Cryptocurrencies are digital currencies that operate on blockchain technology and provide a medium to perform digital transactions like money transfer over a peer-to-peer network without intermediaries. Cryptocurrencies are often touted as a more efficient and cost-effective alternative to traditional monetary systems.
What is a cryptocurrency and how does it work?
A cryptocurrency is a type of digital currency that can be used for virtual payments over the internet. Except for the fact that cryptocurrencies are unregulated and do not actually have a monetary value, in theory, these digital currencies can be used to perform monetary transactions like send and receive payments, transfer money, pay at merchants, and more.
Because cryptocurrencies are built on blockchain, crypto transactions such as digital payments can be performed without the need for an intermediary or third party like a bank, a payment gateway, or a card processing network. This will not only help reduce the payment processing cost but might also greatly increase the security and privacy of payments. Moreover, cryptocurrencies can be used to pay to anyone, anywhere in the world using just the receiver’s address with no other personal information needed.
Cryptocurrencies operate on the blockchain network, where transactions are verified by crypto miners who solve complex mathematical equations and are rewarded with newly generated tokens. Blockchain is a network of distributed nodes, and with each node, a copy of the ledger containing all transaction records is stored, which makes it difficult to hack or manipulate a blockchain transaction. Because blockchain transactions are automatically verified and processed and involve now the involvement of middlemen, the processing cost and error probability in crypto payments are practically zero. This ensures crypto transactions are fast and cost-effective, no matter where you are making payments or to whom.
Cryptocurrency as an alternative to money - advantages and challenges
Advantages
There are, of course, many advantages of using cryptocurrencies for payments. Crypto transactions are peer-to-peer, i.e. the trading happens directly between two parties with a zero role of middlemen. The transactions, therefore, are more secure, private and in control of the trading parties. Thanks to blockchain technology, crypto transactions are very secure and immune to fraud. Because the transactions are peer-to-peer and no intermediaries are involved, crypto payments are faster and incur low charges.
There are many other benefits such as low transaction fees, ability to make cross-border payments, instant transfer, global reach, increased transparency, low operating cost because of automated processes using smart contracts, 24x7 markets with no downtime, unaffected by inflation or traditional markets, among others.
Challenges
The biggest challenge in using cryptocurrencies for payments is volatility. Because cryptocurrencies are too volatile, their values change very frequently and abruptly. This can make it difficult for the users to buy something at the right price and they are always at the risk of buying at the wrong time or when the coin value is too low or too high. While the unregulated nature of cryptocurrencies makes them secure and more efficient, it also fuels their volatile nature, which makes them unsuitable for mainstream use.
More stable and powerful cryptocurrencies such as Libra Coin can be the answer to the volatility problem in the use of crypto as payments. The Libra project offers an ecosystem of blockchain-based products and payments options that can be mass adopted in the e-commerce space and beyond. But, there is still a long way to go before cryptocurrencies can be used as a mainstream medium for payments just like fiat currencies. We seem to be on the right path nevertheless.
So, to the question of whether cryptocurrencies can be considered or treated as money, the answer could be both YES and NO. While cryptocurrencies as money have many advantages, there are challenges that need to be dealt with first.