Will cryptocurrency become a major payment method?
Cryptocurrency has recently captured international attention after experiencing significant, remarkable growth but will it become a major payment method in the near future?
In 2017, the total amount of cryptocurrencies and digital assets on exchanges more than doubled (from 617 to 1,335) sending prices through the roof and causing an international outcry.
As we recover from the excitement of 2017, it’s time to take a serious look at the future of cryptocurrency. Many questions remain about whether this is a viable payment method for companies and if your business should join the cryptocurrency bandwagon.
While large corporate companies may be starting to accept Bitcoin (more on this later), as a small or medium enterprise, you want to consider potential gains as well as problems before you accept it for payments.
In order to help you decide if you should, we take a closer look at how likely it is for cryptocurrency to become a major payment method.
What customers uses cryptocurrency?
So far, cryptocurrency is still only used by “early adopters”. Currently, only 2.9 to 5.8 million people globally actively use cryptocurrency, according to a report from the Cambridge Centre for Alternative Finance.
Population-wise, millennials are far more likely to invest than previous generations, with 17.21% of millennials owning cryptocurrency compared to 2.24% of baby boomers. The same survey from US personal finance comparisons portal Finder also revealed that men are twice as likely to invest in cryptocurrency than women.
If your company is targeted at millennials or younger generations, it may be worth considering crypto payments. Likewise, accepting crypto payments can make you an attractive brand to these early adopters and most companies have seen revenue growth by targeting this audience.
Viable cryptocurrencies in 2018
Bitcoin, as one of the oldest and earliest cryptocurrencies, attracts the widest audience and is arguably the most sensible investment. It has the highest market cap and the highest trading cost of all cryptocurrencies.
As one of the main trading pairs available on exchanges, Bitcoin is also one of the most likely entry points to cryptocurrency. However, the time required to process Bitcoin transactions negatively impacts its suitability as a major payment method.
Ethereum is also a top contender. It was originally designed as a developmental framework with a range of possible applications that extended beyond simple digital currency.
For example, smart contracts – highly secure digital contracts – are currently one of Ethereum’s most common and popular uses in the business world.
Litecoin is another popular option as it’s more affordable than Bitcoin. Unlike Bitcoin, Litecoin mining is still relatively feasible. On the downside, its earlier predecessor LitePay failed, which has recently impacted Litecoin’s trading prices.
Where can you spend cryptocurrency?
The volatility of the cryptocurrency market also means companies that currently accept it as a valid form of payment can quickly change their minds. If you’re considering accepting it as a payment form, you need to be prepared for sharp price changes.
Many well-known large companies currently accept or have previously accepted Bitcoin, such as Subway, KFC Canada, Virgin, Expedia, Whole Foods, T-Mobile Poland and Re/Max London.
Other retailers such as Overstock.com, Expedia, eGifter and Microsoft also accept cryptocurrency payments.
To reduce the risk of price volatility, it is recommended that companies translate cryptocurrency into fiat currency (pound sterling, US dollars, etc) as quickly as possible with merchant service companies.
Most companies use a third party firm, such as BitPay or Cryptopay, to directly access the cryptocurrency market and instantly convert payments into centralised money. By not instantly converting cryptocurrency payments, you’re essentially gambling with your revenue.
What are the current obstacles?
While cryptocurrency has certainly become more popular and widely accepted (especially Bitcoin), there are still a few obstacles preventing cryptocurrency from becoming a major payment method.
One of the biggest concerns for businesses is the risk. Business Insider surveyed 500 e-commerce companies and found that only three currently accept cryptocurrency payments.
According to another study, 35.02% of people are hesitant to buy or accept cryptocurrency as they deem it a high risk, while 16.12% are waiting for the bubble to burst.
These concerns are understandable especially as cryptocurrency is extremely sensitive to news headlines. For example, after Google announced plans to ban cryptocurrency advertising, the overall value crashed by $60bn (£45bn).
In 2017, Bitcoin trading prices experienced drastic growth when they increased from under $1,000 to over $20,000 (£752 to £15,000).
Government regulations on legal and illegal cryptocurrency transactions vary by country. Some countries such as China and Brazil have banned or placed very tight restrictions on cryptocurrency, while others like the USA are yet to create cryptocurrency regulations, and a few such as Switzerland support cryptocurrency trading.
In general, cryptocurrencies operate in a legal grey area in most countries. But this could soon change as countries increasingly implement new regulations. As Bitcoin Magazine states: “If 2017 was the year of the ICO [International Coin Offering], it seems as if 2018 is destined to become the year of regulatory reckoning.”
