What Can Cryptocurrency Be Used For?
Cryptocurrencies are commonly viewed as virtual representations of investment instruments or payment methods. But there are several more cryptocurrency uses, and you'll find that each person or entity might define and name cryptocurrency types differently. But in general, you'll find the most used terms for the different types are governance, utility, transactional, security, platform, and non-fungible.
So, what are cryptocurrencies good for? It appears they can be used for just about anything.
Key Takeaways
- Cryptocurrency has grown from being a technophile’s interest to a versatile asset with many uses.
- Investing and speculating are the most prominent use cases, although blockchain and cryptocurrencies can be used in supply chains, inventory control, money transfers, lending, voting, and many other consumer and enterprise applications.
- Cryptocurrencies and blockchains will invariably find more use cases as the technology is further developed and adopted.
In Transactions
Finance is a popular application for blockchain use because crypto can make transactions cheaper under ideal circ*mstances. Blockchain technology is often advertised as much faster than existing systems, but as of 2023, this isn't always the case. Many are much slower, but this is something developers are working on.
Remittances, or non-commercial money transfers, are an everyday cryptocurrency use. In many countries, financial services are few and far between, but cell phone service and internet are common. People work in one country and send money to family members in another using cryptocurrency because the fees are generally lower, it's quicker, and the people receiving it have access to it.
Lending is another popular idea that hasn't quite caught on yet, but decentralized finance platforms and applications have been made that allow people to lend to each other using smart contracts.
Even financial institutions are looking into the technology because it may turn out to be an excellent alternative to SWIFT if fees can be controlled.
Fees
Transaction fees were a concern for Bitcoin until June 2021, but they dropped in July of that year and remained low until the latter part of 2023. Fees began climbing again from November through December 2023, so it remains to be seen if fees will drop back to their previous levels.
Other cryptocurrencies tend to maintain lower fees, but this could be attributed to fewer transactions and trading volume or the way their blockchains operate. Bitcoin is a competitive network, both in mining for rewards and processing transactions. Transactions are placed in queues and prioritized by how much the users offer to have their activity validated. The more they pay above the average, the faster it is accepted by miners. Ethereum doesn't work this way, so transactions average less—others, like Bitcoin Cash, have even lower average fees.
There is no way to predict whether blockchain and cryptocurrency will replace the existing financial system or if it will end up as a combination of the two. Either way, transferring money is costly, and blockchain offers a way to reduce how much people pay to use their money.
Purchases
Another common use case is retail shopping. It's well-known that big names like Microsoft, The Home Depot, and Newegg accept some cryptocurrencies, but much of the retail activity is from outside of the U.S. From July 2022 through July 2023, nearly 60% of cryptocurrency value received was through decentralized exchanges, with most of that activity going to retailers globally. North America (the U.S. and Canada) is the largest decentralized finance user, followed by central, northern, and western Europe.
For Governance
Organizations issue governance tokens to users to give them a say in how it evolves. For example, you could purchase or mine a token that would provide you with voting rights in how a blockchain is improved.
One of the most common governance token uses is in decentralized autonomous organizations (DOAs), an organization where decision-making is distributed to token-holders. Proposals are published for the holders to consider, and votes are called using blockchain interfaces. Token-holders cast their votes on the proposals, and smart contracts can execute the decisions. If smart contracts are not used, then decisions must be implemented by whichever party is responsible for making the changes.
This type could also be used in local, county, state, and federal elections. Token holders could be issued a voting token that only they could use. There would be no way to dispute votes tallied by an autonomous, immutable, publicly viewable voting system unless it was hacked—and it would be apparent to anyone that it was hacked because the blockchain would reflect it.
As Utility Tokens
Utility tokens are cryptocurrencies issued by entities that give the holders access to a service or product. Ethereum is a prime example of a blockchain with a utility token. Its cryptocurrency, ether (ETH), is used on the blockchain to grant those who stake their tokens the ability to earn more ether. Earning is accomplished by doing validation work for the blockchain.
Binance Coin (BNB) is another utility token, although, like ETH, it is available on exchanges and used as an investment. The exchange introduced it to serve as a way for traders to get discounts on trading fees when using the exchange.
