What is Cryptocurrency?Viral currencies like bitcoin are here to stay. But what are they, how do they work, and should your business accept them?
These days, consumers are spoiled for choice. No matter what you buy, there’s almost always an alternative option available – and money is no different.
Cryptocurrencies (or “cryptos”) offer a decentralized, non-governmentally controlled alternative to federally backed banks. But what, exactly, is a cryptocurrency, and what role does it play in the world of small business?
The most practical definition of cryptocurrency is that it’s a decentralized digital monetary system. Unlike most currencies – which rely on a government-supported banking system to manage, maintain and authenticate transactions – cryptos avoid centralized control. Instead, they rely on peer-to-peer networks to manage money transfers, which happen more or less instantly, without requiring intermediaries.
Cryptos are completely virtual; they don’t exist in paper or coin form in the real world and aren’t backed by any precious metal standard – they’re bits on computer networks. Transactions are managed by a series of algorithms and added to the blockchain, the currency’s permanent ledger. The blockchain is available to every user, making it extremely difficult – if not impossible – to disrupt the currency.
According to cryptocurrency site Blockgeeks, cryptocurrency transactions irreversible, disguised and highly secure. Moreover, cryptos are globally accessible and can be used by anyone with the necessary software.
It’s more than just bitcoin
You’re no doubt familiar with bitcoin – among all virtual currencies, it’s the one that’s stolen the most headlines.
“Honestly, bitcoin is the only cryptocurrency that sees significant consumer usage today,” said Jad Mubaslat, founder of BitQuick.io. “But because bitcoin is open-source, it was inevitable that people would create their own spinoffs. Why not create your own cryptocurrency when there is no barrier to doing so?”
Consequently, dozens of other cryptos have sprung up in recent years. Ethereum, Ripple, Litecoin, Monero and Dash are just a few of the virtual coins in use today, each designed with a specific goal or application in mind.
Some, like Monero, ZCash and Dash, incorporate features focused on creating more anonymity for users, while others were build trying to solve a particular problem. For example, said Mubaslat, “StorJ aims to create a decentralized Dropbox network that uses a native cryptocurrency to pay for storage.”
But how popular are virtual currencies, really? The single best gauge is market capitalization, which measures a company’s size. For cryptos, sites like CoinMarketCap track the current value of each currency. Bitcoin is far and away the leader at more than $25 billion, but Ethereum trails in distant second place with almost $8 billion. After the top 10, virtual currencies clock in at less than $200 million each.
Cryptocurrency and your small business
So what does all this mean for your small business? First and foremost, cryptocurrencies are still very early in their evolution and most mainstream businesses can safely ignore it. After all, unless your business has a uniquely tech-savvy clientele, only few of your consumers are likely to even know what bitcoin is, much less use it for daily purchases.
Instead, Mubaslat explained, bitcoin and other cryptocurrencies are primarily being used in the investing world. “For the most part, bitcoin is being used as an investment vehicle by speculators, as a safe-haven asset, as a global currency, as a way to transfer money internationally or domestically (instead of Western Union or Moneygram), and as a way to pay for things with more privacy.”
Even so, “heavy hitters,” like Dell, Expedia and Dish Network have started accepting bitcoin, showing the movement is clearly getting traction.
“Bitcoin can be good for small dollar payments, depending on the expense associated with taking bitcoin,” said Josh Rosenblatt, managing director at BlackLine Advisory Group. “It’s not at all unusual to see those fees be less than credit card fees.”
That said, retailers who want to explore accepting cryptos should focus on bitcoin. Not only is it the most common cryptocurrency by far, but it’s also the most widely compatible with point of sale systems.
Bottom line: It may be in its infancy now, but the future is looking up for cryptocurrency. As Rosenblatt opined, “Bitcoin doesn’t get a $22 billion market cap unless real people want to use it.”