In recent years, Bitcoin – a type of cryptocurrency – has been a hot topic everywhere from corporate boardrooms to backyard barbeques. Social media is flush with stories about Bitcoin millionaires, and it seems everyone has an opinion about its legitimacy. So, what is it and what does it mean for small business?
What is cryptocurrency?
Bitcoin is just one type of cryptocurrency. Others include Ethereum, Ripple, Neo, Litecoin, Dash, and the list goes on. Essentially, they are all virtual or digital currencies that use cryptography for protection against counterfeiting. This offers greater security against hackers when transferring funds online.
Just like regular currencies, the value of cryptocurrencies fluctuates widely. When Bitcoin launched in 2009, for example, you could purchase it for a fraction of a cent. Now, a single Bitcoin is worth thousands of dollars. Investors have made – and lost – millions of dollars trading cryptocurrencies on various crypto exchange platforms and the world’s largest financial institutions and governments are paying increasing attention to it.
How does cryptocurrency work?
Cryptocurrencies are decentralised digital cash systems. That means they are not issued or controlled by a centralised government or authority.
For a decentralised cash system to operate effectively, it needs a way to record all of the transactions that happen. Think of it like this; when you use your credit card to buy a product or service, the cost of that product or service is subtracted from your account and added to the merchant’s account. No physical cash is exchanged, but the traditional banking system records the transaction and updates each party’s account balance accordingly.
Before Bitcoin, previous attempts at creating digital cash systems failed, largely due to the lack of payment networks that could record moving currencies. That all changed with the invention of blockchain. Blockchain is essentially a shared digital ledger (or record book) that records transactions in a decentralised peer-to-peer network. It’s decentralised because it has no single administrator, but is shared on thousands of computers, in thousands of homes, around the world.
How is cryptocurrency used?
Just like centralised currencies, cryptocurrencies can be used to purchase a wide range of products and services. For example, CheapAir.com has been accepting Bitcoin payment for flights, hotels, car rentals, and cruises since 2013. Universities have also started to accept Bitcoin for course payments.
But, what does this mean for small business? While it’s still early days for cryptocurrency, some noted futurists, such as Thomas Frey, believe it will replace national currencies by 2030.
Cryptocurrencies and small business
Cryptocurrency offers small businesses fast, transparent, and secure transactions. Removing the middleman entirely, cryptocurrency means you don’t have to rely on slow and expensive payment transfer systems or financial institutions to accept payments. If you operate internationally, this is even more enticing, with some bank-to-bank transfers taking almost a week to complete.
Sound good? Fortunately, accepting cryptocurrency from customers is quite easy. Platforms like Coinbase Commerce enable customers and merchants to buy and sell in various cryptocurrencies.
In saying that, cryptocurrencies do come with a word of warning. Traditionally, their value has fluctuated widely. For businesses, that means what you charge for a product today might have a different value tomorrow.
Nevertheless, it’s a case of watch this space as cryptocurrencies stabilise and present a real challenge to centralised currencies and financial institutions. To learn more about financial issues affecting your small business, check out these resources.