The growing popularity of Bitcoin and other cryptocurrencies raises the question of whether businesses should be accepting digital money payments.
Some are already doing so, but is it right for your small business? It’s a big decision with many serious practical and technical considerations.
In this post, we’ll delve into the cryptocurrency world and explore the pros and cons of “magic internet money” for small businesses.
What is cryptocurrency?
Cryptocurrency, alongside NFTs (non-fungible tokens) and Web3, is part of the so-called metaverse, where the digital world coincides with physical reality.
Unlike paper money, digital cash doesn’t require a bank or other financial institution or a Government to produce it or give value to it.
This is why it’s known as decentralised money. There’s no central regulating or issuing authority. Instead, crypto has a decentralised system to issue new units and record transactions.
Because cryptocurrency doesn’t rely on banks to verify transactions, it’s known as a peer-to-peer system. Anyone anywhere can send and receive payments.
Cyber cash provides an alternative to physical money exchanged in the real world by using encryption algorithms to secure transactions.
To use cryptocurrencies, you need a digital wallet – software that holds encryption keys to confirm your identity and link to your virtual money.
Cryptocurrency transactions are recorded on virtual public ledgers called blockchains.
Types of cryptocurrencies
There are thousands of cryptocurrencies. The most common include:
- Bitcoin. The first cryptocurrency, Bitcoin (BTC) was established in 2009 and remains the best-known virtual currency. It uses its own blockchain to verify transactions and create new Bitcoins.
- Ethereum. This blockchain platform was developed in 2015 with its own cryptocurrency, called Ethereum or Ether (ETH). It’s second in popularity to Bitcoin.
- Litecoin: Similar to Bitcoin, Litecoin has progressed to facilitate faster payments and processes that allow more transactions.
Advantages of cryptocurrency for small businesses
Adopting a cryptocurrency payment system can benefit small businesses in several ways, such as:
- Increasing the volume of existing sales.
- Expanding your market reach.
- Cutting transaction processing costs.
- Protecting your business from excessive chargebacks.
- Accommodating changing consumer preferences.
According to some studies, customers paying with cyber cash buy twice as much as credit card users in one transaction. This represents an average increase in return on investment of 327 per cent.
Cryptocurrency also allows small businesses to deal with international customers who otherwise wouldn’t be able to access their products or services.
Attracting younger customers
Cryptocurrency could give you access to a new customer demographic as younger generations seek more convenient and transparent ways to spend their growing disposable income.
For instance, Gen Z consumers in their early 20s in 2023 have eagerly embraced the concept of virtual money and they account for the majority of crypto investors.
Lower transaction fees
Credit cards encourage consumers to spend more than they do with cash payments. Even so, many small businesses are now refusing card payments because of high transaction fees.
The absence of a central intermediary in the cryptocurrency system significantly reduces transaction fees compared with credit card payments via a card processing company.
Credit card transaction fees for businesses in the UK generally range from 1.5% to 3.5%. Third-party bitcoin vendors typically charge one percent.
The decentralised setup of cryptocurrency provides protection against chargebacks. As with cash, the transactions are final because no third party can reverse charges.
Accepting digital money offers customers more ways to pay you, and crypto payments are considered more secure than using credit cards or debit cards.
Disadvantages of cryptocurrency for small businesses
Accepting cryptocurrency entails a lot of work and is technically challenging. You’ll need to navigate a steep learning curve in order to take virtual money payments efficiently and securely. Then there are tax complications, the volatility of cryptocurrencies, and security issues to consider.
With more than 12,000 cryptocurrencies floating around in the ether, finding the time and resources to research, understand and initiate crypto transactions while running your business is likely to be difficult.
It’ll include setting up a virtual wallet on a digital money exchange and selecting from a vast array of options the right crypto payment gateway for your business and your customers’ preferences.
Running a crypto payment system
Cryptocurrency payments are irreversible – only you as the vendor or service provider can refund customers.
While this largely provides protection against chargebacks and chargeback fees, it can also create inefficiencies within your business.
You’ll need to dedicate significant resources into keeping meticulous records of every transaction.
Capital gains tax complications are one of the main disadvantages of accepting cryptocurrency payments.
HMRC classes crypto as a capital asset. The value of cyber money can go up (or down) fast. You’ll have to pay tax on any profits made when you dispose of this capital asset by converting crypto into cash.
This can be a complex process that requires a thorough understanding of how cryptocurrency capital gains tax works before your business starts accepting crypto payments.
Volatility of cryptocurrency
The volatility of virtual cash can dissuade small businesses from setting up a crypto payment system.
Digital currency is extremely unpredictable, from soaring highs to plummeting lows, with inflation a major factor.
Although crypto transactions eliminate cyber threats like stolen credit card numbers, criminals may still be able to hack virtual wallets.
Can you afford to ignore crypto?
Small businesses probably don’t need to worry too much about digital cash right now. But business moves fast, and at some point you’ll likely have to consider the implications of accepting virtual currency.
Various factors will figure in your deliberations, including whether you have the capacity and technical know-how to incorporate cyber cash into your daily business operations. This in itself could be a deterrent.
Then there’s the question of whether the benefit of lowering transaction fees outweighs crypto volatility concerns.
However, as virtual money becomes more widespread and sophisticated, a new question could perhaps emerge. Is accepting cryptocurrency payments about competitive advantage or competitive survival?
In other words, you may regard cryptocurrency as just pretend internet money, but can your business afford to ignore it indefinitely?