Why Businesses Should Care About Bitcoin
It’s increasingly difficult to go a week without reading something about Bitcoin. As a concept which combines economics, currency, mathematics and peer-to-peer social dynamics, it’s no wonder it can seem a little oblique at times. But cryptocurrency looks like it’s here to stay, and it’s changing the way businesses work. Here’s why it matters.
What is Bitcoin?
Bitcoin is a cryptocurrency. All cryptocurrencies function in essentially the same way, and Bitcoin was the first and remains the most popular of those currencies.
Bitcoin transactions are recorded in an encrypted ledger. Rather than being stored in a central place, it is distributed across a network of computers. Computers solve a series of complex mathematic puzzles in order to secure each block of transactions; a process known as ‘mining’. Proponents say that this prevents cryptocurrencies from being seized or controlled by a central power like a government.
The early adopters of Bitcoin have seen huge returns on their investments. Investors like the Winklevoss twins, who are said to have bought $11 million worth of Bitcoin in 2013, are reported to now be sitting on a portfolio of over $1 billion.
An increasing number of big and small businesses alike accept Bitcoin, from Microsoft to local pizza chains. However, with the surge in price and resultant collapse, some companies on the stock market have seen their valuations affected if they accept Bitcoin.
For small businesses, volatile valuations are less of a concern. However, there are other advantages and disadvantages to consider.
The advantages for businesses
Startups, in particular tech startups, usually benefit from being seen as agile and cutting edge.
Small businesses and entrepreneurs who accept Bitcoin and other cryptocurrency in payment can use it as a marketing tool to demonstrate their willingness to be at the forefront of emerging technologies.
It may also increase their potential customer base. While the number of people who want to transit purely in Bitcoin is tiny, they do exist. One of the oft-touted advantages of cryptocurrency is that it’s not overseen by any government or financial institution, but is instead reliant on a peer-to-peer network system. It’s therefore likely to appeal to people who are distrustful of governmental overreach. Over the past few years, opinion polls in the US and Australia, amongst other countries, have consistently indicated a lack of trust in government and large institutions. If that trend grows, the number of people who are searching for a way to trade outside of the mainstream may do likewise.
There are some practical advantages as well, however, each come with potential risks.
PayPal and other merchant transactions often attract standard fees of between 2 and 3%, whereas Bitcoin’s fees are much more modest. For companies who do business with overseas vendors or purchasers, the savings can add up. However, fees can fluctuate, so ensuring that your knowledge of Bitcoin transfer fees is up to date is best.
Finally, and perhaps one of its greatest advantages, it can be a quicker payment method. No more waiting for three days for a payment to show up in your account. Although, cryptocurrency transaction times fluctuate: when they’re fast, it’s great, but when they’re slow, it can cause frustration due to the unknown.
The disadvantages for businesses
There will only ever be a finite amount of Bitcoin. While this contributes to its appreciation, it also poses difficulties for businesses. During the 2017 price surge, merchants who accept Bitcoin saw the amount of transactions decrease. That’s because when cryptocurrency prices rise, people are more likely to treat it as an asset, and hold it for capital growth, than as a transaction method. If that trend continues, cryptocurrency may not be a particularly useful transaction method for business to implement.
Its notorious volatility can deter potential investors, but also cause possible issues for businesses. If someone buys a product for 1 BTC when 1 BTC is worth $1000, but returns it for fault two weeks later when 1 BTC is worth $2,500, what is the buyer owed? 1 BTC or the market value at the time of purchase? There is no legislation to guide merchants at time of writing, nor widespread consensus.
The storage and security concerns associated with Bitcoin and other cryptocurrencies can also make investors and businesses wary. There have been many cases where investments have been lost due to improper storage, transfer mistakes and security breaches. This particularly poses risks for new investors and those who lack in-depth cryptocurrency knowledge, the flow on effects of which can impact businesses who accept the technology.
At the end of the day, cryptocurrency is still in a growth phase, and its volatile nature means it’s relatively high risk. With no financial institution overseeing it, there are no checks on its stability. Businesses are well advised to get professional advice before taking the plunge.
This article was written by Tanya Ashworth-Keppel on behalf of the Australian Institute of Business. All opinions are that of the writer and do not necessarily reflect the opinion of AIB. The following sources were used to compile this article: Globe and Mail, Entrepreneur, 99bitcoin and Bloomberg.