Internal Platform Use
A platform token is generally designed to facilitate activity on a blockchain. This function can be claimed by cryptocurrencies that can be used as on-chain payment, such as for network and transaction fees. The Ethereum, Solana, and Polygon blockchains are examples of ecosystems with platform tokens. As mentioned previously, most cryptocurrencies, regardless of their intended purposes, are used in real-world transactions and trading.
As Securities
One of the most popular cryptocurrency uses is as an investment. Many are used as assets capable of storing wealth or providing growth opportunities. Proponents claim that cryptocurrency also acts as a hedge against inflation—and to their credit, some cryptocurrencies have increased in value more than inflation has increased, at least for the time being. But, the short amount of time cryptocurrency has been in use is not long enough for retail investors to base long-term wealth decisions on.
It's important to note that while cryptocurrencies are commonly considered inflation-proof, they are not. Inflation is an increase in the price of a basket of goods—because you pay in fiat currency and crypto has a market value, it is subject to the inflation the fiat currency it is converted to experiences. Crypto does not negate drops in purchasing power.
Security tokens differ from many other cryptocurrency types you see on an exchange. These tokens represent ownership or interest in a business or enterprise. Generally, they are offered by businesses looking for funding, promising returns, tokens, or company ownership.
The Securities and Exchange Commission regards these tokens as securities, and they must be registered. Many of the cryptocurrencies introduced during the initial coin offering (ICO) boom of 2017 were security tokens, designed to raise funds for projects. There were many, if not more, scams during this time than legitimate offerings.
Store of Value
Cryptocurrency is still a nascent asset class and is subject to large swings caused by investor sentiments, current events, regulator news releases, and more. It might be a fad, as some opponents believe—but it might not. Many people have lost thousands of dollars investing in cryptocurrency while others have gained, so whether it is a good store of value seems to be a subjective argument.
Traditional stores of value have been precious metals or government-backed securities, but many investors are turning to cryptocurrencies as a way to maintain the value of their holdings during market downturns. Whether this strategy should be continued remains to be seen because not all market downturns are the same. Cryptocurrencies may have held value in the last downswing, but because they are so new to the market, there is no way to tell how they will react in the next.
Be wary of interest-bearing cryptocurrency accounts that have become popular since 2022. The providers generally use the crypto placed in the accounts to make investments, and interest is paid based on the performance of the investments and the value of the cryptocurrency at the time.
As Non-Fungible Tokens
Non-fungible tokens are generally not considered cryptocurrencies, but in a way, they are because they are blockchain tokens that can be bought, sold, or held. They are being used to store value, being traded or held for profit, and can even be converted to fiat currency. NFTs are tokenized assets whose tokens reside on the blockchain—but which are stored elsewhere. This concept causes a lot of confusion, so the best way to understand it is that a token is a sequence of numbers and letters assigned to an asset, whether virtual or real. The asset is generally not stored on a blockchain, but its token is.
For instance, consider the vehicle identification number (VIN) assigned to your car. The VIN is the token stored in the manufacturer's database (and that of your DMV) and is associated with your ownership. The VIN is non-fungible, meaning it cannot be duplicated because it belongs to one specific car. Your car is the asset, and you store it in your driveway.
An NFT, in the most popular way they are thought of, is a digital image you can buy on an NFT exchange. The NFT is not the image you see, it is the token stored on the blockchain (like your car's VIN). The image is stored somewhere in cyberspace. You can right-click and save the image when you see it, but ownership is assigned to the creator or purchaser—you only have a copy.
What Is Cryptocurrency?
A cryptocurrency isa virtual currency, an alternative form of payment created using encryption algorithms, networking, and blockchain.
What Are NFTs?
Non-fungible tokens (NFTs) are types of blockchain-stored tokens that represent a physical or digital asset.
What Is Blockchain?
A blockchain isa digitally distributed, decentralized, public ledger that exists across a network.
The Bottom Line
There is evidence that cryptocurrency is good for many uses because people are creating them to serve many purposes. Worldwide, they are being adopted as payment methods, investments, and ways to democratize entities. They are also used in financial services where people don't have access to traditional systems.
So, regardless of what you might hear, see, or read on the internet, news outlets, social media, or any other channel, cryptocurrency is gaining popularity because it is solving issues that traditional systems have been unable to solve.
What is it good for? Apparently, it is capable of addressing many financial issues—but then there are always those who find ways to exploit measures taken to fix problems. Cryptocurrency is no different in that regard, so it is also used by people with dishonest intentions.
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