Blog: What can you do with cryptocurrencies?
The first question many people have about cryptocurrencies is, what can one actually do with them. This is very understandable because their usage isn’t really visible in day-to-day life in western countries. Also for many, the premise of completely digital money used on the internet can sound more like money from video games than traditional currencies. In this blog post, we go over what cryptocurrencies are mainly used for and how the use differs between different countries.
Saving and investing
In most western countries, for example Finland, cryptocurrencies are mainly used for saving and investing. Usually, people acquire their first cryptocurrencies precisely for investment purposes, because as an asset class cryptocurrencies have grown very rapidly in the past ten years. During the past few years also big institutional investors have started to look into cryptocurrencies for investment possibilities. For example, the world’s largest asset manager BlackRock launched a bitcoin fund for large institutional investors as the result of increased demand for it.
The characteristics of several cryptocurrencies, like Bitcoin, also make them good instruments for saving. On the other hand, as a relatively young asset class, the prices of cryptocurrencies have historically been very volatile, which is why some have criticized this idea of Bitcoin as a savings instrument. However as the market has matured having grown in the market cap and user amounts, the volatility has decreased. Based on its properties Bitcoin has often been characterized as digital gold. Also gold has had time periods where its price has been very volatile, but it is still historically been used as a saving instrument. The reason for this is gold’s own properties which have allowed it to retain its purchasing power over long time periods much better than regular fiat currencies. Many have now adopted the same idea for Bitcoin, which based on its properties is very good for that.
Daily use as a currency
As the payment infrastructure for cryptocurrencies has developed, their daily use as a payment method has increased. One of the biggest innovations for this has been the Lighting Network for Bitcoin, which enables bitcoin transactions almost instantaneously and with virtually no cost. With the Lighting network, the daily use of bitcoins has increased rapidly in many developing countries. A large part of the use has come from El Salvador, where Bitcoin was made legal tender in 2021, but the use of Bitcoin has also increased for example in several African countries. The reason for this is simple: Bitcoin Lightning Network enables a cheap and easy-to-use digital payment system for places where many people don’t even have the opportunity to open a bank account. In many of these countries, it is also common that remittances from their citizens working abroad are a large part of the country’s GDP. With the help of Bitcoin and other cryptocurrencies, these remittances can be sent at lower costs and faster than through traditional service providers.
Although adaptation to crypto-payments has been relatively fastest in developing countries, it has also progressed for example in Europe. Many individual companies have made it possible to pay with cryptocurrencies in their online stores, and for example, the city of Lugano in Switzerland enables the payment of public services and even the payment of taxes with cryptocurrencies.
DeFi and Web3
Cryptocurrencies are also an essential part of DeFi and Web3 applications, discussed in previous blog posts. Decentralized finance (DeFi) services are decentralized applications built on top of a blockchain, which enable people to use financial services without third parties like banks. An example of this kind of decentralized application is AAVE, a decentralized loan service running on top of Ethereum, where users can provide liquidity for loans and take out loans themselves against collateral. Although DeFi is still mainly used for investment activities, there are also cases where these kinds of decentralized loan services have been for example used for mortgages. DeFi services also enable many people without bank accounts to access financial services for the first time. DeFi is a great example of what cryptocurrencies can be used for, and as DeFi services develop, it is also easy to see their use increasing in the future.
Web3 refers to the third generation of the internet, where we move away from the platforms of centralized service providers, such as Facebook, towards decentralized services. Blockchain technology and also cryptocurrencies are a central part of this new, more decentralized internet. DeFi services are a key part of this infrastructure, but in addition to them, blockchain technology enables decentralized solutions for other services as well. For example, the use of NFTs in music and art services will enable new solutions that benefit artists and consumers in the future. Decentralized cloud services and data services can transfer the control of users' data back to themselves, and enable new market models for these in the future. Although several of the Web3 services are still in the very early stages, there are already many working Web3 services that are used every day. A wider adaptation of Web3 services is probably still several years away, but just like in the early days of the Internet, pioneers who dare to try and use these services now will benefit from their head start later. You can read more about Web3 in the blog post about it.
Summary
As can be seen from the examples discussed above, one can already do a lot of different things with cryptocurrencies today. In Western countries, they are mainly used as instruments for saving and investing, while in many developing countries they can be used for daily purchases like other currencies. But where cryptocurrencies show their true potential is in global decentralized services built on the internet. Although the use of these services is still in its early stages, their direction is very similar to that of the Internet since the 90s.
Manu Isto
Cryptocurrency specialist
Last updated: 08.02.2023 13:45
