backed crypto provides price stability that conventional crypto cannot. Therefore, investors have an opportunity to invest in digital currency without going through any uncertainties regarding market changes. Moreover, they offer a middle ground to attract new users to the crypto space. Due to these tokens being backed by tangible assets, they are comparatively easier to understand.
Noteworthy asset-backed cryptocurrency
Stablecoins are inarguably the most popular type of asset-backed cryptocurrencies. These coins possess the best of both worlds: fiat currency’s liquidity and digital currency’s decentralization and transparency. In the event of a stablecoin’s price plummeting, its users are still able to receive their supply of fiat currency.
Stablecoins have proven that they are resistant to fluctuations in price. Many experts hope to use the concept of the stable coin to one day eradicate the volatility that the crypto market has been notorious for.
Gold-backed cryptocurrencies are another type of asset-backed cryptocurrency that is garnering a considerable amount of attention. The price of these digital currencies is directly tied to the value of gold. To elaborate, a third party will store the gold, and a digital exchange is used as a way to trade the gold.
Tracing tokenized gold is a lot easier than tracing physical gold. Additionally, the gold’s owner takes advantage of the liquidity that the tokenization process provides. Redeeming the token is also quite easy because it is traded in various digital exchanges.
Conclusion
Volatility is – and likely will continue to be – the main disadvantage of cryptocurrency. Like with creditworthiness assessments in loan approvals, it is to be expected. With that said, investors can take comfort in the fact that asset-backed crypto can rectify this issue.
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