Cryptocurrencies have evolved beyond their origin as a payment system for a niche group of people who didn’t trust the global banking system. But make no mistake – they are still volatile, complex and not to be taken lightly. Ironically, it’s easier for small businesses, because e-commerce platforms like Shopify and Etsy have done the heavy lifting for merchants, making it easy for them to accept cryptocurrencies. But for larger organisations that need to embed it in their infrastructure, it’s a more complex project.
Bitcoin was the first major cryptocurrency, created in 2009. Since then, there have been many others (more than 4000 at the start of 2021), but Bitcoin is still the biggest and best-known (Ether is second). Most companies accepting cryptocurrencies as payment will start with Bitcoin, so for simplicity, we’ll use “bitcoin” here as a shorthand for all cryptocurrencies.
Bitcoin is a currency, which means you accept it in exchange for the transfer of goods – just like the Australian dollar, the Swedish kroner, bars of gold, works of art, and World Series Cricket player cards from the 1970s. Clearly, not all of these are equal, and businesses choose carefully which currencies they accept. The question is: Will you accept bitcoin?
Of course, the real first question is: Why would you accept bitcoin?
It does give you some advantages:
● You offer customers another payment option, which gives you a competitive edge over businesses that don’t accept it – especially now, when bitcoin enthusiasts are keen to support businesses that accept it.
● It also offers lower fees, with low transaction fees and no currency conversion fees.
● Settlement is fast, which helps cash flow.
● Transactions are irreversible, which protects you from chargeback scams.
Of course, there’s no such thing as a free lunch, and cryptocurrencies also have drawbacks:
● Most customers don’t use bitcoin (in fact, many of them probably haven’t even heard of it), so it takes time to reap a return on your infrastructure investment.
● Because only a few businesses accept bitcoin, there are few places where you can spend it, and most of those are for consumer purchases – for example, a few cafes and pubs, a gym, an organic food shop, or a dental clinic. You can’t pay wages, rent, suppliers or most of your other business expenses with it – unless you convert it into a traditional currency, and then pay the associated fees you were hoping to avoid.
● Because the price of bitcoin fluctuates, the ATO (and the IRS in the US) treats it like a stock, which means it might be subject to capital gains tax.
● That price volatility also means your asset position is more vulnerable – and that only gets worse as you acquire more bitcoin.
In fact, bitcoin’s volatility – which makes it attractive to some investors and speculators – is one of its biggest drawbacks as a currency.
As an example, in February, Elon Musk announced Tesla would accept bitcoin for vehicle payments, and the bitcoin price surged by 20 per cent. Just three months later, Musk overturned that decision, citing concerns about the high environmental costs of bitcoin mining – causing a 17 per cent drop in price. In July, Tesla backflipped again, saying it would “most likely” accept bitcoin again, and the price jumped 6 per cent. Even Musk’s appearance on the US talk show Saturday Night Live caused a 30 per cent drop in another cryptocurrency, Dogecoin (which, by the way, started as a joke in 2013).
It’s not surprising for a company’s share price to be affected by something the CEO says, but we’re not talking about Tesla’s share price. Instead, Musk – sometimes with a single tweet – affected the intrinsic value of a currency. A single tweet from an American CEO in the auto industry affects not only his company but every other company that accepts bitcoin – across every industry and around the world.
That’s why cryptocurrencies have yet to gain mainstream acceptance. Most businesses and customers are adopting a “wait and see” attitude towards cryptocurrencies. A few large retailers are taking it seriously – including the usual suspects Amazon and Walmart, who are hiring cryptocurrency experts to oversee the implementation – but even they recognise they are investing more in potential than actual value.
Australia is already one of the most-cashless developed economies (behind Sweden, Denmark and Hong Kong), but those cashless transactions still use fiat currencies like the Australian dollar. Cryptocurrencies could become part of that mix, but at this stage it’s hard to argue for any compelling upside. They are a solution waiting for a problem, and a cure for which there’s no known disease. Until they solve a real problem for consumers or retailers, they are likely to remain a niche novelty.
This was originally published in the October edition of Inside FMCG magazine