Virtual Currency: Advantages and Disadvantages

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24th Apr 2019 Technology Reference this

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Pros and Cons of Virtual Currencies

Virtual Money is defined as a digital representation of value that is issued and controlled by its creators. It is used and recognized by members of a specific virtual community. Virtual money relies on an organization that completely works on trust and unlike regular money, it is not issued by central bank or any other banking authorities. A virtual currency permits to transfer money without having to use any sort of intermediary like banks. It uses a cryptographic technology called blockchain that forms a collective and publicly demonstrable file of transactions to stop fraud. This builds trust between sellers and buyers, thus eradicating the want banks to get involved to authenticate the procedure.

Globalization, virtualization, active customer participation, cost of reduction and networking are indications of altering reality, persuading also the financial amenities. Operating payments services currently regulated by entities of economic trust, which is based on money that is local, made to make profits, do not have a chance to stay on top of the users’ outlooks. Virtual currencies on the other hand, are the people’s demonstration of the need for changes in the world of finance. They are made to become universal. The lack of a middle man makes their use very cheap and the idea of cash lets people create it just the way they like it. They are seen as the money for a world made of trust. Their acquiescence with the market trends help them jump over their opponents who are still working with the old rules and hence make new ideologies for the system as a whole.

Virtual money can be put into three classes and they are “closed virtual currency schemes, virtual currency schemes with unidirectional flow and virtual currency schemes with bidirectional flow”. Virtual currency schemes have almost no connection to the actual economy.  A good example of virtual currency schemes is World of Warcraft gold where the gamers are able to pay their monthly subscription using the gold earned in the game. The second class of virtual money is virtual currency schemes with unidirectional flow. This is where points can be bought using real currency at an explicit exchange rate but cannot be exchanged back. Good examples of virtual currency scheme are Amazon coins and frequent flyer points. Amazon coins is a method of purchase where customers are able to buy products like Kindle fire or Android devices using digital coins from the app or from the Amazon Appstore. The last class of virtual money is virtual currency schemes with bidirectional flow. This class includes Second Life Linden Dollars and Bitcoins. Second Life has its very own economy and its own currency known as Linden Dollars where the users are able to buy and sell using a platform called Linden. Similarly, Bitcoin is a form of digital currency where encryption methods are used to control the initiation of units of currency and confirmation of transfer of funds and it operates separately of a country’s central bank.  

Just like a coin that has two sides, any topic that we deal with in today’s world has its advantages and disadvantages. Similarly, virtual currency has its own advantages and disadvantages but definitely the pros outweigh the cons. But here is one side of the coin which are the advantages of virtual currency. Virtual currency is considered global because if it is correctly implemented, cybernetic money can provide its users an international platform for trading. It can also be considered a stage for interoperability for pricing plans and member accounts. This will be effective for a person if the merchandise base is steadily valued on an international base. Secondly, virtual money can be considered efficient. This is because if a consumer makes plenty of small transactions, a virtual currency can be added efficiency by allowing micropayments or minor scale outflows very easily and without any incremental cost.  This releases up a lot of options for payments and business prototypes, specifically if the currency can be communal or compensated. Also brand plays an important role as prodigious virtual currency can assist improve and expand a brand relationship. This is every common when it comes to airline points, membership rewards or any other virtual points and systems.

The flip side of the coin are the disadvantages of virtual currency  and they are basically exchange limitation, security and regulations. When we talk about virtual currency being able to exchange it is very limited, this is because not a lot of people use virtual currency. Exchanging regular money is easy, sure their value is different but we can still trade regular money for something else. On the other hand exchanging virtual currency is much harder, because a bare minimum amount of people use virtual currency. Another downside about using virtual currency is the security, many times people hacking and trying to mess with the system is being a regular worry for many companies. This is because there is not a big amount of security for this system yet like federal cash. So security measures is definitely a big concern for using virtual currency. Last but not least the regulations are a worrisome factor. There is not a high amount of regulations for the virtual currency. The policies are in the shallow grey area and it might become a concern when dealing with taxes and other issues when dealing with currency refunds.

