Cryptocurrency is a digital currency or asset that relies on encryption technology to transfer value over the Internet. Cryptocurrencies like Bitcoin operate independently of a banking system and can be used in many countries as a store or exchange of value like cash. The most common use of cryptocurrency is buying and selling goods and services online.
Cryptocurrency represents a new way for small businesses to accept customer payments and even pay vendors or suppliers. However, cryptocurrency is relatively new and many businesses don’t yet know what to think about it. To help, this article discusses the ins-and-outs of cryptocurrency, including how to accept it, the benefits and drawbacks, and the tax implications for small businesses.
What Cryptocurrency Is
You can think of cryptocurrency like a hybrid digital currency and commodity. Cryptocurrencies store value just like any other currency and also have stated exchange rates for most of the existing legal tender in the world. However, almost all types of cryptocurrencies also have a fixed supply, making them similar to a precious metal like gold or platinum.
In order to use cryptocurrencies, consumers and merchants need to open a cryptocurrency wallet account. These wallets act just like a bank account specifically for cryptocurrency. Once the wallet is open you can both purchase and accept cryptocurrency.
For example, consumers and small businesses can purchase cryptocurrencies using cash on open exchanges found on Coindesk, Coinbase, and Bitpay at stated exchange rates. They can then use cryptocurrencies to buy goods/services at participating businesses that have wallets to accept cryptocurrency payments.
Wallets typically have the option of automatically converting incoming cryptocurrency to cash, letting merchants “cash out” any cryptocurrency sales into a native or foreign currency. However, it’s also possible to store cryptocurrencies in your wallet for later use. For example, you can convert cryptocurrencies to cash at a later date or use them to make business payments with participating vendors and suppliers.
Traditionally, fiat money is created by a sovereign government when it prints currency and regulates it via a central bank. In this case, the currency that’s created by the government is distributed via a treasury and tracked by a central banking system that issues and manages that currency via a centralized ledger.
Cryptocurrencies, on the other hand, are created not by the government but by technically savvy individuals known as “miners.” These miners let cryptocurrency algorithms use their computing power to keep a decentralized ledger of transactions on the blockchain. In return, miners can “mine” or create new cryptocurrencies known as “coins.” There is no central entity or authority that manages creation and use.
While miners are the only people who can create cryptocurrencies, the coins they mine can be used by consumers and businesses to exchange for sovereign currency, purchase goods and services, as well as keep as an appreciating asset. Cryptocurrencies also typically have a fixed amount of coins that can ever be mined.
How Cryptocurrency Can Affect Small Businesses
Small business owners may be unsure how exactly cryptocurrencies will affect their operations. This is because there are both positive as well as negative ways that these new digital currencies can affect the small business environment. However, the exact way in which cryptocurrency will affect small businesses depends on whether or not they choose to accept it.
Currently, multinational companies such as Amazon, Microsoft, Overstock.com, and other notable brands on this list accept Bitcoin, the most widely used cryptocurrency. These large use cases have prompted many smaller businesses to follow suit. Still, it’s important to understand how cryptocurrency can positively or negatively affect your business before you make a decision.
Ways That Cryptocurrency Can Positively Affect Small Businesses
Cryptocurrency provides a quicker and less expensive way to accept customer payments when compared to traditional payment types like credit cards. Further, all cryptocurrency transactions are final, tipping the balance of power away from the consumer and more toward the merchant.
Cryptocurrency can positively affect small businesses in the following 4 ways:
1. No Processing Fees
Almost all forms of digital payments have a processing fee. This is because there is typically an intermediary that facilitates the payment and takes a cut. For example, when you accept credit cards as a small business, you’re typically charged 2% – 3% by your credit card processing company. This is also the case with companies such as Stripe or PayPal.
Cryptocurrency, on the other hand, doesn’t have any processing fees because there is no intermediary. Cryptocurrencies use decentralized ledgers and act as a peer-to-peer digital currency, meaning that you don’t have to pay anyone to facilitate the transactions. This means that you can either save more money or pass on your savings to your customers with lower prices.
However, it’s important to note that some merchant wallets charge a flat monthly fee for their services, typically around $30. Additionally, you can pay a 1% fee in order to receive priority payment processing and posting. Although, cryptocurrencies are already known for their transaction speed, and this payment processing fee is a luxury rather than a necessity.
Further, when converting cryptocurrency to a base currency, cryptocurrency exchanges will typically have a “buy/sell spread.” This means that the exchange will buy your cryptocurrency from you at the sell price and then sell it to another user at the buy price. The difference between the buy price and sell price is what the exchange earns, common for any type of currency exchange.
