Emerging from obscurity just a couple years ago, cryptocurrency has quickly gained popularity, even mainstream acceptance. A handful of large companies such as Overstock, PayPal, Microsoft, Shopify, Expedia, and Subway have started accepting cryptocurrency — namely Bitcoin — while merchant account providers such as Stripe have also started to accept Bitcoin and Ethereum as payment.
The market is growing quickly and that growth is expected to continue. Market capitalization of all cryptocurrencies worldwide passed a new high of $700 billion at the beginning of 2018, according to data provider CoinMarketCap. Bitcoin futures started trading on two major exchanges — the Cboe and CME — in December 2017.
All this activity makes the future of cryptocurrency seem quite promising. But companies mulling becoming an early adopter in accepting cryptocurrencies need to consider a few factors before deciding whether or not it's a good time to jump into the fray.
Most digital transactions come with processing fees of anywhere from two percent for credit cards to about three percent for PayPal. Cryptocurrency proponents say that one of the biggest advantages of cryptocurrencies is that there are no such fees because, as a peer-to-peer currency, there are no intermediaries. This is not quite the case.
Like everything else with the cryptocurrency market, transaction costs are changing rapidly. First, some background: Each cryptocurrency transaction takes up a certain amount of data — and that data processing power needs to be paid for in one way or another. In the earliest days of cryptocurrency, cost wasn't much of an issue because as a small, new market, the network data usage was negligible. But as these currencies become more popular, the amount of processing power required for cryptocurrency transactions is also increasing and along with it, the fees.
Transaction rates vary for different cryptocurrencies, so the rapidly changing rates are an important factor to consider. In the last few months, the transaction costs for bitcoin soared to new levels, with some users claiming they had to pay a $15 fee to send $100 worth of bitcoin from a digital wallet to a hardware wallet. Coinbase and Bitfinex, the two largest cryptocurrency exchanges, have said they are adopting a software update that will make bitcoin faster and cheaper.
In addition to the cost of the transaction, the cost of the cryptocurrency also can vary tremendously. Cryptocurrencies are notoriously volatile, potentially introducing unpredictability to your business and cash flow.
Bitcoin, perhaps the best-known cryptocurrency, has been through some wild value swings in recent months, ranging from a high price of nearly $20,000 in mid-December 2017 to a low of $6,141 in early February 2018, according to CoinMarketCap. Ethereum, the other most established cryptocurrency, fell from a high of $982 in midFebruary 2018 to below $400 at the end of March.
Regulators have been weighing in on cryptocurrencies, contributing to volatile prices. In early February, the price of bitcoin fell after U.S. regulators testified before the Senate Banking Committee. Regulators in China, South Korea, and India have started cracking down on cryptocurrency markets amid concerns about fraud and other issues. Because of the volatility, it's preferable to convert cryptocurrency immediately — unless it's your intention to speculate in the cryptocurrencies market.
Regulations and Taxes
Since the market is so new, regulators are still unsure how to treat cryptocurrencies. More recently, the U.S. Commodities Futures Trading Commission has warned investors about cryptocurrency "pump-and-dump" scams, after receiving some complaints from investors. Around the same time, three different European Union regulators said they were concerned about the increasing number of people jumping into the cryptocurrencies market without understanding the risks.
But though there is some regulatory uncertainty, taxes are relatively straightforward. Merchants who immediately convert cryptocurrency into cash should expect to pay taxes. Revenue from cryptocurrency is treated like a cash transaction. The same is true with investors who make a profit on crypto holdings. The Internal Revenue Service is eyeing cryptocurrency holdings. In 2016, the IRS summoned records from Coinbase, seeking the identities of U.S. taxpayers who used cryptocurrency.
Types of Cryptocurrency
Unlike most currencies, cryptocurrencies aren't created by governments. They can be created by pretty much anyone, and there are now hundreds. Bitcoin and Ethereum are the two best known, but there are many others, including Ripple, Litecoin, Monero, Dash, Bitcoin Cash, and more.
Cryptocurrencies vary greatly. While some are gaining more widespread acceptance, others are facing backlash. French regulators recently put 15 cryptocurrency and crypto-asset investment sites on a blacklist, saying they ran afoul of new laws.
Meanwhile, more cryptocurrencies are coming to market, thanks to a boom in initial coin offerings, or ICOs. An ICO is a way for companies to raise money for projects through the unregulated sale of crypto tokens. After some pushback from government authorities, the number of ICOs has dropped off. Facebook banned cryptocurrency ads starting in January 2018, while Google recently announced it would start banning cryptocurrency and ICO ads starting in June.
So, is accepting cryptocurrency right for your business? Before you can evaluate whether or not conducting transactions with cryptocurrencies makes sense, it's important to be sure you understand the basics — and not just get caught up in the hype.