The idea of your business accepting Bitcoin or other cryptocurrencies may be a daunting one, especially given the mysterious blockchain technology that underlies this new form of economic exchange. Just the name “cryptocurrency” seems to belong in a realm separate from mainstream business, a realm reserved for genius mathematicians and fringe high-tech enthusiasts. But don’t let appearances deter you from considering what may be a beneficial new angle for your SME or sole proprietorship. All you need is a grasp of the basics and a general comfort with technology to begin dealing in digital currencies. Here’s the gist of what you should know:
What are cryptocurrencies?
Cryptocurrencies are essentially a more precise word for digital currencies. They rely on cryptography, or the practice of developing and solving codes, to ensure the security of financial transactions and control the creation of new coins. No government or other central authority controls cryptocurrencies; they are a completely decentralized and borderless type of currency.
Bitcoin was the very first cryptocurrency, and it is currently the most widely used. Invented in 2009 by a similarly cryptic individual or group known as Satoshi Nakamoto, Bitcoin is accepted by over 100,000 businesses around the world, including brand-name companies like Microsoft, Intuit, Overstock.com, and PayPal. For protection against inflation, the number of Bitcoins are capped at 21 million.
Since the creation of Bitcoin, hundreds of other cryptocurrencies, typically called altcoins, have emerged. The first altcoins, Namecoin and Litecoin, came out in 2011. Ripple created an altcoin as part of a wider international money transfer system that also supports fiat money and other types of currency. In terms of market capitalization, Litecoin comes in second behind Bitcoin, and Ripple is a close third.
How does blockchain technology work?
None of these digital coins would thrive without the ingenious system that protects them from abuse and fraud. A blockchain is most simply a ledger or record of transactions. Every time two parties exchange digital currency, that transaction gets recorded on the ledger. Everyone on the blockchain network sees a copy of that transaction, and they will only verify and accept it if it follows a set of previously agreed upon rules. This democratic system of security is highly effective in ensuring that everyone plays fair, even without a central authority watching over them.
The validation of transactions can get pretty complicated and involve a lot of math. In the case of Bitcoin, computer aficionados known as “Bitcoin miners” run complex processes on high-powered computers to do this work. They get paid in Bitcoin, which is why there’s a small fee for Bitcoin transactions.
What are the potential pros and cons of dealing in digital currency?
Pros:
- It’s cheaper. Transferring digital currency involves lower transaction fees (usually 0-1%) than your bank for cross-border payments. That means you don’t need to worry about taking a hit from unfavorable foreign currency exchange rates.
- It’s faster. Since there’s no middleman to slow things down, digital currency moves instantaneously. That means your business gets paid right away.
- You can get in on the ground floor. While Bitcoin is currently used by less than 1% of the population, its rapid growth doesn’t show signs of slowing down.
- You can raise brand awareness and appeal. By accepting digital currency, you can attract new and younger audiences. You’re more likely to be viewed as hip and relevant.
- Accepting digital currency is easier and safer than ever. Money transfer companies like Abra do the heavy lifting so that you don’t have to. They protect you from the price volatility of digital coins by converting them to fiat money as soon as the transaction is complete.
Cons:
- It’s (relatively) unregulated. Although some countries, like Japan and Australia, are just getting their hands on digital currencies, government regulations tend to lag behind the pace of this parallel economy. So investing in Bitcoin is still a high-risk proposition.
- You have to deal with dramatic price fluctuations. The value of Bitcoin can gain or lose hundreds of USD from month to month, which means you need to constantly update your pricing.
- Your taxes and financial planning will get more complicated. How digital currency gets taxed varies from place to place, so check your local codes and work closely with your accountant.
How do you get started?
If you determine that digital currencies are right for your business, sites like Coinbase.com and BitPay.com can help you get set up. You’ll need to decide how you want to accept digital currency (e.g., through a QR code or an online money transfer service), advertise that you accept it, and carefully plan for how this new offering will affect your finances. Finally, be sure to pat yourself on the back for being on the cutting edge of businesses technology!
