At the birth of bitcoin, the whole start where cryptocurrencies entered the public mind, Satoshi Nakamoto wrote:
“The root problem with conventional currency is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve. We have to trust them with our privacy, trust them not to let identity thieves drain our accounts. Their massive overhead costs make micropayments impossible.”
Does bitcoin and the cryptocurrencies that followed solve this issue and what issues does crypto currencies actually solve?
Remove trusting a 3rd party
Bitcoin did succeed mostly in removing dependency on 3rd parties.
If you lose your private key, or someone else obtains it there is no one to complain to or who can fix it. Your money is lost at that point.
If you mine your own crypto currency then you can stay in the ecosystem and not have to rely on 3rd party services.
The 3rd party that seems a dependency on the different cryptocurrencies is exchanges. These provide on and off ramps to other crypto currencies and to fiat currency. It is no longer easy to get into a cryptocurrency via mining. The most common way is to use these exchanges, which is where this dependency comes from.
So while it has done a good just of removing most of the middle men, it has not removed them all.
Maybe once crypto currency is the standard way you’re paid and spend your money it will be not needing a 3rd party, till then it does not completely remove the need.
Cross border payments
It can be costly and time consuming to send money internationally, there can also be rules about which countries you’re allowed to send from and to.
According to the World Bank, the average transaction fee for worldwide payments is around 6%. That’s a lot!
Cryptocurrency costs and takes the same amount of time to transfer money to your next door neighbour as it does to someone on the other side of the world.
Helping the unbanked
In developing nations in particular a lot of people still do not have a bank account, this could be because they can not afford one, or they live in areas where banks are not easily available.
For someone to start being able to receive and send crypto currencies all they need is a mobile phone or a computer that is connected to the internet.
As we are still in the early stages of cryptocurrencies adoption, the vendor might not be able to accept it yet, but over time this will change.
From this device the person will be able to save and store the money without the need of a bank to hold it.
Censorship Resistant
For many parts of the world, the threat of your savings being seized is a real concern. A lot of the world population still lives under autocratic rule where property can be confiscated.
This isn’t just a problem for citizen’s fleeing war torn countries. Even authoritarian leaders themselves can have their bank accounts and holdings seized by others.
A feature of many crypto currencies is that they are cenership resistant.
Though this is not all cryptocurrencies, how it is handled is different on each different network. The amount of information that is also available varies between different crypto currencies.
Bitcoin for example is censorship resistant in the sense that no single entity has the ability to blacklist a wallet or address or to reverse a transaction. No nation-state, corporation, or third party has the power to control who can transact or store their wealth on the network. Tho there might be a possibility that at an exchange maybe able to track the history and stop coins based on that history.
Something like monero with the history being encrypted is a lot more private.
While traditional financial institutions are in the hands of intermediaries. For example, if a person is deemed an enemy of an authoritarian state, or a particular transaction that they deem suspicious or undesirable. Then that intermediate at their own choosing or the request of the government might freeze their account and prevent them from moving their funds.
While this might have started in something that was completely justified, for example to prevent financial crimes, like theft or money laundering.
It can also be used as a weapon to censor and control people who might disagree with the government. It can leave users vulnerable to political and geopolitical interference such as when a nation state imposes sanctions, asset freezes or capital controls to prevent investors moving their wealth overseas. It also reduces people’s freedom and individual control over their own assets.
For example I had travelled overseas, did not know I should inform my credit card providers before going and when I started to use the card there the card was blocked because of the suspicious location, luckily I had a second card that worked and I could use for the holiday.
A store of value
When you think of a safe-haven asset, precious metals like gold or silver probably come to mind.
A store of value is an asset that’s capable of retaining value over time. If you purchased a good store of value today, you could be reasonably certain that its value would not depreciate over time. In the future, you would expect the asset to be worth just as much, if not more so.
I am mostly thinking of bitcoin here as not all cryptocurrencies are equal here. Some of the tokens are created for the purpose of a pump and dump scheme and will hold no long term value.
Where bitcoin has been designed from the start to keep its value. It has a limited supply, Cannot be copied, is Transportable and Transferable. These features should help it to keep its value.
The one problem is that because of the gains it has achieved it has attracted people who want to get rich quickly and pushed the value above what it can sustain, so this could make it lose value in the short term as the people who are just speculating trying to make a fast buck are removed.