Cryptocurrency has been around since 2009, but it’s only now becoming accepted as a payment method on a large scale. Over 4,000 cryptocurrencies existed as of January 2021, although only a fraction of these are commercially successful. Before you decide to use cryptocurrency in your business, you should carefully consider the pros and cons of doing so.
Cryptocurrency is a digital asset that you can use to buy, sell and invest. Despite the name, it isn’t technically a currency, also known as fiat money, because cryptocurrency isn’t represented by a physical object. Furthermore, cryptocurrency isn’t regulated by any government or other centralized authority as fiat money is. The value of cryptocurrency is therefore determined solely by intangible qualities like availability, desirability and usability, which can vary wildly. For example, Bitcoin has a value of about $39,100 as of February 2022, while Dogecoin is priced at $0.13.
Cryptocurrencies rely on blockchain technology, which consists of databases containing blocks of information on transactions. These transactions are recorded on public ledgers, so they must be encrypted to provide the necessary security. Each transaction in a cryptocurrency consists of three keys, including the sender’s private key and two public keys.
Data miners must confirm the transfer of a digital coin between parties by auditing each transaction to confirm its legitimacy. This process involves solving advanced mathematical equations by using supercomputers, commonly known as hashing. The two parties are thus able to transfer assets without a central authority. The recipient can use these digital coins to buy other types of cryptocurrencies as well as physical goods and services.
The most obvious advantage of using cryptocurrency over other payment methods like credit cards is its fast processing speed. Credit card transactions take days to complete, but cryptocurrency transactions process immediately.
The lower cost is another benefit to using cryptocurrency. Credit card transactions generally cost the merchant a flat fee of at least 25 cents for each transaction in addition to about three percent of the transaction value. Fees for cryptocurrency transactions are much lower, although the exact value primarily depends on whether the payment goes into the merchant’s personal wallet or a third-party wallet like Coinbase. The main reason for the lower cost is that cryptocurrency transactions don’t require a middleman.
The most significant disadvantage in using cryptocurrency is its volatility. Merchants must frequently convert prices between cryptocurrency and fiat money since the exchange rate can change very quickly. For example, Ethereum was worth about $1 when it launched in 2015, but it’s currently worth about $2,700. Services like BitPay and Coinbase protect merchants from this volatility by immediately converting cryptocurrency into its currency value in real time at the time of payment. Holding on to cryptocurrency any longer than necessary is essentially a speculative investment that could put your revenue stream at risk.
Cryptocurrency transactions aren’t completely secure any more than credit card transactions are. However, the risk of cryptocurrency is less known since it’s a much newer payment method than credit cards. Cryptocurrency exchange platforms mitigate this risk by minimizing the assets they maintain in digital form. For example, Coinbase keeps less than two percent of its assets online. Businesses also protect their cryptocurrency by insuring them with providers like Bridge Mutual, Coincover and Etherisc, which specialize in insuring cryptocurrency transactions.
Cryptocurrency is gradually becoming an accepted payment option, especially Bitcoin. Accepting cryptocurrency can extend your customer reach and reduce transaction fees significantly, but you also need to consider the market volatility and security risks of cryptocurrency.