Disadvantages of Using Cryptocurrencies

In the previous articles, we have read about the meteoric rise of cryptocurrencies. We know that investments in these currencies have provided unprecedented returns. Many experts are attributing it to the number of advantages that cryptocurrencies have to offer. However, it needs to be understood that cryptocurrencies are still a nascent technology. Hence, there are still many significant disadvantages to investing in cryptocurrencies. In this article, we will provide an overview of the various disadvantages. It needs to be understood that each of these disadvantages needs to be explained insignificant detail which will be done later in the module. This article is just providing a checklist that can be used for ready reference.

  • Unregulated Markets: Firstly, the biggest advantage of cryptocurrencies is that they can function without the existence of a central bank that coordinates their activities. However, this is also the biggest disadvantage of these investments. Firstly, since there is no central bank or exchange which mediates all transactions, most of them are irreversible. Secondly, since there is no centralized party or government which enforces its value. The value of the coin is purely determined by the value which peers investors place on it. Hence, if the investing community were to lose interest in a particular cryptocurrency because of a security incident, the units of that currency could become worthless overnight!

  • Volatile: Cryptocurrencies have still come a long way as compared to the past. However, they are still a very nascent technology. This means that the markets are still extremely volatile. It is common for cryptocurrencies to double in value in a matter of months. It is also common for cryptocurrencies to halve in value within the same period of time. Hence, for the moment cryptocurrencies are used by investors who are not afraid of speculation or volatility. Investors who are looking for a stable source of value for their investments continue to steer clear of the cryptocurrency markets.

  • Data Loss: The money invested in cryptocurrencies is held in digital wallets which are protected by digital passwords. If the owner deletes these passwords and is not able to recover them on his own, there is a big possibility that the money locked in the digital wallet may become inaccessible to them.

  • Legal Hassles: The problem with cryptocurrencies is that they are completely anonymous. As a result, they are widely used by crime syndicates and other people indulging in unlawful activities. Since cryptocurrencies are not regulated by the government, criminals find this to be the best way to launder their money. As an investor, this can be problematic. Since the market is completely anonymous, it is possible that investors could be aiding and abetting such money laundering activities without having any knowledge of the same. It is possible that investors might end up in a legal quagmire simply because they traded cryptocurrencies. In order to avoid such problems, many investors avoid investing in cryptocurrencies altogether. Apart from the issues mentioned above, many countries have made issuing and accepting cryptocurrencies an illegal activity. If investors trade these currencies despite the ban, then too, they are involved in illegal activities and could face legal repercussions.

  • Tax Hassles: Since cryptocurrencies are relatively new, there is still a lack of clarity about how the gains from these investments need to be taxed. Since the rules are not completely clear. Most countries in the world do not have tax gains from cryptocurrencies mentioned in their tax code. Even though this mention has not been explicitly done, investors are supposed to mention the income and pay taxes on them.

    Since governments do not have a strong mechanism to determine the exact income from cryptocurrencies, some investors have tried to avoid paying taxes on them. This has landed them in trouble with the tax authorities. In many cases, investors genuinely wanted to pay their dues. However, due to the confusion about the exact nature of tax that needs to be applied to cryptocurrencies, they have been unable to do so. Hence, paying taxes on cryptocurrencies is also a complex task that requires significant transaction costs.

  • Data Theft: The overall system which manages the entire cryptocurrencies network is quite safe. Hackers cannot really enter these blockchain networks or take control of them. On the other hand, hackers can and do hack into individual accounts. A lot of the time, they use techniques such as phishing and social engineering. This means that instead of hacking into the system, they actually trick the investor and obtain the password voluntarily.

    Data theft is common amongst cryptocurrency investors. In the year 2020, the estimated value of data theft related to cryptocurrencies shot up to $2 billion. This number was the result of a 45% increase in the value of thefts as compared to the previous years. Since there is no centralized authority that facilitates cryptocurrency-based transactions, data thefts are common. Some fintech companies are trying to provide security solutions. However, those solutions will have to be implemented at the individual level and will have to be paid for individually.

The bottom line is that cryptocurrencies markets may have become popular because of the boom in asset prices. However, they have still not become mainstream. Hence, from the point of view of a retail investor, there are still a wide variety of risks that have not been mitigated at the systemic level.

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