Should your business accept Bitcoin? by Market Action Research
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In 2008 the very first cryptocurrency was invented, which to this day no one is actually sure if it was a single person or a group of people that was responsible for it’s invention. At any rate, a person by the name Satoshi Nakamoto is credited as the creator of this first cryptocurrency, which is now widely known as Bitcoin. The code is based on a system of network nodes that uses cryptography to publicly record and save every transaction, which is called blockchain technology. The code is entirely open-source and is available for anyone to view or download at https://github.com/bitcoin/bitcoin.
Even after 13 years, Bitcoin is still relatively new. Determining if your business should choose to accept Bitcoin payments will vary based on the needs of your business, local laws, and perhaps even your tolerance for risk. This article is not financial advice, or whether you should invest in cryptocurrency. Instead, we will providing a purely informative article giving the basic background and history of cryptocurrency, how it's different from traditional fiat currency, Bitcoin's utility and advantages, considerations for Business thinking about Bitcoin, and what to know about Cryptocurrency in modern times.
There are several things that make Bitcoin unique compared to fiat or traditional currencies. For one, Bitcoin is a completely digital currency, which means that is not attached to a physical element representing it’s value like cash or coins. This means that in order to make a transaction with Bitcoin you must have a cryptocurrency wallet, which is kind of like having a bank account attached to a debit card. In fact, cryptocurrency transactions work very similar to a debit transaction in that a transaction can only be made from a cryptocurrency wallet if it has sufficient funds to initiate and complete the transaction. From a process standpoint however, cryptocurrencies work very different behind the scenes than a standard debit transaction, in that no intermediary is required to conduct the transaction.
Another unique characteristic is that cryptocurrencies are decentralized through a peer-to-peer network, meaning that Bitcoin can be exchanged directly between people’s cryptocurrency wallets without any intermediaries administering the transactions. This is very similar to how cash works, where one person pays directly out of their "wallet" into another person's wallet for a transaction, which is why cryptocurrencies are sometimes referred to as virtual cash. This is an important characteristic and fundamental difference of how a cryptocurrency transaction or an exchange is handled compared to traditional transaction, that typically relies on a central authority and centralized systems that are owned and maintained traditionally by private corporations. Whereas a Bitcoin transaction takes place in a peer-to-peer network, which as of 2021 is maintained by both a combination of private corporations and individuals. Theoretically anyone can participate in supporting the network with the right technology and software, which in a proof-of-work model is called mining. This is possible because Bitcoin is completely open-source and all transactions are publicly distributed in a ledger accessible by anyone and anywhere in the world.
The main difference between a traditional debt transaction and cryptocurrency is the speed of the transaction. A typical debit card transaction takes about five to seven days from the initiation of the transaction until the funds are fully settled in the receiver’s account, even though the funds are debited immediately on the transaction. Speed is one of the biggest strengths of cryptocurrencies, because a cryptocurrency transaction can be sent from one wallet to another nearly instantly or within seconds. For businesses, the speed of cryptocurrency transactions can be a big advantage over traditional transactions for several reasons. Not only do customers expect faster service these days, if you’re not as fast your competitors will be.
The actual speed at which a transaction goes through is actually dependent on a couple factors, one is the fee the sender is willing to pay for the speed of the transaction and how busy the network is, or in other words how many transactions are all happening at or around the same time. Simply put, the higher the fee someone is willing to pay the faster their transaction will go through because it will be prioritized higher. It’s sort of like giving the network a tip. It’s safe to assume that most people will work harder when they know their tip will be better, and this same principle is true of the network.
Since the network knows how much it is going to be “tipped” upfront, it knows exactly how hard it’s going to work relative to all the other “tips” from other transactions in the network. In other words, the more you are willing to pay for your transaction, the more your transaction will be prioritized, and the faster it will go through. And since the fee, or tip, is set and guaranteed by the sender, the speed of the transaction is more than likely assured at the onset of the transaction. This in turn makes the transaction trustless, because the network knows exactly what it’s going to get and the sender knows more or less what to expect at the moment of the transaction, without any intermediary needing to make sure that it all happens.
