Business and Bitcoin: can the two ever go together?

Posted on Nov 6th, 2013 | Tax

I’m sure you’re as surprised as I am to find yourself reading about Bitcoin on an accountancy blog. Famous for their use in the online underworld of drug traffickers and enterprising criminals, Bitcoin has now grown large enough to find its way to our doors, and we have several clients actively trading in this new “cryptocurrency”.

Bitcoin emerged as an anonymous peer-to-peer online currency in 2008 and has had a turbulent rise to prominence to say the least – primarily because it’s been inextricably tied up with criminal activity.

In 2013, the FBI cracked open a drugs cartel operating with Bitcoin currency, worth an estimated £2.2 million, dropping the market value of an individual Bitcoin by £20 in just 24 hours.

However, just two weeks later, Bitcoin was endorsed by giant Chinese social network Baidu and hit a five month high, with a single Bitcoin then valued at £125. So how has Bitcoin prospered during a worldwide financial crisis, and how are businesses starting to employ this currency?

What is Bitcoin?

Unlike other currencies, Bitcoin has no physical denominations, and is strictly an online commodity. As with other traded commodities, Bitcoins’ value are largely dictated by the activity (or lack thereof) on the open market.

Technically, an individual Bitcoin is a long string of characters derived from a central algorithm, generated through a process called mining. You can’t therefore buy Bitcoins without someone having mined them first!

If you’re confused, it’s easiest to imagine Bitcoin as analogous to gold; mining takes time and becomes increasingly difficult the more you do it. The algorithm has built-in diminishing returns so, just like a natural resource, obtaining Bitcoins becomes more difficult with time. There are roughly 21 million Bitcoins in existence, with over half of them already mined.

Testament to the increasing popularity of this currency, in February 2013, the world’s first Bitcoin hardware was introduced for $1,500 a pop – a computer dedicated to and optimised for mining the currency. In August of the same year, another company released a machine priced at $18,500 designed to improve mining speed by a factor of 50.

To illustrate the unstable nature of the currency’s value, consider that Bitcoin prices dropped 33% in a day after the FBI Silk Road scandal and rose 11% in a day during the US debt ceiling crisis.

Is Bitcoin here to stay, and what does it mean for businesses?

The fact that Bitcoin was last month endorsed by Baidu as a legitimate trading currency, and that the market price jumped to a five month high (even after weathering the Silk Road storm) suggests that Bitcoin will be around for a while yet, and is even likely to become a permanent (although niche) part of business transactions.

Coinfloor, a new UK-based Bitcoin exchange opened trading last week, limited to UK and European customers alone. The prohibition of US customers shows a trend in Bitcoin businesses – to avoid trading in the US because of ‘diverging regulatory approaches’ in the country.

Our very own Tim Morris, a firm advocate of Bitcoin from its inception, believes that:

“Bitcoins are now very much the reserve of professional traders, as it requires time and investment in large amounts of powerful technology to sustain a presence.

“Trading in Bitcoin has proven to be antithetical to global currency markets. The collapse of Cyprus, Greek bailouts, and most recently the US threat of debt ceiling doom, are all examples of when Bitcoin has boomed. Conversely, drops can be predicted whenever legislation or criminal activity relating to Bitcoin hits the press.”

Unfortunately, the built-in anonymity that accompanies Bitcoin transactions means it provides a very attractive platform for those trading in shadier areas of business, which somewhat discredits the currency and makes people wary of dealing with it.

Some economists also question whether the limited number of available Bitcoins ultimately prevents it becoming a valid economy, as it will inevitably push the currency into deflation.

None of these worries seem to be stopping Bitcoin’s move into the mainstream though; the first Bitcoin ATM just opened in Vancouver.

How Crunch and other businesses can deal with Bitcoins

A good way to approach Bitcoins in Crunch (or any other accounting software) is similar to how you would treat any other traded commodity or niche currency. You’ll have to convert your Bitcoins into a supported currency (usually done by “cashing out” at a Bitcoin exchange), and enter it into your accounts in that currency. Simple!

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