Technology has added efficiency and modern conveniences to daily life. Among these conveniences, computer experts have managed to apply digital traits to new, online currencies in what is called cryptocurrencies.
Simply put, cryptocurrency is a digital money that operates independently of a bank and can be used similarly to cash around the world. Cryptocurrency is a relatively new way for businesses to accept and send payments to customers, vendors, and suppliers. Despite concerns over cryptocurrencies, they aren't likely to go away anytime soon as an alternative method of payment, investment, or means of raising capital.
While it can be easy to get caught up in the excitement and potentially lucrative nature of cryptocurrencies, it's important to understand how they work as well as their positives, negatives, and risks.
How Do Cryptocurrencies Work
While it may seem confusing on the surface, the way cryptocurrencies function is actually quite simple. Relying on encryption technology to make transfers, most cryptocurrencies are decentralized and work without administrators. This means that there is no central entity or authority that manages the creation and use of cryptocurrency.
Like most currencies used around the world, cryptocurrencies store value and have specific exchange rates. Cryptocurrencies are similar to commodities like gold or platinum in that they have a limited supply.
Bitcoin, one of the most popular cryptocurrencies, encourages users to participate in the system by rewarding additional bitcoins. In fact, this is the only way new bitcoins circulate.
To use cryptocurrencies, consumers and businesses must first acquire a cryptocurrency wallet account. These accounts work like a bank but are designed specifically for individuals who want to purchase or accept cryptocurrency. Most cryptocurrency coins have an official wallet or recommended third-party wallets, and it's important to conduct thorough research before choosing a service.
After you have acquired a wallet, you can purchase cryptocurrencies on open exchanges and use them for a variety of transactions. You can even convert cryptocurrencies to cash at a later date if you so choose.
The Positives and Negatives of Cryptocurrencies
Cryptocurrencies - and bitcoin in particular - have greatly increased in popularity over the past few years. Japan declared bitcoin legal tender in 2017 and online services like Microsoft, Overstock and PayPal also accept the currency.
Before adopting cryptocurrency at your business, you must consider its potential benefits and drawbacks.
The Benefits of Cryptocurrencies
No processing fees
Unlike traditional forms of payment like credit cards, cryptocurrencies have no processing fees. This is because cryptocurrency transactions are facilitated through a decentralized ledger on what's known as a blockchain. Transactions are recorded on the blockchain chronologically, and the user can create, verify, and enforce transactions without an intermediary or central authority.
High transaction speed
Credit and debit card payments often take two to three days to process and clear. With cryptocurrencies, transactions happen in real time and take about 10 minutes or less. As an added bonus, cryptocurrency transactions are final, which means consumers can't dispute a charge and negate a sale.
Increased payment options
The more payment options you can provide as a business, the better. As such, cryptocurrency has the potential to attract a wider customer base.
The Drawbacks of Cryptocurrencies
The value of bitcoins and other cryptocurrencies can change drastically over a small period of time.
While the details of cryptocurrency users and transactions are often held in a public ledger, names and locations are encrypted. This can be an issue when complying with regulations on customer identification or fraud protection.
Cryptocurrencies exist digitally, and the proof of ownership is often limited to the private keys used to authenticate transactions. This makes cryptocurrencies a prime target for hackers, especially because many businesses aren't aware of how to protect this new form of currency.
Should You Accept Cryptocurrency?
While global companies like Amazon and Microsoft accept cryptocurrency, that doesn't necessarily mean it's right for your organization, especially if you're a small business. Before using cryptocurrency, it's important to conduct adequate research and understand how it may impact your company. In addition, you should speak with a qualified insurance broker to determine how using cryptocurrency opens you up to new risks.
To learn more, contact us at Scrivens today.