The 6 Problems Solved By Cryptocurrencies?

These days, information on cryptocurrencies and blockchain can be found almost everywhere. The issue of "why do we really need cryptocurrencies like Bitcoin?" is one that is often posed to me by my circle of acquaintances. This article was inspired by the fact that I'm sure many other people have undoubtedly thought about similar things (i.e., government-issued paper money), and I hope it will help clarify why cryptocurrencies are fundamentally better than fiat currency.

In particular, I've been concentrating on finding answers to issues in our existing monetary system that can only be addressed via cryptocurrency. I really hope that you like this and that it helps you in some way.

1. Inflation (also known as currency depreciation)

These days, one dollar doesn't buy nearly as much as it formerly did. The fact that governments and central banks can readily raise the amount of money circulating in any currency by manipulating interest rates and issuing bonds (debt) is one of the most basic problems associated with fiat currencies. This temporarily makes the market more liquid, but since more of those currencies are now available, the buying power of those who hold them will go down.

How severe is the damage that this erosion causes over time? The stunning graphic that can be seen below illustrates the deterioration of the purchasing power of the United States dollar over the course of the previous century:

The inverse connection that exists between the buying power of the US dollar and the amount of that currency that is now in circulation can also be shown in the picture that can be seen below, which focuses on a more recent span of time:

Inflation, in many respects, may be seen as a covert kind of taxation that is used to finance political promises. If it is possible to make more money, then the amount of money will keep growing even if inflation is a problem.

Cryptocurrencies, in contrast to conventional currencies, have the capacity to have a predetermined generation schedule as well as a maximum supply that is strictly limited. Both Bitcoin and Decred, two of the most popular cryptocurrencies, have a maximum supply limit set at 21 million. A breakthrough innovation that is simply not conceivable with fiat currencies is the creation of a currency that has a set quantity and cannot be diluted. This kind of currency is known as a "fixed supply currency."

Value is driven by scarcity. Gold has maintained its status as a viable asset for the last 5,000 years, in part because of the widespread belief that the metal is scarce. But there is no better way to make sure that something is scarce than to set a mathematical limit on how much of it can be made. Cryptocurrencies make this possible.

2. Foreign Exchange Fees

Imagine for a moment if each retail establishment had its own currency, and that in order to use that money at the establishment next door, you had to give up thirty percent of its worth. This is comparable to the behavior of fiat currencies when seen from a macroeconomic perspective. People who own various currencies are discouraged from doing business with one another due to the fact that the United Nations has authorized the circulation of 180 distinct currencies. Foreign exchange costs, which were formerly inescapable but may now be avoided, are among the most pointless levies that can be imposed on individuals doing business with one another.

Geographical boundaries impose an artificial limit on the circulation of currencies that central banks issue. If you have ever gone to another nation, it is quite probable that you have brought back some extra change that is virtually useless to you. On the other hand, cryptocurrencies don't recognize national boundaries because of their digital nature. Remember that a superior option is now open to us if you are charged foreign exchange costs or find yourself with useless foreign spare change. This option is now accessible to us thanks to recent developments.

3. Inefficient transfer of payments

The circulation of fiat currency is inherently inefficient. As a consequence, we are forced to depend on a number of different intermediaries, each of which takes a cut of the profits to facilitate the transfer of funds to the subsequent receiver. As someone who works in the financial services industry, I've seen firsthand how ineffective the modern system of correspondent banking is. If you have sent a wire transfer to another nation, the receiver may not be able to access the money for up to five business days (!) after the payment has been completed. Because these middlemen are trusted guardians of the walled money system, we can understand why using their services is expensive and takes a long time to settle.

Digital currencies, in contrast to fiat money, which needs the use of middle men to move around, already have a payment and settlement network built into them. It just takes a few minutes and costs about the same as a cup of coffee to transmit hundreds of millions of dollars straight to someone on the other side of the planet if you use Bitcoin. Even though companies like JP Morgan and Ripple are making blockchain-based payment systems for large businesses, this kind of difference is almost impossible to bridge with fiat currencies.

4. Limited divisibility and incompatibility with micropayments (future use case)

What's the least amount that can be purchased with a dollar? In the context of the paper and coin money that is in use today, the answer will be $0.01, despite the fact that the amount may be theoretically reduced. These limits are arbitrary, since we should be able to do business in increments as small as a tenth of a cent, a half of a cent, or even smaller amounts.

In contrast to traditional currency, Bitcoins may be subdivided into one hundred million smaller pieces (0.000001 BTC, also known as a Sat). The use of micropayments is not immediately clear in the present day. However, there are growing indications with the internet of things where intelligent devices will interact with each other. There will be chances to monetise microevents as there is an increase in the number of smart devices that are linked to the internet. Imagine a future where there are self-driving cars and you are able to assign a cost to any vehicle that chooses to go around another. Better payment facilitation via cryptocurrency may make it possible to unlock these and other high-frequency fractional transactions.

Another potential use of micropayments is in the realm of virtual products and video games, which both have tremendous market potential in the gaming industry. Imagine you are playing your favorite video game and have the option to invest one tenth of a penny to level up to a unique character attribute. What would you do? Are you looking for more lives and add-ons for Candy Crush?

5. Threat of Confiscation and privacy of asset ownership

In many places around the globe, you should be aware that there is a genuine risk of having your funds taken away from you. There are still authoritarian regimes on the planet that are home to the majority of the world's population, which accounts for almost four billion people. It's not only citizens of war-torn nations that are having trouble with this issue. Even the most dictatorial presidents can have their bank accounts and gold taken away by others.

This has resulted in the establishment of a sector relating to offshore banking that is now valued at more than 30 trillion dollars. As a significant portion of the world's population does not have access to the offshore banking sector at the present time, one may make the case that the true global worth of an asset that cannot be seized ought to be far larger. A non-sovereign, censorship-resistant store of value is something that cannot be achieved with fiat currencies. Cryptocurrencies provide this feature.

6. Financially including the globally unbanked

Even though access to bank accounts is something we take for granted, over 2 billion people on the globe still do not have a bank account. Because of the paperwork and infrastructure that is needed, a large number of people can't take part in global business.

Girls in Afghanistan who use their mobile phones to receive payment in bitcoin rather than having to ask male coworkers to accompany them to the bank for safety reasons is an illustration of the significant opportunity that exists to provide financial services to individuals who do not have bank accounts. Using cryptocurrencies makes it possible to store and move money more privately and anonymously than ever before. This was not possible before.

Conclusion

The fact that cryptocurrency may be used to amass wealth is often what sparks people's first curiosity in the sector. I have made a conscious decision to avoid engaging in any pricing debate or making price forecasts because price is a function of demand, and value generates and maintains demand. In addition, cryptocurrencies now provide value propositions that any other asset class cannot match.

That's all for today, see ya tomorrow! If you want more, be sure to follow our Twitter (@croxroadnews)

DISCLAIMER: None of this is financial advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. Please be careful and do your own research.

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