We hear about bitcoin on the daily, and as it continues to push into the mainstream for making payments, we wonder where it’s going to lead small business.
Being in the tech game for over two decades, we’re fascinated by the current state of cryptocurrency and how it’s appearing to drive a new era. Its recent popularity has sparked big players like Microsoft to get involved in taking bitcoin as payment, so where does that leave smaller businesses in their quest to stay alive and keep their competitive advantage sharp?
We thought we’d break down our understanding of this captivating movement to help small business owners have a better understanding of what it is, and how it might affect them.
What is it?
Cryptocurrency is a form of digital money designed to be secure and in many cases, anonymous. In the 90’s, many tried to create a digital currency free of government control, but they were all unsuccessful. In the wake of the Global Financial Crisis (GFC), Satoshi Nakamoto, the still unknown inventor of bitcoin, proceeded to create the first ever cryptocurrency and released it on January 3rd, 2009.
The systems biggest and continued achievement is that it’s a totally decentralised digital cash system. Having no server or central authority was intentional in alleviating government control, and the corruption, risks and fees associated with traditional accounting systems.
Bitcoin was developed as ‘the honest currency’, coming with a promise that your money is owned by you. Take the instance that a bank decides to recapitalise itself, or up its monthly fees. In these circumstances, your money will be taken regardless of what you want. Other digital accounting systems such as Paypal, also take fees and have the power to freeze your account and funds, leaving you jumping through hoops to get it back online (Ameer Rosic). Bitcoin doesn’t work like this…
How it works:
Cryptocurrency is essentially an online accounting system where people can send and receive money directly, through an open ledger (Banking on Bitcoin 2017). Just like regular money, cryptocurrency is kept in a wallet – it’s just a digital one.
For security purposes, every wallet contains a set of private keys. The owner must have these to access their currency. Bitcoin owners can, among other things, purchase from online stores who accept this form of payment (most notably Shopify, Microsoft & Expedia), and transfer money internationally with no border restraints and little waiting time.
Fun fact: The first transaction involving bitcoin was reported on May 22, 2010, when a programmer identified as Laszlo Hanyecz said he “successfully traded 10,000 bitcoins for pizza.” As of Nov. 28, 2017, 10,000 bitcoins are worth about $99 million. (Entrepreneur.com)
Bitcoin transactions work thanks to the ‘blockchain’, a system where peers run bitcoin software to validate transactions. Again, this is independent of any bank or treasury. Every time people exchange bitcoin online, the whole network gets updated with new information that is publicly available. Transactions create long chains of data for computers to solve (known as blocks). Once they’re solved, the transaction is approved. This process typically takes around 1 hour – unlike bank transfers that can take days, if not weeks.
Just like there’s X amount of gold or oil in the world, there’s also a certain amount of bitcoin; 21 million to be exact – with each one able to be split into a hundred million pieces. Unless bitcoin’s protocol is changed to allow for a higher cap, the earths supply will be stopped once the full amount is released in 2140 (Stack Exchange).
Almost a decade on, there are now over a thousand different types of cryptocurrencies, and the price of a bitcoin has risen from a mere $0.00076 per coin, to around $14,000.00AUD!
Important to keep in mind, is that even though it’s widely known about and almost a decade old, cryptocurrency is still in its infancy. This is the ironic reason it’s gaining so much popularity. People think that it will continue this trajectory and take off even further to become a revolutionary way the world does business. This growing popularity and wishful thinking makes it an opportunistic time for businesses to jump on the bandwagon and adopt this as a payment type, but like anything in this market, there are risks associated. But first – let’s talk about the pros to accepting bitcoin:
- In accepting bitcoin, you’re instantly putting your business into the international market space. Those looking for companies who accept bitcoin will be pleasantly surprised to find your business, prompting intrigue in your products and services.
- Exporting goods or purchasing supplies abroad with bitcoin allows you to bypass foreign transaction fees and exchange rates. If you’re trading with companies who also accept bitcoin, border restrictions will no longer be an issue.
- You’ll join a niche of businesses who do offer bitcoin, potentially setting you apart from your competition and giving you an upper-hand.
- There’s a possibility to increase the money you’re making. Given bitcoins fluctuate, there’s a chance that upon withdrawing your bitcoin, it will be worth more than it was when you received payment (however it may also have the opposite effect – we’ll touch on that below).
- Say goodbye to 2 – 3% merchant transaction fees that are draining your cash flow. Bitcoin generally charges as little as between 0 – 1%.
- Bitcoin transactions are typically available to you much faster than those going through centralised institutions (around 10 minutes, as opposed to a couple of working days).
- If your company struggles with customers disputing their credit card charges, accepting bitcoins will mean that all transactions are final – so payments can no longer be contested.
- The most obvious risk with bitcoin (and any cryptocurrency) is price volatility. Back in 2013, the price of bitcoin fell by 61% in just one day!
- While being unregulated is seen as a plus in the bitcoin community, some business are put off by the lack of government support, with bitcoin even being banned in some countries.
- Planning out financial statements, taxes and prices can be difficult with bitcoin’s price volatility. The lack of stabilisation means that it’s tough to make projections that account for any kind of fluctuation or changing regulations. (Entrepreneur.com)
- Losing your private key or having it stolen is the most significant danger as a bitcoin owner. Without your private key, you’ll simply never see your bitcoins again.
- Losing your private key isn’t the only way you can lose your bitcoin. Other dangers include computer malfunctions like crashing a hard drive, hacking or physically losing the computer or device your digital wallet is on.
- Ensure you speak with your accountant before your business ventures into the bitcoin marketplace. Seeking the advice of a professional and being informed is the best way to be prepared.
- Ensure whatever device your bitcoin wallet is stored on has a secure password to enter the device.
- To keep yourself safe from hackers, experts advise keeping ‘cold storage wallets’. This is the offline mode of securing bitcoins as they’re not connected to the Internet and are therefore less susceptible to hacking. Cold storage takes the private keys in an offline mode to reduce the chances of theft. Large cryptocurrency exchanges also use this tactic to deal with huge sums as they’re under constant threat by hackers.
- Wallet software is constantly updated with the latest security fixes and protocol. If yours isn’t up to date, it’s a soft target for hackers. As with any software, ensuring you update your mobile device or computer operating systems and software will make you safer!
- Backing up your bitcoin wallet is essential in restoring it in the case that you have a computer failure. The hot tip here is to ensure you’re backing up all wallet.dat files across multiple devices (think USBs, hard drives and CDs). Also ensure you set strong passwords on the backup devices / folders too (Investopedia).
There are always pros and cons to any business decision. It’s important to fully assess your company requirements and speak with an expert in accounting / cryptocurrency before you make the decision to go ahead with accepting it as payment.
What do you think about the current cryptocurrency environment and businesses accepting this payment method? Let us know on our socials!