2. High Transaction Speed
Cryptocurrency transactions happen in near real-time. For example, it takes Bitcoin miners roughly 10 minutes to verify and facilitate a transaction from one person’s wallet to another. There are even cryptocurrencies like Litecoin and Ethereum that verify transactions in as little as 20 seconds. This means that coins are deposited into your merchant wallet in 10 minutes or less.
This is faster than the 2 – 3 days it takes for a credit card transaction to clear. However, merchant wallets typically convert coins to cash automatically, sending the equivalent currency to a business’s bank account via ACH within 2 – 3 days. This means that while you can receive coins quickly, the time it takes to actually receive the cash is the same.
3. All Transactions are Final
Unlike with credit card transactions, all cryptocurrency transactions are final. This means that there is no way for a consumer to dispute a charge and negate a sale. Merchants are therefore able to better control their return policies and it removes the risk of chargebacks and other things that might eat into your revenues. This also helps with customer fraud, such as when fake credit cards or bills are used or when a customer fraudulently disputes a valid transaction.
4. More Payment Options for Customers
Typically, the more payment options a small business provides its customer the better. For example, a 2016 payment processing survey found that consumers use as many as 5 different payment types. If a small business decides to accept cryptocurrency it has the potential of attracting a wider customer base.
Ways That Cryptocurrency Can Negatively Affect Small Businesses
Cryptocurrency, while it provides many benefits, also has its potential drawbacks. Unsurprising, many of the ways that cryptocurrency can negatively affect small businesses surround its volatility and lack of regulation as a new form of currency.
Cryptocurrency can negatively affect small businesses in the following 2 ways:
1. High Price Volatility
The number one cryptocurrency risk that can negatively affect small businesses is the volatility of individual cryptocurrencies as well as the overall industry. For example, the increasingly popular Ethereum recently went through a “flash crash” on the GDAX exchange, where it dropped from $319 to $0.10 per coin in a matter of seconds.
Price volatility is something that all cryptocurrencies face. Luckily, most merchant wallets convert coins to cash automatically in an attempt to avoid potential crashes. However, if a flash crash can happen in a matter of seconds, your small business might be forced to wait until coin values recover before converting to cash or risk taking massive losses.
Further, this price volatility can have a large impact on businesses that bill their customers on net terms. For example, if you’re a business that invoices your customers on net-30 terms and you want to accept cryptocurrency, you’re forced to quote prices at the current exchange rate at the time of sending the invoice. If the value of the cryptocurrency declines, you might be giving your customer a huge discount without meaning to.
This can also cause an issue for small businesses that have stated prices online. Since the value of cryptocurrencies can swing wildly, small businesses typically have to update their pricing as often as daily. However, many merchant wallets have plugins and other services that can auto-update online prices given the current value of cryptocurrencies.
2. Unregulated Currency Environment
While not an immediate concern, there is definitely risk surrounding cryptocurrencies given that the coins are currently highly unregulated. Sovereign governments and central banks are still unsure exactly what type of legislation they should pass surrounding cryptocurrency taxation. Currently, cryptocurrency is treated as either cash or property.
It’s important to note that cryptocurrency is legal in many – if not all – countries around the world. Still, the tax environment may change over time, both for domestic taxes as well as for international taxes and import/export taxes. Prudent business owners should keep an eye on any changing regulations around taxation and legality.
Should Small Businesses Accept Cryptocurrency?
A general rule of thumb when deciding whether or not to accept cryptocurrency is that you should accept it if you’re a B2C business and consider holding off if you’re a B2B business. This is because while consumers are using cryptocurrencies more and more, many businesses are less willing to pay their B2B partners (such as vendors, suppliers, agencies, and consultancies) in cryptocurrency.
For a better understanding of whether or not to accept cryptocurrency, we caught up with Ivan Brightly, Chief Investment Officer at Full Node Capital. We also spoke with Chris Post, CEO of Post Modern Marketing and a B2B business specialist. When asked about a general rule of thumb, they told us the following.
“If you’re a B2C merchant you should accept
cryptocurrency. It’s easy to implement and the amount of free advertising alone as a forward-thinking company that accepts multiple payment types is worth putting up a widget on your website or POS system. Cryptocurrency transactions also have lower fees than credit cards, cannot be reversed, and are typically settled and converted to cash the same-day by your merchant wallet account, reducing any market risk.” – Ivan Brightly, Chief Investment Officer at Full Node Capital.
“My business is predominantly B2B and I’ve given clients
the option to pay by Bitcoin for over a year now. I’ve been unpleasantly surprised that when I mention this to business clients they still choose to pay by traditional means. In my opinion, the marketplace isn’t ready for B2B services to receive payments in the form of cryptocurrency. The time and effort of a B2B business owner can be better served elsewhere given the current environment.” – Chris Post, Post Modern Marketing.
