What is digital currency and why should your small business care about it? For many, it may seem like an investment opportunity – buy your bitcoins, sit back and watch them grow in value. But that’s a risky proposition for a number of reasons described here.
The real value of digital currency is that using it for global business payments is cheaper, often much faster, as secure, and always far less headache.
So while the rest of the world wonders what is digital currency, or toys with bitcoin speculation, you can profit from the Bitcoin protocol behind it to save your business time and money. Here are 9 things you should know about the new digital currency, aka bitcoin – a new form of electronic currency that has taken the world by storm:
- What is digital currency – it’s like money, but not exactly.
- Digital currencies aren’t really currencies – they’re virtual.
- Digital currency is hot, hot, hot.
- Governments are queasy about digital currency, but analysts are bullish.
- The currency called bitcoin is based on Bitcoin protocol, aka blockchain technology.
- Blockchain technology bypasses governmental and central banking control.
- Blockchain technology is faster.
- Blockchain is secure.
- Blockchain is a more efficient payment system.
Digital currency has attributes similar to, but distinct from physical currency (like bills and coins), and allows for instantaneous transactions and borderless transfer-of-ownership.
According to a recent NYT article, digital currencies “are not legal tender … and are not controlled by a central bank and their value can fluctuate wildly.” This year alone, bitcoin has risen 5,171% (yes, you read that right) and is currently trading at around $700 – and that is down nearly 44% from its record high of around $1,242 in late November of 2016.
In that same month, Patrick Murck, general counsel for the non-profit Bitcoin Foundation, the U.S. Senate when asked what is digital currency, said that “it’s very much still an experimental currency and it should be considered a high-risk environment for consumers and investors at the moment.”
In fact, the creators and proponents of digital currencies regard them as more of an ideology or philosophy than a method of finance.
A quick Google search on the term digital currency yields over 27 million results. Just a few short years ago, the question what is digital currency was on no one’s lips. In the past year, interest in cryptocurrencies has skyrocketed. Take a look at the search history for blockchain, for instance. Virtually non-existent just 3 years ago, search volume for the term blockchain has taken a sharp turn northward, particularly in the last few months.
China, Thailand and Norway are leading the pack in the fight against digital currency, claiming that there are no applicable laws on the books to regulate it – or make it subject to capital gains tax it as an asset. Analysts the world over, however, claim that when it comes to digital currency, the horse has left the barn, so to speak. Indeed, ‘bitcoin’ was added to the online Oxford Dictionary earlier this year.
So if digital currencies aren’t really currencies, are risky investments, and more ideological than tangible, how can you profit from them?
Blockchain technology maintains an anonymous, permission-less, peer-to-peer distributed transaction ledger without any traditional intermediaries like banks or financial clearing houses. What this means for you, is that you can make financial transactions – like sending and receiving global payments – without having to go through a bank.
The reason blockchain technology is so disruptive is that it poses stiff competition for the traditional banking system we’ve been relying on for decades. The digital currency blockchain technology supports is electronically created and stored, not issued by any central authority, unregulated, and controlled by developers not banks. It was specifically created to take financial power and control away from governments and central bankers and put it back into the hands of the people.
But even Federal Reserve Chairman Ben Bernanke said in a letter to the U.S. Senate in 2013 that digital currency “may hold long-term promise, particularly if the innovations promote a faster, more secure, and more efficient payment system.”
The messy truth about traditional international bank-to-bank transfers is that they rely on an archaic, multi-chain process involving many parties, which can slow your payments down – or lose them. Especially for international payments, the process can get quite sticky. Here’s what it looks like from end to end.
–> Domestic Clearing House
Your bank –> –> currency exchange –> your supplier’s bank
–> International SWIFT –> CHIPS
Far from instantaneous, this process can take an average of 3 to 5 business days – when it works. And when it doesn’t work, look out – it can be an awfully complicated process to sort out.
Blockchain is secure because it’s utterly transparent and fully distributed. Copies of blockchain records are fully accessible by anyone and distributed across servers and domains throughout the world. Knowledge of your blockchain transaction is shared across so many distribution points, that it’s easy to prove the transaction occurred. Unlike having to go through a rigorous process with your bank to prove that a payment actually has been sent or received, your blockchain payment is known by everyone.
The bottom line with blockchain is, no banks, no hidden bank fees. No bank wire fees, inactivity fees, minimum balance charges, overdraft charges, or stop payment fees. Particularly for small businesses that may engage in frequent, but small value transactions, the money saved per transaction can be significant.