Cryptocurrency use is on the rise – better get a grip on it
You may have heard the terms Bitcoin, Silk Road, cryptocurrency, PeerCoin, CoinFunder, and so forth, and if you’ve turned a deaf ear because it sounds geeky, that’s a mistake. Cryptocurrency is a digital currency that some say is a fad, others insist it is the currency that will eventually become mainstream.
Victoria Treyger, the CMO of Kabbage, which provides working capital for small businesses. She says she joined the company because she loved the message: To understand customers better and provide them with cash when they need it. We’ve been writing about Bitcoin for years, and Treyger agrees that Bitcoin and other digital currency is important to business.
“Bitcoin use is on the rise; however, most people today still do not understand the use, distribution, and regulation of Bitcoins. The big question concerning Bitcoin and your small business is whether you should accept Bitcoins in the first place,” said Treyger.
She adds, “There are many advantages and disadvantages in implementing Bitcoin into your business plan. Yet at the end of the day, it’s a decision you as a small business owner need to make when taking into account Bitcoin’s regulation, security, value, taxes, security, and acceptability.”
Because Bitcoin is inexpensive and fast, it is popular in the financial world, and Treyger says it is “tech-forward, which also garners many followers for the digital currency.”
Bitcoin is not currently regulated by any government agency, Treyger notes, so it is an international form of currency available to anyone with Internet access. So far, not many businesses accept Bitcoins, making Bitcoins difficult to spend and seemingly useless even as their exact value fluctuates daily. So will the Bitcoin bubble eventually burst?
In her own words, Treyger dives into what Bitcoin is, how it works, and what you need to know for your business.
Who regulates Bitcoin?
Bitcoin currently has no government or protocol regulation. Instead, there are Bitcoin miners who essentially process Bitcoin transactions and secure the network. Because there are so many Bitcoin users spread out across the world, it is highly improbable that a form of regulation will ever be implemented.
So far, the only type of regulation that could emerge is some sort of government regulation that either bans the use and distribution of Bitcoins or designates laws for legitimate uses of Bitcoins. And if a regulatory system were put into place, it would create higher transactions costs for Bitcoin, taking away one of its main advantages. Bitcoin is also resistant to any form of regulation, which makes it potentially the prime type of currency for questionable activities.
Bitcoin is argued to not be a legal currency. Its value fluctuates and changes daily, and the volatile nature of Bitcoin’s value could cause the bubble to pop due to the perception is gives to users. As a Bitcoin user, you can hold onto your individual Bitcoins in the hope that the value increases or you can exchange them into legal tender for their current projected value. If the value of Bitcoins steadily decreases for a long enough period of time, it could cause users to sell all of their Bitcoins, causing the Bitcoin network to crash.
Is Bitcoin secure?
Fraudulent use of bank accounts and credit cards can be reversed easily, yet Bitcoin does not offer the same services. All Bitcoin transactions are final. The only person who can decide to issue a refund through the Bitcoin network is the person who has the currency in their Bitcoin wallet.
A wallet is a digital platform that holds your Bitcoin codes for fast, simple, and easy use. Because there is also no Bitcoin regulation, no Bitcoin user can be forced to issue a refund.
Consumer losses are generally greater on the Bitcoin network than any other payment plan network because of the lack of mandatory refunding. Most other payment networks set up consumer protection to avoid stolen funds and hackers. So if your Bitcoins are stolen or lost due to network failure or hacking, there is no way to ever get them back and there is no sort of insurance on them.
To turn Bitcoins into legal currency, a Bitcoin exchange must be used, which charges a small fee and also opens your wallet door up to hackers. The FDIC does not protect Bitcoin wallets either, so wallets are constant targets for hackers.
Exchange sources are also large targets for hackers because they receive thousands of keys to wallets every day to perform exchange transactions. If their network is compromised, all of those Bitcoins are gone for good. Bitcoin software is still being developed to try to make the system as a whole more secure and accessible, but for now if you insist on using Bitcoins, exchange them quickly.
User error also leads to a lot of Bitcoin security issues every day. Bitcoin wallets essentially hold keys or passwords for Bitcoins that can be accidentally deleted, lost, and stolen. There are independent insurance companies that offer insurance on Bitcoin wallets as well as third party service providers that can handle all of your wallet information for you. Bitcoin is still currently working on security procedures to implement to give their users greater protection.
What is the value of a Bitcoin, and how do I handle Bitcoins during tax time?
Bitcoins gain value based on consumer and merchant implementation into use. Bitcoins are only valuable if they can be accepted as a form of currency, and this is backed by the trust that its users instill into it when they purchase them.
The value fluctuates based on amount sold and distributed. There is a fixed amount of Bitcoins that will be sold to the public, and as demand for Bitcoins increases, so does its value. Bitcoin’s price is determined by this same principle of supply and demand. Because there is a predetermined number of Bitcoins, which are distributed at a decreasing rate, demand for Bitcoins outweighs supply, keeping inflation at bay.
Because the Bitcoin market is currently so small, the price of Bitcoins is extremely volatile. If your business accepts Bitcoins, depending on the day, you could gain or lose money based on exchange rates. Inflation could cause the downfall of Bitcoin eventually, leaving them worthless. Technical failures, waning interest, and government regulation could all garner Bitcoins useless one day.
Despite that Bitcoin is not a legal form of currency, tax issues still arise. Not claiming Bitcoin income could lead to audits from the IRS. For now, there is no exact way to designate the value of your Bitcoins for tax purposes but regulations will eventually be put into place.
How widely are Bitcoins accepted?
Widespread use of Bitcoins as currency has not fully taken off yet, if at all. Few businesses accept Bitcoins, which make it hard to spend and use them. This is probably because a lot of people still don’t even know what Bitcoin is or how to use it properly.
Its use is so small, which makes the value extremely volatile. Bitcoin can be seen as unstable, which deters more people from implementing it into their business plan. As a result of its unpredictable nature and potential use in questionable activities, most merchants have not accepted Bitcoins as a form of payment for their stores.
When considering whether to accept Bitcoins as a form of currency for your small business, there are a few key things to remember. Bitcoin transaction fees are quite small, usually between zero and one percent. Because Bitcoin is a digital form of currency, there is much higher risk of fraud and hacking, and all transactions are final, meaning there is no consumer or merchant protection plan put in place to keep your Bitcoins safe.
Bitcoin and consumer protection
Because Bitcoin lacks these basic consumer protections, a lot of customers could be deterred from buying from vendors who use Bitcoin as their primary payment type. The fluctuating value of Bitcoins also means that your business could lose or gain money each day based on Bitcoin supply and demand.
Because no government agency currently regulates Bitcoins and Bitcoin is an online marketplace, it is extremely vulnerable to fraud and hacking. The risks for a small business are equal or greater than whatever benefits you could get out of using and accepting Bitcoins. The major thing you need to think about is liquidity and whether you want to have your business tied up in Bitcoin currency.
Bitcoin is extremely risky, which could be part of its appeal, but think about what the consequences are for you and your business. For now, it is hard to tell what the future of Bitcoin is. As a small business owner, you have a few things you definitely should take into account when determining whether accepting Bitcoins as a payment method makes sense.