With so much noise surrounding bitcoin, and other cryptocurrencies, and the potentially large gains to be made from speculation, SME leaders should be familiarizing themselves with the opportunities and the pitfalls of new developments in the digital economy.
Traditionally, the uses of money are; a store of value, a medium of exchange and unit of account. Most people recognise money as valuable, but is a cryptocurrency recognised as valuable? If people stop recognising money as valuable, then it will cease to be a good medium of exchange because people will not be willing to trade goods or services for it. A cryptocurrency such as bitcoin is a digital asset designed to work as a medium of exchange using cryptography, the art of writing or solving codes, to secure transactions and to control the creation of additional units of the currency.
Another critical element money needs is a promise of scarcity. If the government issuing a currency prints more and more, then the currency becomes worth less and ultimately worthless. Take for example Venezuela today, or Argentina a few years ago, or South Africa. Bitcoin’s scarcity lies in its code as nobody can print more and there will only ever be a predetermined amount created.
Asia is at the epicentre of the bitcoin boom. This may be attributed partly to a passion for new technology, gambling and the proactiveness of Asian governments. Japan’s government put laws into effect on April 1, 2017 recognising bitcoin as a legal method of payment, bringing exchanges under anti-money laundering rules, along with capital requirements and operational security regulations. Similar developments are afoot in India and China.
Cryptocurrencies and the Blockchain
Bitcoin and blockchain are difficult concepts to grasp. Bitcoin refers to the digital money that is created and held electronically. Blockchain is a network technology that is public and accessible to anyone, just like the Internet. Blockchain is a ledger that contains every transaction in the history of bitcoin. When you use bitcoins to buy anything, a global network of computers checks the blockchain database, verifying that you own the bitcoins, with thousands of computerised notaries automatically checking, authenticating and guaranteeing every transaction. This is different from using a credit or debit card where a financial middleman, such as a bank, verifies every transaction. This takes time, and there are charges for the service. In a bitcoin transaction, the verification and transfer are performed instantly by the Blockchain. These more efficient, less costly transactions could end up saving individuals and SMEs millions of dollars as the currency is more widely adopted.
Cryptocurrencies are set of blockchain-based digital assets created as a means of ownership of a blockchain-based business. Bitcoin is currently the “reserve” currency of all cryptocurrencies. Ethereum is another new cryptocurrency it is a virtual currency network. A number of blue-chip companies including J.P. Morgan and Microsoft have announced the formation of an alliance that will use ethereum for blockchain-related opportunities.
Bitcoin has soared from around US$300 in 2015 to more than US$5,000 recently and many financial experts predict gains to continue in the future. So should an SME own some bitcoin today? Cryptocurrencies are liquid and tradeable for the everyday investor.
Initial Coin Offerings (ICOs) are a form of financing, similar to crowdfunding, for cryptocurrency startup firms. The company will typically write a whitepaper outlining its project, along with the general terms of the ICO. Early investors can then put money into the ICO and be issued with cryptocurrency tokens which can then be traded on the secondary market. Investors usually expect immediate multiples of return on capital with near-guarantees of immediate big gains, similar to Tulip Mania or the Dot.com bubbles. At the peak of the dotcom bubble, the market cap of the NASDAQ index was nearly US$6 trillion. The entire cryptocurrency market cap was less than 1.5 percent of that in Q3 of 2017. However the level of general public participation in bitcoin is still extremely low.
Buy and Hold
Given the limited but growing use of bitcoin globally an SME owner may consider simply buying, and holding, a small amount of bitcoin to test the waters and make some short-term profits. If an SME is doing business with a large MNC that uses cryptocurrencies then there may be scope for transactions, saving the SME costs compared with existing payment methods. In short, every SME owner needs to familiarise themselves with the process of buying, trading and storing cryptocurrencies. Blockchain and bitcoin are here to stay and this technology will grow in use, scale and opportunity.
What can go wrong with bitcoin?
To get started with Bitcoin, download an App like Coinbase. Register and create a trading account and a payment account. A wallet is where you store your bitcoin and an exchange is where you trade bitcoin and other cryptocurrencies. A wallet has a public key (which might look a bit like this: 0JwX7fPX97hjavd7iNrUOAof) which is where the bitcoins are sent to. This is like an account name. Your wallet also has a private key which will either be an alpha-numeric sequence that looks like the public key above, or a long sequence of random words generated by the wallet. This is the password you use to access your wallet. Making a transfer request is simple and may take a few minutes but one customer received the message ‘awaiting approval’ in their transaction ledger. It took 10 days for this to be processed before it was rejected. During this period of time there was no help available and noone to call. Cryptocurrencies do not yet have the same investor protection provided by banks and brokerages. If the exchange where you bought bitcoin is hacked, then you may lose your money. This has happened in a few cases; in 2014 bitcoin exchange Mt. Gox, which at the time was handling up to 70 percent of all bitcoin volume, filed for bankruptcy, saying that 750,000 of customer bitcoin was missing. That’s US$1.5 billion-worth at today’s prices. To mitigate this you can keep your bitcoin offline, in what’s called a “cold storage” wallet.
SMEs may not be ready for bitcoin and other cryptocurrencies quite yet but given the fast pace of developments in digital commerce it will pay for SME owners to begin learning about the basics of bitcoin and to keep abreast of future developments.