One doesn’t need to be a market guru to see that increasing numbers of people believe that Bitcoin – or, for that matter, cryptocurrencies in general – are on the way to becoming the future of finance. Some proponents of cryptocurrencies even go as far as opposing currencies managed by central banks.
While there is a point here, regarding the fact that fiat currencies are not inclusive, crypto does not seem to offer a viable solution in this case. Cryptocurrencies may be good assets for speculators, but their performance as mainstream currencies remains questionable.
Hurdles facing cryptocurrencies
There are a few undeniable obstacles in the way of a widespread adoption of cryptocurrencies.
- Central banks around the world have either started or are in the process of launching their own digital currencies. Nearly 50 central banks are already publicly showing interest in shifting their currencies to the digital world. USA, Norway, China, and many others want to gain a bit of control over the crypto space, and thus they are working on launching their own CBDCs (central bank digital currencies). If this works as intended, it can serve as a headwind for the rise in popularity of cryptocurrencies. This is because governments have the capacity and ability to manage such large projects unlike individuals with computers and mining equipment in their garage.
- Cryptocurrencies are still expensive when it comes to carrying out transactions. It takes time and money to conduct a transaction with Bitcoin, and there are fees associated with transactions when it comes to Ethereum as well. The slow speed and high costs make it unlikely that sellers and companies at large will accept them as payment methods.
Here, again, the capacity and distribution power of central banks and commercial banks are needed to improve effectiveness in this area – and they are not too happy to lend a helping hand here. Thus far, the appeal related to cryptocurrency is mostly related to their speculative nature, since traders can easily take advantage of it via exchanges, trading platforms and crypto trading apps.
- The energy costs of mining cryptocurrencies are enormous. Mining Bitcoin alone requires enough energy to power a medium-sized country. This energy often comes from unclean sources such as fossil fuels, and it increases the cost of electricity substantially. Mining may help increase the supply of crypto, but it makes the currency less effective considering the high economic and social costs. A better way to manage supply of cryptocurrencies is necessary for their expansion.
- The increasingly tight regulations by governments. China recently banned cryptocurrency transactions, after cracking down on crypto mining operations. Even though governments are somewhat late in the process of regulating cryptocurrencies, they are catching up fast and they want to ensure that those transactions are done under their watchful eyes. Transparency makes cryptocurrencies less desirable, as they are built on the basis of anonymity. Government regulations, in that sense, might make cryptocurrencies more transparent and negatively affect their general appeal to the public.
Given the rise in prices of cryptocurrencies in recent years, it is hard to make an argument against their attractiveness as financial assets. However, thus far, they are still not very useful outside of that domain. They are still costly to mine and to use in transactions, and exchanges remain vulnerable to hacks. Unless those hurdles are dealt with, the road to crypto becoming mainstream is long.