One of the key virtual currencies is bitcoins. Bitcoin is a virtual currency, or cryptocurrency, which is measured by a non-regionalized system of customers and is not openly questionable by the notions of the central bank and its officials. “At its peak in March of 2014, the daily volume of Bitcoin transactions in United States dollars exceeded $575,000,000.” To think of the fact that bitcoins was well known and used three years ago is marvelous as it reflects the knowledge of the consumers and the state of the economy. Also the fact that consumers were able to meet their requirements and needs through virtual money is an important thing to be noted. Bitcoin is definitely the prevalent and extensively made use of virtual currency, even though at present there are a few millions of cryptocurrencies in the market.

Iddo de Jong, senior expert in the market integration division of the European Central Bank (ECB), states that bitcoins “do not pose a risk to price stability nor can they jeopardize financial stability.” As bitcoins are an unfettered source of transacting, they carry a factor of danger for the people that use them as they do include in the territory of central banks’ power. Because Bitcoins have a common platform with other transaction schemes, higher specialist that carefully view the virtual currency get to keep a watch on the trends of the market, develop security necessities for payments that take place within the system and any legal matters with regards to the particular issues are kept rationalized.

The article written by Griffin “Virtual currencies in the crosshairs”  states “The government has been able to target both the individuals involved with Liberty Reserve as well as the institution itself to prosecute AML violations precisely because of its centralized nature: Liberty Reserve had administrators, employees, and even a place of business. So what happens when you remove all of the centralized structure around a virtual currency? Bitcoin and other similar decentralized virtual currencies happen. Bitcoin is an open-source “peer-to-peer” digital currency that has no administrator. Rather, it uses an algorithm that constantly checks itself against other Bitcoin users to verify its amounts and locations.” This article clearly explains that bitcoins does not need to be administered by Federal Reserve or any other government agencies unlike real money that floats around. It is kept account for by the system that repeatedly verifies itself with further users of bitcoins to check on the totals and the places where it has been used.

Similar to any customary currencies, like the US dollars or the Euros, Bitcoins also have value comparatively. Bitcoins can also be split up into fractions that showcase units of less value than a whole number. At present the smallest Bitcoin unit is satoshi which is 1.0E-7/10 Bitcoin. This cannot be further fragmented down into lesser units. The structure of Bitcoins is in a way that it can be broken down further but that is only going to happen if the value of virtual money were to rise.

Bitcoin is the utmost flexible cryptocurrency as it can be made use to buy goods from an increasing cluster of dealers that take Bitcoins as a source of payment after a related transaction is complete. Bitcoins can also be swapped with other people that use virtual money for the service rendered or for paying off debts. It is also used to be traded as other forms of currencies which are both the common ones that we use or the other kinds of virtual money. The dark side to this is that it can be made use for buying illegal items online like drugs or firearms with any record being put to what is purchased.

Protection for bitcoins

The impression following bitcoins was to remove the Intermediary, like the government or a financial establishment. It was made to give privacy to the people using it. So, this raises some concern as to who is using it and why. There is a big concern from the Federal regulators around the globe that criminal organizations are using bitcoins for underhanded business transactions such as money laundering, and trafficking. Despite this, unlike cash, bitcoins leave a footprint by the way of blockchain. The block chain, also called a public ledger is a place where every transaction is displayed. Every user is given something called a “Private key” The key is used to make safe transactions together with a “public key” that knows either people on both ends of the transaction. Even though this can keep an eye on the illegal transactions, it can have a certain amount of risk for actual users.

Government controls

A fact about the bitcoin is that it is a decentralized currency, meaning it is not controlled by any governments or federal organization. On the other hand, normal money like cash, credit cards and things like that are regulated by the Federal government. Since bitcoin is not regulated, it is helpful to the buyers because they do not have to pay any high fee for obtaining the bitcoins.

Acquiring bitcoins

What are some ways to get bitcoins? Well one of the most common way is to trade in money for bitcoins through exchanges. Another way to obtain bitcoin is to exchange them for goods and services, you can also do something called “mining” which will get you bitcoins. When you are mining, you are mining for the virtual keys which can unlock transactions. The more transactions you can confirm, the more bitcoins you can acquire which is roughly around twenty-five bitcoins for single transaction.  The problem is that mining needs a specific quantity of computer processing power to look for the key that decipher a certain file. It is very time consuming and also most houses and office computers do not have that ability, so it can limit a lot of technology.

