Cryptocurrencies—Should You Care?
Forget greenbacks. The humble dollar bill now welcomes the newest evolution of money—cryptocurrencies.
Digital-based currencies such as bitcoin are primarily exchanged online and outside the control of banks or government entities. There are more than 1,000 types of cryptocurrency in existence, with Bitcoin serving as the elder statesman at almost 10 years old.
One of the qualities of cryptocurrencies is their method of storage and transfer—blockchain. The technology works as a decentralized database, meaning that its information is spread across multiple peer networks as opposed to being housed in one location. Through encryption, cryptocurrency exchanges are captured, timestamped, and connected in a blockchain to serve as a permanent public general ledger. This prevents spending a unit (or parts of it) more than once.
Why should you care about cryptocurrencies?
There are big bucks tied to cryptocurrencies. Bitcoin has a market capitalization of roughly $170 billion and was trading as high as $19K a unit in late 2017. Ethereum is estimated at $106 billion and Ripple runs around $45 billion.*
Big businesses such as Microsoft, Overstock.com, and Expedia accept payment by bitcoins.
Governments are also taking notice of cryptocurrencies and digital payments in general, either embracing them, regulating them, or exploring options to offer versions of them.
If cryptocurrencies don’t touch your world just yet, it’s on the horizon.
The value fluctuates.
Cryptocurrencies aren’t attached to specific governments or financial institutes, but they aren’t immune from common factors that can drive their value up or down. Government regulations, politics, and even press coverage can impact their worth.
Brexit prompted a surge in bitcoin price, as those uneasy about the British pound invested in the cryptocurrency. Japan accepted bitcoin as legal tender in 2017, causing another uptick.
On the other hand, rumors of South Korea banning cryptocurrencies made value plummets, even after they were proven false. China has taken steps to ban the trade of bitcoin and stop initial coin offerings. Both instances resulted in drops in the value of cryptocurrencies.
There are no reversing payments.
Once you authorize a payment using a cryptocurrency, you can’t stop it or reverse it as you can with a credit card or ACH payment. For this reason, experts advise that you interact only with highly trusted individuals or businesses. Refunds can be performed, but they are separate transactions and must be initiated by the recipient.
Businesses benefit from this feature, as it reduces fraud and ensures payment for goods and services. Another benefit for businesses: The senders often shoulder cryptocurrency transaction costs, rather than businesses.
Expect limited amounts.
Bitcoin has only 21 million units available. More than 16 million are already mined, meaning the supply will soon be limited and unable to grow.
What’s the future of cryptocurrencies?
Reviews are mixed.
Experienced investor Warren Buffet thinks cryptocurrencies will “come to a bad ending,” possibly due to the belief that they represent a bubble that will soon burst—much like the .com bubble in 2001. Others say that cryptocurrencies—bitcoin in particular—represents an asset like gold more so than an actual transactional currency.
Proponents say that cryptocurrencies are the future of commerce, citing benefits such as a reduction of fraud and identity theft, universal accessibility, and lower transaction costs.
Regardless, expect more worldwide government interest in cryptocurrencies. Regulations will most likely increase, as governments try to tamp down on illicit activities such as illegal trading and tax evasion enabled by the relative anonymity of the currency.
The cornerstone of cryptocurrencies—blockchain—has attracted significant attention from banks. Some are exploring how to use the technology to create centralized digital currencies.
Should your business take cryptocurrencies?
A recent report by Morgan Stanley finds that only three of the top-500 internet sellers take bitcoin—down from five last year. This seems to signal a lack of demand for bitcoin payments by consumers.
However, if you’d like to explore cryptocurrencies, start by determining if your customers would like to pay with it. Then, confer with your accountant to dig into pros, cons, and costs for your business.
*Numbers change on a daily basis.