As the price of cryptocurrencies skyrocketed in late 2017 and early 2018, there was rampant speculation about whether blockchain and cryptocurrencies are the future. They have potential to replace gold as a store of wealth or even fiat currencies for daily transactions. Bitcoin may be pilfering some gold demand, but gold and fiat currencies will not be ousted anytime soon.
Even if cryptocurrencies will not displace gold and fiat currencies, there is great potential in crypto and blockchain for business applications.
So what can crypto really do for business, and for small business in particular?
Here are four ideas.
1. Transactions
The original aim of Bitcoin (and many other cryptos) was to cut out the middleman. Doing so is possible, but it carries a slew of security and implementation risks the general public may not be ready to accept just yet. However, for import/export businesses that regularly engage in cross-border transactions crypto offers clearer benefits by making transfers less costly and faster to execute. For these firms, it might be worth managing the risks.
Microtransactions are infeasible on some crypto networks, where average transaction fees can exceed the cost of the transaction (for example, buying a $5 cup of coffee with Bitcoin on 22 December 2017 would have resulted in a transaction fee of around $55). Some cryptos, like Nano and Ripple, were designed with this particular weakness in mind, so high-volume, low-margin businesses may find these cryptos useful.
Setting up your business to accept cryptos as payment is not difficult. In fact, there are plenty of firms willing to help for a fee, or for free if they are actively promoting a specific platform.
2. Records
Blockchain technology is perfectly designed for recording transactions as well as other types of data. Since the information is stored on a decentralized network it is very difficult to wipe out (short of destroying every computer server connected to the network). As a result, storing important records using blockchain technology should significantly reduce the risk of loss due to accidental damage or malicious cyber-attack.
3. Smart Contracts
Automation is a major force in today’s economy, so its ability to automatically execute contract terms is a significant use case for blockchain. One of Bitcoin’s strongest competitors is Ethereum, which is designed to store and automatically execute code, making it suitable for creating blockchain based smart contracts. Businesses, especially those that rely on historical performance, might benefit from using smart contracts to record and execute agreements. For example, an SEO company could guarantee a customer a ranking on the first page of a search engine under certain keywords. If this goal is achieved within a specific timeframe, the smart contract is completed and the money is transferred. Then in the future, potential customers could view the performance track record and choose the best company for their needs.
One of the biggest problems for smart contracts is scalability. Network congestion can occur, slowing down transactions. For businesses that need to process many transactions in a short space of time, this could become a major nuisance. This drawback would be even more problematic for contracts that are time-sensitive and need to be executed within a certain window of time to ensure synchronicity. Business activities that require timely execution may include foreign currency transactions and buying or selling stock. Since exchange rates and stock prices move constantly, and moves are determined by an uncontrolled market, a smart contract that takes a few extra minutes to execute could lead to a big price difference.
4. Free Marketing
Cryptocurrencies may not become a substantial source of revenue, but any small business that accepts them will at least generate some marketing buzz. Free well-meaning word-of-mouth marketing is an excellent way to spread awareness of a business. Friends talking about their latest purchases might be intrigued to find out that the local coffee shop allows people to pay using cryptos.
Words of Caution
Security, scalability, sustainability, and volatility.
These four problems are the biggest obstacles to widespread adoption and limit the ultimate benefit that a small business will gain from accepting crypto. Blockchain algorithms themselves are relatively secure, but our means of trading and storing them may not be. So, whenever a business accepts crypto, it would be wise to quickly and efficiently turn those receipts into fiat currency.
For businesses that engage in a high volume of transactions, scalability is a major issue; and for businesses that intend to use the technology long-term, especially those companies that espouse environmental causes, sustainability is problematic. Some estimates peg the energy consumption of a single Bitcoin transaction at the same level as an average household’s entire weekly energy consumption.
Finally, no business can survive rapid price fluctuations. Until such time as cryptocurrencies actually do replace fiat currencies, there will continue to be a pressing need to convert to dollars, euros, yuan, or whatever your local currency happens to be. Unless a business is interested in speculation, the exchange rate risk is something that will require active management.
Conclusion
Overall, there are many real-world uses for cryptos including allowing efficient value transfers, recording past transactions, automatically executing contract terms, and creating marketing buzz. However, there are also risks, and small businesses need to be wary of the hype.
Nick Rojas combines 20 years of experience working with and consulting for small to medium business and a passion for journalism to help readers grow. He writes about technology, marketing, and social media for the aspiring entrepreneur. When Nick is not sharing his expertise, he can be found spending time at the beach with his dog Presto. @NickARojas
Images: Shutterstock
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