As cryptocurrency exists completely in the digital sphere, it is particularly vulnerable to cyber-attacks. Despite the high-security provided by blockchain technology, hackers could potentially access digital exchanges and steal millions of pounds.
For example, Coincheck made BBC headlines in January 2018 when £380m in virtual assets were stolen by hackers. When a theft occurs, most digital currency exchanges are unable to reimburse the lost funds.
Typically, digital wallets are considered more secure as they can only be hacked via social engineering. With digital exchanges, hackers can gain access through the website’s back-end system. Cryptocurrency users can reduce risk by storing assets in digital wallets instead of digital exchanges.
Factors that promote cryptocurrency growth
Despite some significant obstacles, cryptocurrency is taking the world by storm. Its success or failure results from three key factors: vulnerability to fake news, greater stability for insecure nations and investor appetite.
Cryptocurrency, as a decentralised currency, isn’t heavily regulated. This lack of regulation makes cryptocurrency extremely sensitive to headlines. Positive headlines, such as a major corporation accepting it as a valid form or payment or promotion from well-known cryptocurrency experts can drastically increase prices.
For example, the use of a fake Twitter account for John McAfee (a long-established cryptocurrency expert) to promote a new digital currency, known as GVT, caused its prices to double and then crash within the short space of 20 minutes. This was a classic example of “pump and dump schemes”.
Similarly, fake news can significantly hurt exchange prices. For example, when Ethereum founder Vitalik Buterin was incorrectly reported dead, the cryptocurrency market value crashed by $4m (£3m).
Since cryptocurrency is so sensitive to headlines, fake news is the biggest contributor to its growth as well as decline. All users should check multiple sources and the trustworthiness of the source before making or selling any cryptocurrency investments.
Greater stability for economically unstable nations
Cryptocurrency is particularly attractive in financially unstable countries such as Sudan, Kenya, and South Africa. Centralised financial institutions depend on the stability of the government, so exchange rates are extremely sensitive to political unrest or corruption.
Cryptocurrency, as a decentralised currency, isn’t as severely impacted since cryptocurrency is only controlled by market dynamics. So, in some countries, cryptocurrency can actually offer more stability than centralised banks.
Following the economic crisis of 2008, many people lost faith in the traditional financial sector and decentralised financial systems such as Bitcoin became an attractive alternative.
It’s not surprising that Bitcoin’s development and popularity closely followed the rebound of the traditional economy. As the economy recovered, investors were less averse to risk and looked for other places to put their money.
The dramatic growth of cryptocurrency in 2017 demonstrated its potential for economic gain and subsequently encouraged investment. As the hype around cryptocurrency intensifies, new investments are made, further driving cryptocurrency growth.
What do critics and supporters say?
Whether cryptocurrency is a sensible investment is still up for debate. Critics point to issues with security and criminal activities, while supporters see its potential to become a global commodity. Here are the opinions of some well-respected experts:
“The main feature of cryptocurrencies is their anonymity. I don’t think this is a good thing. The government’s ability to find money laundering and tax evasion and terrorist funding is a good thing.”
- Bill Gates (Microsoft co-founder)
“I believe that we are heading into a new age in which blockchain technology is going to provide a significant level of a digital currency that is going to have a consumer application. And I believe that Starbucks is in a unique position to take advantage of that.”
- Howard Schultz (Starbucks chairman and founder)
So, what is the future of cryptocurrency as a payment method?
The future of cryptocurrency and Bitcoin remains unknown. If it is to be successful, the market volatility of cryptocurrency will need to be drastically reduced and security will need to be improved. Nonetheless, cryptocurrency does hold interesting potential.
Large companies such as Overstock.com, Expedia, eGifter, Newegg, and Microsoft have recognised this potential and currently accept cryptocurrency payments.
Other businesses, including Shopify and Magento, have partnered with alternative payment providers such as BitPay and CoinBase to allow merchants to accept Bitcoin payments.
On Magento, you can accept more than 50 forms of cryptocurrency including Ethereum, Litecoin, and Ripple. These services are free to implement but charge a 1% transaction fee.
Accepting cryptocurrency payments can be risky as the market is extremely volatile and cryptocurrency prices can easily skyrocket or nose dive. All cryptocurrency payments should be exchanged into fiat currency as soon as possible.
If you’re interested in implementing crypto payments without using plugins, start by implementing the following process:
- Obtain the desired cryptocurrency price via an API, such as CoinMarket, and do a conversion from GBP.
- Generate a wallet address for accepting payments
- Obtain the customer’s wallet address to validate the payment
- After the customer has made the payment, make sure to confirm it before providing your goods or services.
If you’d like to understand more about cryptocurrency, check out: What is cryptocurrency and how does it work?
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