What Is the Future of Cryptocurrency?

It’s been over a decade since bitcoin was unveiled. As it spread around the world, many wondered if they should jump on the bandwagon and get a piece of what might be the currency of the future. Others wondered if it would be a fatal mistake.

So should you invest in cryptocurrency or stick with traditional money?

Let’s take a closer look at how bitcoin and other types of cryptocurrency are shaping the economy, and what this might mean for your wallet.

What is Bitcoin?

Bitcoin is a type of cryptocurrency. It was created by someone or a group of people using the name Satoshi Nakamoto.

Cryptocurrency is a digital form of currency that uses cryptography to help users make more secure digital transactions. Bitcoin is one of the most well known types of cryptocurrencies, but there are many more, including Ripple, Litecoin and others.

One of the most important things to understand about bitcoin is that it is decentralized. This also means the digital currency isn’t issued by the government or backed up by banks.

Bitcoin.org says:

“Nobody owns the Bitcoin network much like no one owns the technology behind email. Bitcoin is controlled by all Bitcoin users around the world. While developers are improving the software, they can't force a change in the Bitcoin protocol because all users are free to choose what software and version they use. In order to stay compatible with each other, all users need to use software complying with the same rules. Bitcoin can only work correctly with a complete consensus among all users. Therefore, all users and developers have a strong incentive to protect this consensus.”

But it’s factors like decentralization and a small user base that make some people wary about investing in cryptocurrency. Why? The value of cryptocurrency can fluctuate drastically.

Stability — or lack thereof

The Federal Trade Commission (FTC) explains that because the government does not back cryptocurrency, the value of your cryptocurrency can change more often than the value of traditional currency. This means your cryptocurrency might be worth a lot one day, but the next day, its value may depreciate significantly.

The FTC website says:

“A cryptocurrency’s value can change by the hour. An investment that may be worth thousands of U.S. dollars today might be worth only hundreds tomorrow. If the value goes down, there’s no guarantee that it will go up again.”

Because cryptocurrency isn’t backed by the government, it can also be riskier if something goes wrong. If a company is hacked or goes bankrupt, you can lose a lot of money.

Plus, although cryptocurrency is on the rise, it isn’t universally accepted, and a relatively small percentage of the population uses it.

Here’s what Charlie Wells wrote in a Bloomberg Wealth article:

“But most people don’t really use Bitcoin to buy things, and instead use it as an investment or a store of value — in the way people purchase gold but don’t really use it to buy everyday objects.”

The relatively small number of people using bitcoin can also contribute to a lack of stability in value.

Bitcoin.org says:

“The total value of bitcoins in circulation and the number of businesses using Bitcoin are still very small compared to what they could be. Therefore, relatively small events, trades, or business activities can significantly affect the price. In theory, this volatility will decrease as Bitcoin markets and the technology matures. Never before has the world seen a start-up currency, so it is truly difficult (and exciting) to imagine how it will play out.”

Beware of scams

Because bitcoin and other cryptocurrencies aren’t backed up by the government, users have fewer protections. This can attract scammers.

Most payments made with cryptocurrencies are not reversible unless the buyer chooses to sell it back, according to the Federal Trade Commission.

Why does this matter? If you’re scammed out of cryptocurrency, you might be out of luck. It’s a lot harder to recover money from a cryptocurrency scam than it is to recover traditional money from a scam.

The Federal Trade Commission recommends:

“Before you buy something with cryptocurrency, know a seller’s reputation, where the seller is located, and how to contact someone if there is a problem.”

While some people are attracted by cryptocurrency’s relative independence from government control, that makes others especially wary.

Here’s what software developer Ross Hartshorn wrote in a 2018 op-ed for The New York Times:

“Many of the so-called limitations of government-regulated currencies are features, not bugs. There is a place for cryptocurrency, though I don’t believe it’s for the average, nontechnical user. In general, cryptocurrencies are not a replacement for ordinary currencies. That’s not in spite of their freedom from government control but precisely because of it.”

2014 bitcoin collapse

When looking to the future of cryptocurrency, it’s vital to examine the consequences of the past. One of the most notable examples of past trouble with cryptocurrency is the 2014 bitcoin collapse. Mt. Gox was the world’s largest bitcoin trading exchange, but it collapsed in 2014 after unexplained losses. Hundreds of millions of dollars worth of cash and cryptocurrency were lost, according to Reuters.

Years later, ramifications of this economic turmoil are still being felt.

Jake Frankenfield wrote for Investopedia:

“Despite declaring bankruptcy nearly six years earlier, the final destiny of Mt. Gox still had not been determined as of early 2020. There were still lawsuits alleging fraud on the part of Mt. Gox, attempts to find the hackers, and proposals to bring back the exchange. The controversy over Mt. Gox continues in large part because the price of bitcoins went up dramatically, raising the stakes.”

It’s not just the 2014 collapse that has some people worried. Some experts fear the world isn’t ready to fully embrace bitcoin and other cryptocurrencies because of a lack of restrictions.

There are also concerns about what would happen if there was a worldwide embrace of cryptocurrency before people fully understood potential ramifications.

Here’s what Marco Iansiti and Karim R. Lakhani wrote in “The Truth About Blockchain” for Harvard Business Review:

“Our experience studying technological innovation tells us that if there’s to be a blockchain revolution, many barriers—technological, governance, organizational, and even societal—will have to fall. It would be a mistake to rush headlong into blockchain innovation without understanding how it is likely to take hold.”

Hartshorn echoed a similar sentiment in his op-ed for The New York Times:

“The underlying danger is that some of these new systems and technologies have grown too fast and have been adopted for general use before we recognize the problems caused by their lack of restrictions.”

With the economic crisis caused by Covid-19 and the ongoing instability of cryptocurrency, it’s unclear if bitcoin is still the currency of the future. Cryptocurrency’s instability has made some experts wary, and it’s hard to say how other sectors of the economy might be helped or hurt by cryptocurrency.

Before you invest in bitcoin or other forms of cryptocurrency, be sure to do your research. Know who you’re engaging in transactions with, and be on the lookout for potential scams.