Bitcoin and blockchain technology are seen as a major financial innovation of recent times. So should your company take the plunge and start invoicing in Bitcoin? The answer is, at best, a qualified ‘yes’: it might be worth considering if, for example, your business involves shipping goods to China.
For any exporter it is normally the best to invoice either in their own local currency, or the currency in which the majority of their costs are incurred. However, for marketing reasons many exporters invoice in foreign currencies. While this might often increase the currency exposure, it could also prove to be the significant factor that promotes and enables the sale. Some importers will look for a price discount or look around for an alternative supplier when not billed in their preferred currency.
Table 1: Blockchain US dollar transaction volumes 2009-16:
In 2013, Bitcoin overtook the then world’s largest remittance network – Western Union’s – value of daily transactions, recording an average daily transaction volume of US$257m. The following year, volumes rose sharply in the early months to push that average to almost US$ 600m but by April 2016 average daily volume was back at around US$115m. Not only is transaction volume volatile; so is the price. At the start of May 2016, the Bitcoin price in US dollars (USD) amounts to US$442 per one Bitcoin.
It’s not just the price and volume of Bitcoin that have proved volatile; in a further aspect the digital currency has experienced an interesting transformation. Whereas in 2012 nearly all transactions were executed against USD, now the most important currency is the Chinese yuan (CNY) and most users of Bitcoin are in China. Analysts and exchange operators report that China’s dominance in Bitcoin trading is largely due to macro factors such as the country’s investment environment. It should also be mentioned that some of the trades executed in China would not be permitted under US law.
Table 2: Blockchain market price in US dollars 2009-16:
The growth and importance of Bitcoin/CNY trade is enormous and overshadows other trades. Until mid-2012 USD trade amounted to at least 80% but has been reduced to less than 3% of all transactions against all currencies. Bitcoin/CNY trade amounted only to less than 1% in 2011; today almost all transactions are done against CNY while Bitcoin/CNY trade represents more than 95% of total transactions. No other currency has experienced such growth and increase in importance than CNY. More than 50% of Bitcoin network computational power is currently located in China.
While USD remains the most important currency in the world its current status cannot be taken for granted. The misuse of the greenback for political purposes could undermine the significance of the currency as a reserve medium. The widespread use by the US of sanctions against any institution that clears in dollars and offends the country’s foreign policy might dethrone USD quicker than anything else and the rise of Bitcoin/CNY shows that this scenario is not too far-fetched.
Table 3 below, which shows Bitcoin trading volume, helps also to answer the question of which exporters should consider invoicing in bitcoins. It would be probably not be helpful to offer US importers Bitcoin billing but doing so for sales to China as an option might generate additional sales and should be a part of the marketing mix.
Billing in Bitcoin raises additional questions which are specific to the currency – and partly to other digital currencies – but not to fiat currencies.
All Bitcoins are stored in a large database or public ledger called the blockchain. Bitcoin applies software that interacts with the blockchain allowing it to be determined at any given time the amount of the currency belonging to an individual.
Bitcoin uses the combination of private and corresponding public key. Private key has to be kept secret but public key can be given to anybody and is also the address to which Bitcoins will be sent. So billing in Bitcoins involves providing on the invoice the public key to which bitcoins can be sent. There is a greater combination of private and public keys than stars in the universe (there being 10^48 possible Bitcoin addresses as opposed to an estimated 10^29 stars in the universe). Therefore it is unlike email addresses, where users must checked whether the address is still available before using it address. With bitcoin anyone can simply issue a new address, as the likelihood that the address is already in use is practically nil.
Table 3: Trading volume in CNY and USD 2011-16:
Public keys and bitcoin addresses cannot be created by hand; the most appropriate way to generate public keys being Bitcoin wallet. There are also various kinds of wallet.
For creating public keys for billing purposes and managing received, Bitcoin software wallets are the most adequate. A software wallet is a Bitcoin application that sits on the computer’s hard drive and gives users complete control and great security.
Bitcoin wallets at different Bitcoin exchanges are required when users exchange their Bitcoins for fiat currency, but they should not store in these wallets any more than they can afford to lose – and then do so only for a very short time. It should also be borne in mind that Bitcoin exchanges can very quickly disappear – as demonstrated in 2014 when the once-dominant exchange Mt. Gox filed for bankruptcy and US$470m of Bitcoins vanished. Mt. Gox’s bankruptcy was spectacular but not an isolated case; other exchanges to disappear, taking customers’ Bitcoins, include Bitconica and BitFoor.