Advantages of Using Bitcoin

Bitcoins are considered to have a very large amount of liquidity when compared to other types of cryptocurrencies. Bitcoins are distinctively more liquid than its peers in the market. This helps in way to maintain the value when exchanging to fiat currencies. On the contrary, other types of cryptocurrencies cannot be converted directly into other common currencies and if at it is possible they lose a large amount of value associated with it. In this matter, Bitcoins can be compared directly to other fiat currencies even though it is not possible to buy and sell bitcoins in virtually at time or at any amount. Bitcoins are now a widely accepted form of payment method. There are thousands of  dealers that are ready to receive bitcoins as a form of payment. It is possible to purchase any item or physical goods that are needed for daily activities using bitcoins. If a consumer wants to decrease their interaction with real money, the acceptance of bitcoins is more likely going to be a big help for them.

Bitcoins also make it easier than regular money to do trade worldwide. Business with bitcoins that happen within a country is not any different from bitcoin transactions that happen in other parts of the world or in any other country. When using ATM cards as a form of payment in other countries to buy merchandise or using a debit card to get cash from an ATM, there are often times transactional fees associated. They vary from anywhere between 4%-6% and transferring money may include a fee of 15% of higher. This is not the case when using bitcoins internationally as there is no fees associated with any transactions done using bitcoins outside the home country. When paralleled with other forms of digital payments like PayPal, bitcoins have relatively low or no transactional fees.

Bitcoins also offer way more secrecy and confidentiality when compared to traditional currencies. When a consumer has their money holding in a bank account or in any other forms of online credit card, it does not guard your money from any fraudulent actions that are prone in the market. Even though most bank accounts and credit card agencies offer fraud protection and protection from complex attacks , there are private agencies that are able to track daily transactions and how the money is spent and from where money is received. On the other hand, Bitcoins have an in built confidentiality protection that let all users upon choice to separate their personal identification from their Bitcoins account. Even though it is easy to keep track of the flow of Bitcoins between users, it is really difficult to understand who the users really are or their individuality.

Bitcoins tend to be free from all political agencies. This is because Bitcoins are not generated or measured by an individual or governmental agencies. Because it survives outside the all political power, it is really difficult for any government or the powerful authorities to put a hold on or completely stop the production of Bitcoins. Bitcoins are not beholden to its makers because of its spread out nature, attractiveness and fluidity. Other cryptocurrencies that are less famous than bitcoins are considered to have an intense holding as a major share of units are held by very few people. This actually permits the makers of currencies to influence the supply and demand also with adversely impacting the value of the currencies. At present there are only 21 million of bitcoins that exist and is more likely to support its survival for long term when compared to real money that we use in our daily lives. This is the reason why bitcoins are considered as precious as gold or any other precious metal as bitcoins instill a fear of scarceness in people. The money that we use in our daily lives are not considered scare as if the federal government runs out, they have the right to print new ones and put out in the market for use.

Disadvantages of Using Bitcoin

Even though Bitcoin is basically liquid and can be traded with ease, it stays vulnerable to crazy price fluctuations over a small amount of time. When Mr. Gox collapse happened, bitcoin’s values dropped by more than half. So after FBI made a statement that they will consider Bitcoin and other similar virtual currencies as actual financial services, bitcoin’s worth went up almost the same percent. Although Bitcoin’s instability occasionally gives small-term benefits for tentative traders, it solidifies the currency unbefitting for long-term investors. An because Bitcoin’s purchasing ability fluctuates so extensively from week to week, it is pretty hard for consumers to take advantage of as an appropriate way of trade.

Because of bitcoins, many other cryptocurrencies came to being. Even though many are basically comparable to Bitcoin, they have made quite some developments. The newer cryptocurrencies make it hard to keep an eye on the flow of money or identify the users. Some other cryptocurrencies have something called smart contract systems that make sure the providers are held responsible for their word. Some have in house exchanges which will allow users to trade cryptocurrency units for fiat currency units which will in return stop third party trading’s and decreasing risk that are associated to fraud. As time goes on, many of these substitutes can usurp Bitcoin as the biggest cryptocurrency on the globe. This can easily impact Bitcoin’s value in a negative way.