Still, if you choose to accept cryptocurrency as a small business, it doesn’t hurt to accept all types of cryptocurrencies. This is because most merchant wallet accounts not only accept all forms of coins but also automatically convert any sales transactions to the business’s base currency. Let’s take a look at how you can start accepting all types of cryptocurrencies as a small business.
How Small Businesses Can Start Accepting Cryptocurrency
The steps needed to start accepting cryptocurrency as a small business is relatively simple. In fact, the entire process, from merchant wallet account set up, to integration, to general education, can take 30 days or less. The steps include account set up, customer payment integration, and importing transactions into your accounting software.
Follow these 3 steps to start accepting cryptocurrency as a merchant:
1. Set up Your Merchant Wallet Account
The first step when starting to accept cryptocurrency is to set up a merchant wallet account. The top merchant wallets include providers such as Coinbase, BitPay, and CoinGate. These merchant wallets can be set up in minutes, have customizable portals, automatically convert cryptocurrency to your base currency, and send money via ACH within 2 – 3 business days.
When you setup your merchant wallet account you’ll receive a unique wallet address in the form of a 26 – 35 alphanumeric string of characters as well as an associated QR code. This address is used by customers to send cryptocurrency payments to your wallet. You’ll also receive a private key, which is essentially your login information to access your wallet.
Some merchant wallet accounts only accept Bitcoin while other wallets accept many – if not all – types of cryptocurrencies. It’s important to understand what types of cryptocurrencies your wallet accepts before you start allowing your customers to pay in multiple types. However, since all transactions are automatically converted to cash, there’s no real downside to accepting multiple forms of cryptocurrencies.
“Bitcoin is the only cryptocurrency with any type of retail
footprint. However, it’s relatively easy to accept other coins and there’s no reason not to accept multiple types. All you have to do is open a merchant wallet and post your public address so customers know where to send the coins. These digital wallet companies automatically convert cryptocurrencies into a business’s sovereign currency, thus removing any tax and accounting issues and market risk.” – David Yermack, Professor of Finance at NYU.
2. Integrate Cryptocurrency Option into Existing Points of Sale
Once you’ve opened a merchant wallet account and received your public address and private key, the next step is to integrate your public address into your various points of sales. For example, you can use your wallet’s address to accept cryptocurrency using a physical POS system, an online shopping cart, and even with digital and physical invoices. The ways in which you can do so is relatively easy to implement.
Physical POS System
If you have a brick-and-mortar-type of POS system, merchant wallet providers typically provide you with an app that generates your specific QR code. Customers can then scan your QR code to send coins. Each transaction generates a specific amount and transaction ID, allowing you to easily accept and track customer payments. The app can be used on a smartphone or tablet.
Online Shopping Cart
Most merchant wallets will also provide shopping cart and online payment plugins, checkout pages, APIs, and more. If you sell goods and services online, this makes it easy to add cryptocurrency as a payment option without needing a developer or background in computer science. You can even accept Bitcoin via PayPal or Stripe, but you’ll still need a wallet.
Digital & Physical Invoices
Physical and digital invoices can also both be used to accept cryptocurrency. If you use physical invoices, you can include your QR code or wallet address on your invoice in the same section as your bank account and other payment information. Customers can either use their smartphone to send coins via your QR code or manually type in your address online.
For digital invoices, the process is even easier. All you have to do is create a live link using your wallet address, allowing customers to click on it and send coins to your wallet directly online. Alternatively, you can also include your QR code and let your customers pay via their smartphone.
Remember that with invoicing, you might have to quote your prices at the time you send your invoices. This can expose your business to market fluctuations.
3. Integrate Transactions with Your Accounting Software
The last step when accepting cryptocurrency as a form of customer payment is to integrate/import and track your cryptocurrency transactions using your accounting software. Leading accounting software providers like QuickBooks or Xero have their own integrations. If you don’t use either of these, your merchant wallet typically provides documentation on how to manually import your transactions.
Tax Implications of Accepting Cryptocurrency
One of the biggest question marks among small business owners is how to treat cryptocurrency for tax purposes. However, adhering to your country’s tax laws is easier than you might think. Basically, all revenue earned from cryptocurrency has to be treated like a cash transaction. Most countries will have their own documentation on best practices, such as with the IRS in the United States.
This process is simplified by the fact that most merchant wallets automatically convert cryptocurrency to cash. So, when you receive ACH payments from your wallet account, you can simply categorize the transactions as revenue and include it in your gross revenue numbers. All cryptocurrency sales are taxed at the normal corporate tax rate of your corporate structure.