For an ecommerce business or any business that does virtual transactions, a trustless transaction can be a huge plus because it means that transactions are guaranteed, there are no chargebacks, and a business know exactly what they are getting and the funds settle near instantly. At the moment, cryptocurrency transactions are more adventitious for businesses, because the customer has no assurance that they will ever receive the product they purchased. This requires a lot of trust on the part of the customer trusting the business, especially without any buyer protections. Even though the transaction lives publicly on the ledger for anyone to see, and theoretically it would be easy to prove that one person sent a transaction from their wallet to another, there is little governance which gives any one or multiple authorities the ability to apply enforcement of transactions and there is no helping hand or service that will get your money back if the business ends up being a fraud.
Currently a lack of buyer protections and governance is one of the downsides of cryptocurrencies transactions. This mostly stems from the fact that currently there is nothing that is set up to guarantee the transaction of physical products. Although it is not really a downside of cryptocurrencies per se, but rather the way physical products are currently sold and distributed as of 2021. This is because many physical products do not have anything that uniquely identifies each individual product, where in a simple scenario for example, can be proven that one specific product was purchased, shipped, tracked, connected to the individual transaction on the blockchain, from the seller to the buyer. Although many companies do use NFC tags and barcode technologies to do this type of tracking internally and thus this type of set-up could theoretically be plausible. Where this gets a bit more complicated is that cryptocurrency transactions by their nature are anonymous, and which for many people is key feature. So connecting the transaction to the buyer would defeat the anonymity of the purchase. Keep in mind that this is primarily only an issue with physical products, but can made to work seamlessly with virtualized products, such as NFTs (Non-fungible Tokens), etc. at the moment, but is not to say this cannot change in the future too.
Although, this type of model could work well with technology products that have unique MAC addresses associated with their products. On the flip side, for some products this would not be entirely practical with current technological infrastructure, mostly due to the costs associated with keeping track of all the products. It’s almost as if their needs to be a separate blockchain just to keep track of products! And perhaps another to anonymously handle shipping requests to truly keep the anonymity of a purchase, but these are still the early days of crypto! Hey, if it’s not already invented, maybe we said it first? Maybe we can help?
There are certainly some major advantages of cryptocurrencies, which include speed, low fees to process transactions, no chargebacks, no local or international transaction fees, and the ability to convert cryptocurrencies to almost every major fiat currency. The true uses and utility of cryptocurrencies and blockchain technologies are still relatively in the very early days, with approximately 106 million people using cryptocurrencies worldwide. To put that in perspective, in 2021 there is about 7.7 billion people on earth, which means only about 1.3% of the world’s population owns cryptocurrency, but there are 7.1 billion smart phone users or about 90% of the total population. This puts cryptocurrencies in a unique position for the potential of accelerated adoption, especially since a majority of the world has a smart phone capable of conducting a cryptocurrency transaction.
Since Bitcoin’s creation, many other people saw how much potential utility cryptocurrencies would have too. This is part of the reason why there has since been the creation of new cryptocurrencies to address various needs and problems. Today there are literally thousands of other cryptocurrencies around the world, with the most popular in 2021 being Bitcoin, Ethereum, Binance Coin, Tether, Solana, Cardano, Ripple (XRP), USD Coin, Polkadot, Dogecoin, Avalanche, Shiba Inu, and Crypto.com Coin. Each ranging in utility from faster transaction speeds, greater privacy, better security, environmentally friendly, and other specific needs, and some with no real utility, which are often referred to as meme coins. Regardless of the various needs and purposes, it’s more than likely that cryptocurrency is here to stay and will over time reach main stream adoption, as well as finding other practical uses that were not initially apparent. When this will happen is hard to say for sure, but it is possible it will accelerate as even more people not only become aware of the utilities of cryptocurrencies, but begin to use it for everyday transactions.