When the user installs a Bitcoin wallet he/she is able to create multiple addresses, with an individual address for each shipment or for each client. Bear in mind that the whole blockchain, with all your Bitcoins is visible to all. So if you use only one address at some point, anyone can connect this address with you and see how many Bitcoins you have. It cannot take away your Bitcoins unless it also has your private key; however, using many public keys makes it nearly impossible to connect them to the same owner.
Users should also always back up their wallet into different external device and encrypt it. The wallet also allows for the creation of Quick Response (QR) codes, which represent your public key and makes it possible to add them to your invoices. Each Bitcoin address is between 26 and 35 alphanumeric characters in length and starts with 3 or 1; for example: 3J98t1WpEZ73CNmQviecrnyiWrnqRhWNLy.
Users can create as many new addresses as they like; the wallet will manage them for the user. However, should you lose your private key corresponding to your Bitcoin address (public key) the bitcoin which were sent to this address are lost forever. Instead of using the software wallet installed on your PC, tablet or Smartphone, you could also use online wallet – online wallets are third party services.
The biggest security risk is where the user has the password to his/her wallet but all their private keys are stored in the database of the wallet provider. Should the online wallet service shut down or be hacked, the user would not have control over the Bitcoins stored in their wallet. There are several ways to send a Bitcoin to another Bitcoin user. First of all you can ask the recipient’s Bitcoin address and send the money using your wallet. Using your smartphone then offers an easier alternative – you just scan the recipient QR code, which represents the Bitcoin address and send funds to this address.
Bitcoin confirmations are sent whenever the transaction has been validated by miners. A Bitcoin transaction that has no confirmation on it will always be a high risk for double-spending. The double-spending risk occurs more for those who sell goods to the public and are paid in Bitcoin, but the risk reduces when you sell on open account basis. Bear in mind that every transaction confirmation takes place whenever a new block is created, which takes around 10 minutes. As a general rule of thumb, you need six confirmations to be reasonably sure that double-spending did not occur.
When setting a software wallet for the company, it is advisable to apply the multi-signature feature. Receiving transaction to a multi-signature wallet works in the same way as in a regular wallet; however sending funds requires more signatures. Where three people are creating a multi-signature wallet, at least two signatures are needed for transferring Bitcoins. The multi-signature feature of some software wallets provides greater security for businesses and groups of people who share a mutual wallet; for example the Armory Wallet.
Acceptance and handling of Bitcoins installed in a wallet on a smartphone or computer can be further improved by using a bitcoin payment processing services such as BitPay or Coinbase. Bitpay is focused almost entirely on payment processing for merchants. Coinbase is more of a full service approach, which combines an online wallet; the ability to transfer money from a bank account; the ability to purchase bitcoin directly through their service; and payment processing similar to BitPay
Deciding whether to use payment processing services, or sell Bitcoins at the exchange, depends on each individual situation. Better rates are more likely when selling directly through a Bitcoin exchange, such as Vaultoro, Kraken, Plus500 and eToro.
When using an exchange for security reasons you should transfer to that account only as many Bitcoins as you intend to sell immediately. They are more secure in the software wallet on your computer or smartphone.
Bitcoin network is a secure technology that is unhackable by any individual computer or even tests the most skilled hacker. Trying to hack the Bitcoin network is akin to trying to hack the Internet; it’s possible to hack individual computers but not to hack the network, as there is no central point to attack.
The weakest link is the user; especially how he/she protects his/her private keys. Without private key Bitcoin is useless. While Bitcoin, or rather blockchain is unhackable, Bitcoin services such as exchanges, payment processing payments and wallets can be hacked and the bitcoins stored there lost once an attacker obtains the private key.
Also, in the event that an attacker obtains more than 51% of the computer power of the network and has the capacity to influence and manage blockchain, he cannot take away your Bitcoins without knowing the private keys. He can just spend his coins twice. The probability of such attack is extremely low, as the costs of achieving such an amount of computer power would be substantial but the potential gain limited to the double spending.
Finally, an additional argument for using Bitcoin as an invoicing currency is that Bitcoin customers are willing to spend more for their purchases than other customers. Should this apply to your company’s products or services you should invoice in Bitcoin as well – having first taken the precautions outlined above.