When bitcoin was originally launched 9 years ago, bitcoins traded for the equivalent of a few cents each. Right around Christmas of last year, one bitcoin was worth over $15,000. It literally created wealth out of thin air.
And now, the landscape is full of alternative cryptocurrencies, companies organize ICOs (initial coin offerings), and new millionaires are getting rich off of getting in early. Everyone is talking about it.
But I bet that you don’t understand how bitcoin actually works. I have – at best – a grasp on the concept but I would be unable to do justice trying to explain every aspect about how it works (try explaining hashing nonces to anyone). But if you want to turn your brain upside down, here are a couple of primer guides to check out.
Even if we don’t fully understand it, the rise of bitcoin has been impossible to ignore. Another thing that has been unavoidable recently are businesses accepting bitcoin for payments. You have probably seen the little Bitcoin symbol at a trendy coffee shop or concept store. That’s what I want to focus on here: should businesses accept bitcoin and other cryptocurrencies for payments?
Allure Unlike Any Other
The eye-watering valuation of bitcoin right now is attracting many interested parties, including consumers. Without going into the technical details, people either buy or earn bitcoins. You can go to an exchange like Coinbase and buy some bitcoins (or different fractions of bitcoins). The record of that exchanged is grouped into a block of transactions every ten minutes and attached to the massive chain of transaction blocks. Hence the blockchain.
The blockchain is decentralized, meaning that copies of it exist in different places. For a transaction to go through, it has to be registered on all of the blockchains. As you can imagine, this requires a lot of security measures and record keeping to prevent people from hacking and creating false transactions as well as keeping everything up to date. This is where miners come in. Miners group together transactions and work out codes called nonces for each block so that it can be accepted by the chain and communicated to all the nodes. Miners earn new bitcoins for each block they process – as well as transaction fees from people buying, selling, and using bitcoin.
Bitcoin is appealing to people for a number of reasons. It started as an online payments system that required no agency in the middle (a bank, for example) to transfer money. Two (or more) people can transfer money to each other directly. Bitcoin is not pegged to any national currency or commodity so the price is based on scarcity and the difficulty of mining. There are theoretically then no risks of a shock powerful enough to eliminate the system like if a giant bank fails and everyone loses their savings.
The other appeal is the pseudo-anonymous nature of the blockchain. Since all of the transactions are public, the identities of the people who make those transactions are not. People can choose to remain almost completely unknown.
Finally, bitcoin has become an attractive investment target since the growth curve drove prices up enough to create over a hundred billion in market capitalization. Now there are even bitcoin future trading in certain stock markets (Chicago, for example). Unlike a stock from a company that fluctuates and pays dividends but is not liquid, bitcoin varies (often wildly) in value and can be used to pay for things.
Consumers are increasingly buying bitcoin as a way to convert their national currency into something that could gain purchasing power over the span of a few months. It makes sense then that businesses are wondering about getting in the game.
Businesses (like an e-commerce player) that accept bitcoin for transactions are not investing in bitcoin. In most cases a business works with a payments service that accepts the bitcoin from the consumer and pays the merchant in their local currency. The business never even sets up a bitcoin wallet. Doing so would mean having to convert bitcoin into their national currency in order to pay their suppliers.
This is effectively the same thing as if someone from a foreign country pays with a Visa. Visa and their bank convert the money to your currency before it goes into your account. You pay Visa the transaction fee for facilitating the payment.
Businesses do accept bitcoin in some cases directly, preferring to keep the transaction in the cryptocurrency and then using it to pay suppliers that accept it. Bitcoin is not widely enough adopted for it to be a serious alternative to cold hard cash, especially when a business needs to maintain its cashflow to keep operating. The recent benefit of bitcoin has been its meteoric rise in value, meaning that a business that has been using bitcoin and thus has ownership of some bitcoins has seen this asset rise in value relative to national currencies.
That’s nice to have, but it could also backfire. The drop in value since the beginning of 2018 (a drop of over 40%) shows that bitcoin is a speculative endeavor – much more so than stock markets since there is nothing tangible attached to the value of bitcoin. There is no company behind it that performs highly or makes an acquisition that justifies a rise in value. There are also no competition or trade laws or surplus that could depress its value like a commodity.
So businesses that plan on accepting bitcoin themselves and forgoing the cashflow as a way to build a cryptocurrency investment portfolio better be prepared for things to go sour quickly.
Is it worth it then to accept bitcoin?
There are some cases where the anonymous nature of bitcoin is helpful and the fact that a merchant accepts bitcoin could make its service more attractive. Buying illegal goods on the dark web, for example, or subscriptions to porn sites. Things that people don’t want anyone else to know about.
Chances are you aren’t running an illicit business on Tor – if you were you definitely wouldn’t be reading this – so in most cases the transaction layer will be almost identical to the other payments services that you have in place. Sometimes the transaction fees for processing bitcoin are lower (between 1 and 2% compared to 3% for Visa and higher for American Express), but considering the limited scale of bitcoin, this isn’t going to have an impact on the bottom line.
The trendy coffee shop that accepts bitcoin is not leveraging being anonymous, but they are simply jumping on the trend as a sort of brand building exercise that shows that they are trendy and ahead of the times. If your business could benefit from a bit of communications push, then by all means go ahead and accept bitcoin. Just don’t expect anything different to happen than if you started accepting Discover card.