Since bitcoin has become world’s more popular cryptocurrency, it has seen a lot of scams, fraud and attacks. Many times, these range from small schemes such as bitcoin savings and trust to big attacks. Other cryptocurrencies do not have the critical number of users necessary to make a big problem profitable to the criminals, and when that happens such activities are most likely to be taken to the court by authorities.

Even though there are very public prosecutions of the worst offenders, bitcoins remain very much in high demand for criminals and gray markets users. Dark web marketplaces like “Silk road” and “Sheep” try to reveal and file users to fraud and the threat of going to court. But still the use of immoral activities by upstanding bitcoin users, make a threat to bitcoin’s reputation. It is still very unclear if the international laws are strong enough to make an impact on these problems.

One of the biggest shortcomings of Bitcoin is not having a regulated policy for refunds like they do for all credit card companies and regular online payments. People who were affected by fraud like if they made a purchase but it never came through, in such cases they cannot ask for a refund with Bitcoins. As a matter of fact, Bitcoin’s decentralized structure will make it pretty much impossible for anyone to settle disagreements between two parties. Even though miners take some accountability for logging transactions, they are not authorized to assess their authenticity. Crypto currencies like Ripple have a simple refund options, but Bitcoin do not have this feature yet.

According to Wozniak, in “Virtual currency schemes – the future of financial services”  he says “Virtual currencies open new horizons for finance and redefines the concept of money. Their appearance is the incentive for creating the entirely new financial system, based on the principles different to those previously known. Virtual currencies are the starting point for revolution, as they require focusing on the radically new concepts rather than searching for the ways of incorporating them into the existing financial system. The consequences of such novelties will go far beyond positive impact of the new solutions on the effectiveness of the system’s functioning. Forthcoming changes will be so radical and so different from the reality we know, that they are even hard to imagine, not to mention the describing in details.”

Regardless of all virtual currencies’ pros and cons, we cannot neglect their role as a traditional money substitute. Virtual currencies are just ahead of our times and, when reaching the satisfactory level of IT infrastructure, digital coins may become a common means of payment, accepted together with or even without national currencies.

References

  1. Griffin, G. (2013). Virtual currencies in the crosshairs. Criminal Justice, 28(3), 1-2.
  2. Tu, K. V., & Meredith, M. W. (2015). RETHINKING VIRTUAL CURRENCY REGULATION IN THE BITCOIN AGE. Washington Law Review, 90(1), 271-347.
  3. Mikolajewicz-Wozniak, A., & Scheibe, A. (2015). Virtual currency schemes – the future of financial services. Foresight : The Journal of Futures Studies, Strategic Thinking and Policy, 17(4), 365-377.
  4. Kim, Young Bin, et al. “Virtual World Currency Value Fluctuation Prediction System Based on User Sentiment Analysis.” Plos ONE, vol. 10, no. 8, 04 Aug. 2015, pp. 1-18. EBSCOhost, doi:10.1371/journal.pone.0132944.
  5. Kim, Thomas. “The Predecessors of Bitcoin and Their Implications for the Prospect of Virtual Currencies.” Plos ONE, vol. 10, no. 4, Apr. 2015, pp. 1-18. EBSCOhost, doi:10.1371/journal.pone.0123071.
  6. “Report of the Commonwealth Working Group on Virtual Currencies.” Commonwealth Law Bulletin, vol. 42, no. 2, June 2016, pp. 263-324.
  7. Yang, Chen, et al. “Cogent: A Case Study of Meaningful Gamification in Education with Virtual Currency.” Formamente, vol. 10, no. 1/2, Jan. 2015, pp. 133-147.
  8. Gerkis, James P. and Serafima Krikunova. “Bitcoin and Other Virtual Currencies: Approaching U.S. Regulatory Acceptance.” Administrative & Regulatory Law News, vol. 39, no. 3, Spring2014, pp. 4-8.
  9. https://www.quora.com/What-are-the-pros-and-cons-of-using-virtual-currency
  10. http://www.fatf-gafi.org/media/fatf/documents/reports/Virtual-currency-key-definitions-and-potential-aml-cft-risks.pdf
  11. http://www.blakesbusinessclass.com/bitcoin/
  12. http://www.coindesk.com/world-bank-forum-weighs-pros-cons-of-virtual-currencies/

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