Disclaimer: This is not legal, financial advice and must be considered for educational purposes only.
Cryptocurrencies are a hot topic right now.
But, the two main questions that people have are “What are cryptocurrencies?” and “Why should I care about them?”.
Well, the first part is easy to answer. Cryptocurrencies are a new form of currency that uses cryptography to secure transactions between peers without the need for a third party such as a bank.
The second question can be answered by asking one more question: Why do we even use banks?
Well, banks provide several services — storing money securely. Hence, it’s not easily stolen, transferring money via wire transfers or checks, and offering credit cards which allow people to spend money they don’t yet have.
But now, all of these functions can be done with cryptocurrencies as well quite easily. It doesn’t take long before cryptocurrencies start looking like better investment options than traditional banking for most of us.
One of the main reasons cryptocurrencies are more profitable than traditional banking is that they don’t charge fees. Banks charge fees for opening an account, closing an account, closing a credit card, etc.
Other reasons include secure and faster transactions.
In traditional banking, transfers can take up to days or weeks. In cryptocurrency, transactions are almost immediate.
Cryptocurrencies also allow secure transactions that don’t require a third party, such as a bank. That’s because cryptocurrencies use cryptography and decentralized mining to make sure the currency is safe from hackers and other threats, while online transactions may not be 100% safe.
Banks provide security for your money, but they do not guarantee it if something happens on their end.
An example of this includes the Bangladesh bank heist, where more than $80 million was stolen from an account at the Federal Reserve Bank of New York thanks to fraudulent transfer requests sent over the SWIFT network by cybercriminals.
Cryptocurrencies solve many of these problems using decentralized ledgers that any one person does not control.
Cryptocurrencies are more profitable because they allow transactions on a global scale, while traditional banking is limited to certain countries or regions.
An example of this would be China’s capital controls that limit the amount of money an individual can transfer out of the country in a year.
The decentralized nature of cryptocurrency means that it is up to each peer on the network to verify transactions rather than through third parties that may have different restrictions on their end.
Traditional banks also take advantage of consumers by charging interest rates for borrowing money which can be upwards of 20% compared with less than 1% per year when using cryptocurrencies for loans.
Some cryptocurrencies, such as SALT Lending, even allow for lending cryptocurrencies with interest. This is safer than borrowing and then having to trust that the borrower will repay since it uses smart contracts, which are coded into the transactions themselves.
Cryptocurrencies also allow faster payment processing thanks to blockchains, whereas traditional payment methods such as checks, wire transfers, and ACH take several days when they’re not delayed entirely.
Your money will be in your bank account within a day or less once it’s confirmed (depending on which cryptocurrency you use and how congested the network is), while banks can make you wait up to five business days before your funds are available.
It doesn’t matter if someone steals your credit card number and tries to use it elsewhere; they'd have any luck because of security measures put in place, while with cryptocurrency, the person who holds that private key has access to spend it.
This is not legal, financial advice and must be considered for educational purposes only.