What are the disadvantages of cryptocurrencies?
You can use cryptocurrency as a means of payment, but you can also invest in it. Are you hesitant to invest in a cryptocurrency like Bitcoin? Then it’s a good idea to first delve into the world of digital currencies. On this page, you can read directly about the 19 disadvantages of crypto and blockchain!
Disadvantage 1: You can’t use cryptocoins everywhere yet
There are more and more companies that accept cryptocurrencies like Bitcoin as a means of payment. However, you should not assume that you can pay almost everywhere with your digital coins. In fact, the chance is greater that you cannot pay with cryptocurrencies at a certain company.
If you want to invest in cryptocurrencies and then use them to pay, it is important to keep this in mind. When investing in Bitcoins or other cryptocurrencies, this is less important.
Disadvantage 2: Transactions can be expensive
If you want to transfer one euro to a friend, family member, or company, you don’t have to pay anything. There are no transaction costs associated with your transaction. If you pay with Bitcoin or another cryptocurrency, however, it’s a different story.
In fact, the transaction fees for cryptocurrencies have risen significantly in recent years. Where you used to pay 1 euro in transaction fees for a Bitcoin transaction, it is now about 20 euros.
This is not only a disadvantage when you want to pay with cryptocurrencies, but also when you want to invest in digital coins. When you exchange crypto for fiat, you pay fees to the crypto exchange.
Disadvantage 3: Cryptocurrencies do not have a stable value
The value of the euro can rise and fall, but the increases and decreases are never very large. This is different for cryptocurrencies. Your investment can be worth a lot one day and completely worthless the next. This can change again afterwards, but you certainly don’t have this guarantee. An investment in a cryptocurrency like Bitcoin is therefore certainly not a stable investment.
The only exception to this volatility is stablecoins. A stablecoin tries to follow the exchange rate of the underlying currency one-to-one.
Disadvantage 4: You always need access to your wallet
If you want to pay with cryptocurrencies or take your profits by selling your coins, you need access to your wallet. If you can’t access it, for example because you forgot your password, you can’t do anything with your cryptocurrencies.
You also need access to your wallet when paying with fiat. With your tangible wallet, however, you don’t have to worry about forgetting your password or being hacked. And if you lose your wallet, you can still access your money, for example by using your banking app. This is not the case with the wallet containing your cryptocurrencies.
Disadvantage 5: Lack of clear regulations
Governments are still struggling with cryptocurrencies. In some countries, for example, cryptocurrencies are banned. Supervision of crypto is limited. There is therefore no safety net when your crypto exchange runs off with your cryptocurrencies.
It is also difficult to make international agreements. Because crypto is decentralized, no one has complete control over crypto.
Disadvantage 6: The value is difficult to determine
Cryptocurrencies are fairly new and, unlike stocks, there is not necessarily an organization behind them. This makes it difficult to accurately determine the value of a cryptocurrency. It is therefore difficult to compare crypto with other investment options.
Disadvantage 7: Many cryptocurrencies are not environmentally friendly
Cryptocurrencies that work according to the Proof of Work principle consume a lot of electricity. Bitcoin, for example, consumes as much electricity as Switzerland! Especially now that sustainability is becoming increasingly important for many governments, this is a clear disadvantage.
Disadvantage 8: Banks barely support crypto
Despite the growing interest of banks in blockchain technology, they do not yet offer crypto transactions. You cannot simply transfer cryptocurrencies or make payments with a credit card at ING Bank or ABNB AMRO. It will probably take a long time before major banks fully embrace crypto.
Disadvantage 9: Taxes are complicated
When you hold crypto as an investment, you must report its value on January 1st. This can be disadvantageous when crypto then drops significantly in value. In this article you can read more about crypto and taxes.
However, when you receive a payment in crypto for providing a service or product, you must report its value as income. Due to the high degree of volatility, this can make your tax return a lot more complicated.
Disadvantage 10: Competition from existing fiat
Governments are increasingly working on their own cryptocurrencies. For example, a decentralized euro and dollar are being developed. When governments promote their own cryptocurrencies and ban other cryptocurrencies, it can make existing cryptocurrencies less popular. In China, for example, all other cryptocurrencies have been banned so that the government can continue to control digital money.
Disadvantage 11: Higher risk of theft
Because there is no central authority, you are completely alone in case of theft. When someone steals your crypto assets, it is almost impossible to get your money back. Due to the limited oversight, there are many fraudulent parties active, which sometimes steal the assets of their customers, even large crypto exchanges.
Disadvantage 12: Many worthless cryptocurrencies
It is easier than ever to launch a new cryptocurrency: anyone can hold an ICO. There are now thousands of altcoins in which you can invest. However, many of these cryptocurrencies are worthless and have no clear function. Especially for inexperienced investors, it can be difficult to recognize the difference between a valuable and worthless cryptocurrency.
Disadvantage 13: Bitcoin’s scarcity is not certain
Bitcoin supporters always point to the scarcity of Bitcoin. According to the protocol, no more than 21 million Bitcoins can ever be created. However, if the majority of Bitcoin holders decide that more Bitcoins can be created, this is also possible. So, the scarcity of Bitcoin is not entirely certain, and if more Bitcoins suddenly come into existence, the price can come under pressure.
Disadvantage 14: Limited scalability
Many cryptocurrencies have scalability problems; the complex calculations limit the number of transactions that can be performed. The infrastructure of companies like Visa and Mastercard is much stronger.
However, crypto developers are constantly working on improvements. With techniques such as sharding, staking, and lightning networks, transaction speed can be increased.
Disadvantage 15: Crypto is difficult to explain
The technology behind crypto is complex, and it will be difficult to convince grandparents to start making payments with Bitcoins. Only when crypto becomes easier to use and understand will more people start using it.
Disadvantage 16: Negative Bias in the Media
Traditional media and politics mainly publish negative news about cryptocurrencies. This discourages many people from investing in crypto, which slows down the growth of the technology. This negative bias could change in the future as governments implement better regulation.
Disadvantage 17: No Monetary Policy
Governments cannot execute active monetary policy with decentralized cryptocurrencies. Normally, central banks manipulate interest rates and print money during times of crisis.
If everyone were to use crypto, the government would lose complete control over the monetary system. This could cause an economic crisis to spiral out of control much faster.
Disadvantage 18: Limited Anonymity
Bitcoin is known for being anonymous, but in practice, this is not entirely true. All wallets and transactions are publicly visible on a ledger. If someone can link your wallet to you, they can see all the transactions you’ve made.
Disadvantage 19: No Underlying Value
Fiat currency is backed by central banks. There is no underlying value behind a cryptocurrency.
When you buy a share, you invest in an underlying value (i.e., the company). Therefore, the price of crypto is 100% dependent on people’s trust in it. This results in strong price movements when something goes wrong within the crypto world.
What Are the Disadvantages of Crypto?
As you have read, there are several disadvantages associated with crypto. Despite these drawbacks, more and more people choose to invest in crypto. The technology is still very new, and crypto will continue to develop and improve in the coming years. If you are curious about the advantages of crypto, you can read this article.