Blockchain. Bitcoin. Big Deal… or Just Big Hype for Small Business?
“Two bitcoins, four bitcoins, six bitcoins, a dollar… all for blockchain, stand up and holler!”
It’s unlikely varsity cheerleaders are going to do that routine along sidelines anytime soon. However, there are a lot of people rooting for the increasingly popular blockchain and bitcoin, and headlines about these technological phenomenon now fill the news.
If you don’t know what either of these does, you’re rapidly becoming a minority. Both are sweeping the business world. First because each offers a revolutionary new way to conduct commerce, and second because they have become the “next big thing,” much like the dot.com bubble of nearly 20 years ago. Are blockchain and bitcoin appropriate for small business? And will this bubble, like all other bubbles before it, burst?
Let’s start with a few simplistic explanations. Blockchain began as technology that allowed digital information to be shared, but not copied. As far as the business world goes, blockchain serves as a ledger or spreadsheet of sorts, to record value. Unlike a paper ledger or an Excel spreadsheet, Blockchain resides on the Internet. As such, it can be used to verify and record endless transactions – initially monetary transactions, but eventually any type of transaction involving something of value. A key selling point is that by utilizing Blockchain, users never have to go through a bank, credit card, etc.
Blockchain is digital, however it is not housed in any single server or database. Rather it utilizes peer-to-peer network sharing (remember Napster, an early example of peer-to-peer?). This means, essentially, that blockchain is everywhere. It is truly public and transparent, and its files are continuously updated and reconciled. As for security, proponents say that its decentralized nature protects it from hacking and interference (blockchain also employs encryption). It is not controlled by a single entity that can be corrupted and it has no fixed location that can be compromised or fail.
Bitcoin is an outgrowth of blockchain. More accurately, bitcoin is, itself a blockchain. Bitcoin is what is more accurately known as a cryptocurrency – a digital currency in which encryption techniques are used to regulate and verify the transfer of funds, operating independently of a central bank. According to one source, bitcoin has been in existence since 2008. However, only in recent years has it grabbed the attention of the business world, and in particular, investors.
Trading in bitcoin has seen a rollercoaster of activity, with dazzling highs and terrifying falls. It is definitely not an investment for the faint hearted. At the moment, many respected observers claim the bitcoin market not only has all the trappings of a classic speculation bubble, but that the bubble may have already burst.
This article is not about bitcoin investing. However, with the incredible volatility surrounding bitcoin trading, many concerned national governments are considering cracking down on both Bitcoin and other cryptocurrencies. This could put its future in doubt. One of the touted benefits of bitcoin is that it is not regulated or controlled by any entity. If that were to change, who knows what could happen?
This article is more concerned with whether utilizing blockchain and bitcoin are a good idea for a small business. On those subjects, the results are mixed. Bitcoin is a cryptocurrency that is an outgrowth of blockchain. In other words, bitcoin is just one feature of Blockchain. Blockchain itself has many types of uses beyond cryptocurrency.
Blockchain, for example, can be employed to bring products and services to market cheaply and quickly. It can also help reduce data storage and security costs, easing the economies of scale problems that often hinder small businesses. Best of all, in terms of our discussion, it can help enforce contracts, particularly so-called smart contracts or cryptocontracts. These are computer programs stored on blockchain technology that directly control the transfer of digital currencies or assets between parties under certain conditions. Smart contracts can be of help in paying employees, paying bills, filling orders or invoicing.
Smart contracts can offer small businesses several advantages over regular legal contracts drawn up by a lawyer. For one, they are quicker and cheaper to execute as they cut out intermediaries and third parties. As they are stored electronically, there is backup, meaning the other party can’t claim to have lost it. Finally, they are encrypted to provide safety. Here is an example of how to set up a smart contract.
Of course, bear in mind that few, if any, systems are perfect. Such is the case with a blockchain smart contract. Obviously, with any type of computerized, electronic technology, bugs can impair programming. Human error can also occur during coding. Lastly, at the moment, there are almost no government regulations regarding smart contracts.
So, are blockchain and bitcoins an effective solution for your small business? That’s ultimately a question only you can answer. As with any business decision, it requires proper due diligence and careful consideration. There is a lot of hype and cheerleading going on about blockchain and how it’s the next “big thing” in business. Sometimes it can be deafening. We’ve presented some advantages and disadvantages to blockchain, bitcoins and smart contracts to get you started on making an informed decision.
Sr. Vice President of Operations at Charter Capital, a leading invoice factoring company for small to mid-sized businesses. Headquartered in Houston, Texas, Charter Capital provides accounts receivable financing and asset-based lending for major industries including freight and transportation, consulting firms, service providers, staffing firms, distributors and manufacturers, an oil and gas service companies.