Cryptocurrency, the digital assets used as a medium of financial exchange, are rapidly emerging from high tech obscurity and becoming mainstream.
These currencies continue to proliferate, and last year all cryptocurrencies combined had a market capitalization of over $13 billion.
Cryptocurrencies are therefore an enduring part of the financial landscape; they aren’t going anywhere. Businesses, especially small businesses, which embrace these new financial instruments, therefore, stand to possess a competitive advantage over their rivals.
Here are three things for your small business to think about as our financial transactions are increasingly paperless, and we rely on a wider variety of financial instruments to enable purchases, sales, and contracts for real property.
Similarities and Differences
“There are hundreds of cryptocurrencies available for financial transactions, although the top dozen or so account for the majority of market capitalization” confirms Amit Bhardwaj, CEO of GainBitcoin.com, a Bitcoin mining company.
All cryptocurrencies are paperless and exist entirely within the digital realm. Interestingly, the popular cryptocurrency Bitcoin, in a nod to mainstream currencies, does offer an ATM service.
However, the “coins” dispensed from these machines are merely physical representations of the underlying digital asset. Cryptocurrencies rely on their namesake cryptographic techniques to ensure that each payment, and the payment system itself, is secure.
Bitcoin, for example, utilizes a cryptographic system commonly called blockchain, which essentially timestamps each digital transaction successively for systemic verification. The enhanced security of cryptocurrency allows it to function as a peer-to-peer financial transaction enabler, without the intermediaries (central banks, treasuries, exchanges, etc.) most other financial instruments require.
Despite the common foundations for these digital financial instruments, there are marked differences in the various types of cryptocurrencies available today. To start with, some cryptocurrencies limit the total number of digital “coins” that can exist within the system; these are commonly called deflationary currencies.
Inflationary cryptocurrencies, on the other hand, allow for additional monies to be added to the system. Bitcoin is an example of the former, while the cryptocurrency Ripple is an example of the latter.
There are pro and con arguments for these two types of cryptocurrencies, so understanding them both is a critical first step for any small business that is going to start using them.
Going Global with Cryptocurrency
One of the best ways to make your small business competitive is to expand into international markets. Many businesses have recently expanded into international markets realized a positive return within two years, with 34 percent of those achieving returns within six months. Adopting cryptocurrency can actually help your small business enter global markets, and be more effective than competitors who have yet to embrace digital currencies.
Cryptocurrencies are essentially a peer-to-peer transaction system – they do not rely on a central bank or exchange; therefore, businesses that accept cryptocurrencies can do so without the hassle and costs of currency exchanges that businesses relying on traditional currencies must shoulder. Paperless currency is increasingly a borderless currency.
As cryptocurrencies become increasingly mainstream and universally adopted around the world, their value in enabling global business will only increase. Beyond maneuvering past exchange rate costs and risks, this technology will enable increasingly rapid, secure transactions.
Moreover, since cryptocurrencies operate peer-to-peer, these new financial instruments will serve to further empower small businesses and their customers as well. Standard financial transactions, even ones using relatively new systems such as PayPal, are essentially at the mercy of the third party intermediary facilitating them; f the bank decides to freeze an account or otherwise invalidate a given transaction, the costly and time-consuming burden of addressing this issue will rest upon the small business caught in the middle.
The P2P nature of cryptocurrencies eliminates reliance on these third-party intermediaries and can free small businesses from the hazards and costs associated with them.
Enhanced Security and Customization
The use of cryptocurrency can help reduce two major costs that place a heavy burden on nearly all small businesses: loss due to fraud or theft, and transaction costs due to intermediaries. Fraud is a major drain on businesses; credit card theft alone costs merchants an estimated $190 billion annually.
Cryptocurrencies, however, can offer businesses a respite from this vulnerability. The backbone of these new digital financial instruments is the cryptographic system that underpins them and therefore makes them secure enough for peer-to-peer transactions in the first place. They are dramatically less prone to the types of fraud small businesses often have to contend with in legacy payment systems.
Additionally, use of cryptocurrencies in lieu of legacy financial instruments, like credit cards, offer additional protections for businesses and consumers alike. For example, since cryptocurrencies employ a closed, peer-to-peer, businesses and consumers that employ them are considerably less prone to crimes like identity theft.
Using cryptocurrency also offers enhanced privacy for businesses and consumers than other financial instruments; in fact, part of the reason that these financial instruments were considered somewhat controversial in their early days was due to the anonymity they offered users in questionable transactions on some of the darker parts of the Internet.
The unique nature of many cryptocurrencies also allows them to be custom-designed to execute a specific transaction, as a contract. By enabling two parties to essentially agree to and then execute a contractual financial transaction, cryptocurrency can essentially eliminate many of the middlemen – notaries, brokers, lawyers, etc. – often required for a complex financial transaction. This can save businesses and their customers considerable time when buying and selling real property.
It can also eliminate the often hefty fees associated with these intermediary services, and offer small businesses that adopt cryptocurrencies a considerable advantage over competitors who continue to rely on legacy financial instruments.
Despite being a relatively new player in the world of financial instruments, cryptocurrencies are firmly established and here to stay.
Over 100,000 businesses, including diverse corporate giants like Amazon and Tesla, have begun accepting cryptocurrencies as a means of payment, and hundreds more are adopting them each and every day. Small businesses that fail to do so are in danger of being left behind in an increasingly paperless, global business environment.
The sooner you understand how cryptocurrencies work, the better you will be prepared for a rapidly evolving financial landscape.