With all the hype in 2018 surrounding cryptocurrencies, the appeal of making a fortune by joining the cryptocurrency market is enticing. It seems a new cryptocurrency pops up every day (currently there are more than 1300 available), there are no signs of it slowing down. Unfortunately, there are as many risks as there are choices when it comes to investing in this rapidly evolving financial landscape. We’ve identified the top three risks for small businesses to consider, and shared them with you here.
As a currently unregulated market, cryptocurrency trades are facilitated through one of just twelve independent cryptocurrency exchanges. These companies create digital wallets, and allow you to create an account and transfer existing fiat or legal tender such as United States Dollars (USD) for a cryptocurrency such as Bitcoin (BTC).
- The top risk to cryptocurrency is both non-regulation and regulation. As an unregulated market, everyone in the cryptomarket is relying on the perceived trustworthiness of the blockchain technology that drives the cryptocurrency market and the security of the exchanges. There are no investor protections. Fiat cash is being converted into virtual currency. In order to return it to cash, exchanges must work with regulated financial institutions, and due to the uncertain source of digital currencies, traditional banks may refuse to accept USD from these exchanges. International regulations are also beginning to solidify to prevent fraud, tax evasion and scams, placing digital currency under increased scrutiny. Regulation will help legitimize cryptocurrencies but will also bring the same oversight in areas of taxability and income, which can already be complex for small businesses.
- As a completely digital commodity, cryptocurrency is hackable. Both crypto exchanges and wallets are vulnerable to hacking. As blockchain wallets hold both the public and private keys to decode your “coins” or “tokens” they are targets for theft. Once the private keys to your coins are gone, you no longer have access to those coins. Should you lose the hardcopy of your keys or the software copy, there is no legal recourse to get back your virtual currency. Unlike traditional banking or trading institutions that have fiduciary responsibility and heavy oversight, your cryptocurrency accounts are unregulated.
- With market volatility and 1,300 cryptocurrencies to choose from, some “currencies” may not last. Unlike traditional banking institutions, virtual currency valuation is not standardized, nor is backed by any government. It’s completely subject to the volatile cryptocurrency market. Huge swings in the value of altcoins and tokens makes it difficult to actually use it as a method of exchange for goods. Retailers and small business won’t accept coins for payments if they don’t have a relative value of their worth that is stable enough to use as currency. Tokens sold during Initial Coin Offerings (ICO) are used to crowd-raise real, fiat funds and may not retain any monetary value if their specified project doesn’t perform as projected, and may not necessarily be converted into cash. If a virtual currency crashes, you’re out hard, cold cash.
As cryptocurrency continues to evolve, small businesses should be watchful. 2018 will be full of more news about the developing cryptocurrency market. Regulation is on the horizon with the US Internal Revenue Service and Securities and Exchange Commission coming up with institutional rules to address this new asset class. Whether cryptocurrencies will overtake or replace traditional currency remains to be seen, but without a doubt, blockchain technology will make a significant impact in many areas of business and our future economy.