However, if you fail to convert your cryptocurrency immediately to cash, your taxes become a bit more convoluted. For example, cryptocurrency is considered property by the government, and any gains in the value of your cryptocurrency is taxed as capital gains. We spoke with David Yermack of NYU, who warned us of the following:
”Cryptocurrency is treated as property for tax purposes.
If you don’t convert it immediately to cash, you may have a capital gain or loss in the future when you eventually sell the currency. There is also the need to convert crypto into real currency for accounting and financial reporting purposes. For example, to report revenue, the crypto is required to be in your base currency, which is different from a company that has revenue in both dollars and euros but simply reports everything in dollars.” – David Yermack, Professor of Finance at NYU.
5 Common Types of Cryptocurrencies
While Bitcoin is the most popular cryptocurrency with the highest use and market cap, there are many other cryptocurrencies you should know about. However, with more than 800 cryptocurrencies available (and growing), it’s better to keep your eyes out for only the ones with high overall value and transactional volume. You can track these cryptocurrencies on exchanges like Coinbase.
Below are 5 cryptocurrencies you should know:
1. Bitcoin (BTC)
Bitcoin is the first decentralized, peer-to-peer digital currency to hit the market. It was introduced in late 2008 and subsequently launched in 2009 by the alias Satoshi Nakamoto. Many believe that “he” is a group of individuals rather than a single person. Bitcoin values fluctuate widely but has a current market cap around $66 billion and a per-coin value greater than $4k.
2. Ethereum (ETH)
Ethereum is a relatively new type of cryptocurrency that’s considered “Turing complete.” This means that while it works much like Bitcoin in its transfer of value, its underlying technology can support other applications that run on top of it. This provides the opportunity to use Ethereum for other purposes, such as expense-specific coins like gas or fuel coins.
3. Litecoin (LTC)
Litecoin was created specifically to reduce the time it takes miners to verify the transactions on the blockchain. For example, while it takes Bitcoin roughly 10 minutes to verify a transaction, Litecoin can do it within 2 minutes. Other than that, it operates exactly like Bitcoin. It’s important to note, however, that Ethereum has been able to further reduce the verification time to 20 seconds.
4. Monero (XMR)
Unlike most other cryptocurrencies, Monero is a coin that is based on the CryptoNote protocol, which is different than Bitcoin. The creators of Monero felt that this CryptoNote protocol can better help with privacy, decentralization, and scalability of digital coins. Monero is an open-sourced software created in 2014.
5. Zcash (ZEC)
Zcash is similar to Bitcoin in almost every respect except for its privacy. While Bitcoin keeps the identity of the people involved in the transaction anonymous, people can still typically see transaction amounts and what was purchased. With Zcash, however, there is much more anonymity, keeping almost everything about a transaction completely private.
Important Cryptocurrency Facts & Figures
The most common type of cryptocurrency is Bitcoin (BTC). Bitcoin was launched in 2008 by a supposed group of anonymous programmers under the pseudonym “Satoshi Nakamoto.” Bitcoin was the first cryptocurrency available and was created as a peer-to-peer electronic cash system. Since the launch of Bitcoin there have been as many as 800 different types of cryptocurrencies available.
The value of cryptocurrencies are driven by market forces such as supply and demand. All cryptocurrencies have a fixed supply of coins that can be mined but demand is typically volatile and speculative, causing large swings in the value of most cryptocurrencies. For example, Bitcoin and Ethereum currently have market caps of ~$66 billion and ~$29 billion, respectively. At one point, both of these coins had individual market caps under $100 million.
The current market cap of all combined cryptocurrencies is currently ~$141 billion. The number of cryptocurrency wallets (crypto-bank accounts) is currently at ~16 million, more than doubling in the past year alone. This has resulted in an explosion of cryptocurrency transactions, with Bitcoin alone boasting between 150k – 375k daily transactions worldwide.
These current cryptocurrency trends look very similar to the trends we’ve seen with other alternative digital payment types like PayPal. PayPal’s user-base has grown by ~100% over the past 5 years. By comparison, cryptocurrency wallets have grown with a 100% growth rate over the same 5 years. Cryptocurrency use might very well continue to follow PayPal’s path.
Bottom Line: Cryptocurrency
Overall, small businesses should typically accept cryptocurrency if they’re B2C and think twice about it if they’re B2B. However, thanks to merchant wallets, the downside of accepting cryptocurrencies is mitigated thanks to automatic conversion to cash. Further, merchant wallets make it easy to integrate cryptocurrency payment options into POS systems, such as in-person as well as online.