By now, most people have heard of Bitcoin and other digital currencies, but few have a grasp of what it really is, and what it means for commerce now and in the near future. After a crash in virtual currencies in 2018, they have been making a dramatic comeback in 2020.
The Basics:
Bitcoin is a currency, much like the U.S. Dollar, Euro, or British Pound, but it exists only in digital format. While most consumers and businesses are familiar and comfortable with digital transactions, with funds for a purchase or other service being electronically transferred between accounts, the concept is still based on a physical currency being located somewhere. These other currencies existed for centuries in physical format only before digital transactions arrived in the late 1990s.
Bitcoin was created as an open-source software by a person (or possibly a group) named Satoshi Nakamoto in 2008. The term originally used was “a peer-to-peer electronic cash system,” with the key advantage being its privacy, as well as no transaction fees, since there are no banks involved in the process.
Digital Only
With Bitcoin, however, there is no “Bank of England” or other centralized national bank holding the deposits or issuing the banknotes. Instead of a central bank controlling the supply and creation of Bitcoin, it is managed by an algorithm originally created by the founders of Bitcoin, which determines the rules and quantity of Bitcoins on the global market. At its most basic, users can think of Bitcoins as a digital gift card that can be used at many places, but the funds on the card exist only in the digital format.
Built on Blockchain
Here’s where some people get glossy-eyed. The backbone of Bitcoin is called blockchain, which is a ledger of sorts, like an accountant uses to manage the books for a small business. Similar to the ledger at a bank, it tracks all transactions, but the ledger is not held in one location and cannot be erased or overwritten, it can only be added to. Groups of transactions are called blocks, and they are “chained” together with cryptographic links. This ensures that people spending Bitcoin currency can only spend it once, then it becomes a part of a new block.
In short, blockchain is considered by many to be less prone or vulnerable to errors than traditional accounting methods, and it is much more real-time. It is also more useful in auditing since all transactions are automatically logged and managed. The security benefits of blockchain are being hailed widely by the accounting profession, and many see it as the future of ledger-based accounting.
Blockchain is also extremely secure, using the same cryptography for data security as military and government organizations.
Valuation
The value of traditional global currencies varies day-to-day and over the course of the year, often based on their comparative value against other currencies, and also because of national and international events. Inflation, for instance, can affect one currency due to the issuing country’s finances and standing on the world stage. Bitcoin is generally immune to that form of valuation changes, since it is not tied to a specific nation, however, it is more variable in value because it is still seen as a relatively new financial tool. As such, it can be driven up or down in value based on the speculation of currency investors. Because of recent strong gains in the value of Bitcoin, its use as a currency has gone down, as investors choose to hold it as an asset instead.
Illegal Uses
Just as there have always been people using currency to purchase contraband merchandise, there are those who use digital currencies like Bitcoin for illegal purposes. Most notably, drugs have been bought and sold using Bitcoin on the global market because it is digital and doesn’t leave as much of a trail back to the users as when conducting transactions with traditional currencies. The digital currency can also enable users to get around trade restrictions, since user locations are generally not disclosed.
Legitimate Commerce
Currently, some of the largest businesses in the world are starting to accept Bitcoin as payment for online purchases, including Dish Network, Subway, Expedia, Tesla, Square, Shopify, NewEgg, RE/MAX and even Microsoft. By 2015, more than 100,000 merchants around the world were accepting Bitcoin as payment.
Bitcoin has benefits because it allows digital commerce without use of a bank account, or without disclosing the user’s bank account in ways that could put it at risk. For communities without access to reliable banking organizations, this is a boon, particularly in parts of Africa, Asia and South America.
Should Small Businesses Accept Bitcoin?
Accepting Bitcoin is generally simple for most businesses that already accept online payments or have electronic point-of-sale terminals. The business should consider the form of payment to be as secure as other forms, but there are other concerns business should note. Since the currency is generally anonymous, users may be using it to avoid tracking of purchases that may be used for illegal purposes. Businesses should maintain their traditional bookkeeping practices and treat the exchange as a cash sale and report the income as they would other income.
Pros of Bitcoin for Business
Lower, or no-cost, transaction fees. Transaction processors like Coinbase (similar to credit card processors) often charge no fee for lower value transactions, and only about 1% for higher volumes. This is compared to 3-4% average transaction fees for credit cards.
Instant conversion to USD or other traditional currencies. Since Bitcoin (and other cryptocurrencies) is traded and its value fluctuates, it is important for businesses to change it into their local base currency quickly or risk devaluation.
Blockchain is Good Accounting. All transactions are very transparent, which is necessary for accurate tracking and valuation of the currency. As such, transactions are instantly verifiable and the “books” cannot be manipulated.
Transactions Cannot Be Reversed. The seller and purchaser’s information is not tied to the transactions, making them more like sending money between anonymous bank accounts. This virtually eliminates fraud, since the customer cannot reverse payment or use private information to falsify payments.
Cons of Bitcoin for Business
Volatility. Since it is still a new currency, and not well understood, Bitcoin is still speculative. As such, its value can fluctuate and, in fact, it has been increasing significantly in value over the past few years. As a result, more holders of Bitcoin have been saving it as an investment, instead of spending it as a currency. The volatility makes it imperative that businesses that accept it as payment convert it into their local currency immediately, for both proper bookkeeping purposes and to ensure retention of revenue.
The Bottom Line
Should small businesses accept Bitcoin? It depends on the business, according to the experts. For some, the benefits of lower fees, no payment disputes and instant receipt of funds can be alluring. It also has the benefit of allowing sales to those who may not have traditional digital-linked financial accounts.
However, the anonymity may lead to some questionable transactions if the seller is in an industry that is regulated. The volatility of the currency’s value can also be a deterrent if the funds are not converted immediately, because the funds could be worth considerably less (or more) in a short time, making financial management and income reporting much more complex.
Peter Thiel, the cofounder of PayPal, recently told Fox Business that he considers it a good investment more than a tool for commerce.
