Business Crypto Investment: Worth The Risk?

Investing in cryptocurrency is a topic that has gained traction in recent years, with more and more businesses exploring its potential benefits. Cryptocurrency, often referred to as crypto, is a digital currency that can be used for various purposes, including buying goods and services or as a speculative investment. While it offers several advantages, such as reduced transaction expenses and a decentralized form of payment, there are also disadvantages and risks associated with it. Understanding these aspects is crucial for businesses considering investing in this relatively new asset class.

The use of cryptocurrency in business has been a topic of interest, with an increasing number of companies worldwide adopting bitcoin and other digital assets for investment, operational, and transactional purposes. This trend is not limited to small businesses, as even mainstream companies like Tesla have made significant investments in Bitcoin. However, it's important to note that the crypto market is highly volatile, and businesses need to carefully evaluate the potential risks before making any investment decisions.

One of the primary advantages of cryptocurrency is its decentralized nature, eliminating the need for third-party intermediaries in financial transactions. This not only reduces transaction costs but also provides a secure and transparent way of transferring funds. Additionally, the technology behind cryptocurrency, known as blockchain, is inherently secure and difficult to tamper with.

On the other hand, the crypto market's volatility can be a significant disadvantage, as the value of cryptocurrencies can fluctuate due to various factors, including hacks and breaches. Another concern is the lack of widespread acceptance, as crypto is yet to become commonplace in the business world. Furthermore, the regulatory landscape surrounding cryptocurrency is still evolving, and businesses need to stay updated with the changing laws and guidelines.

Overall, while investing in cryptocurrency can offer businesses certain advantages, it also comes with a set of challenges and risks. It is essential for companies to thoroughly evaluate their financial goals, conduct due diligence, and seek appropriate financial advice before making any investment decisions in this domain.

Should your business invest in crypto?

Investing in crypto can be a challenging decision for businesses. While it may be a viable option, there are several factors to consider before making any decisions. Here are some key points to help guide your decision:

Advantages of Investing in Cryptocurrency for Businesses:

• Reduced Transaction Expenses: Crypto eliminates the need for third parties in traditional transactions, reducing the cost of doing business. It allows direct payments between businesses and clients, with minimal transaction fees.
• Decentralized Form of Payment: Cryptocurrency is decentralized, meaning there is no central authority tracking or storing your transaction history. This can be an advantage in maintaining financial privacy and security.
• Secure Technology: Cryptocurrency transactions are based on blockchain technology, which is inherently secure and difficult to tamper with. Blockchain provides a distributed ledger that authenticates all transactions.
• Diversification: Investing in crypto can help businesses diversify their investment portfolio. It also has the potential to attract new customers from various demographic groups who are interested in crypto.

Disadvantages of Investing in Cryptocurrency for Businesses:

• Market Volatility: The crypto market is highly volatile, and the value of cryptocurrencies can fluctuate significantly due to various factors, including security breaches and hacks. This volatility can impact the stability of your business finances.
• Limited Acceptance: Crypto is not yet widely accepted in the business world. Before investing, consider whether your clients or customers would benefit from crypto payment options.
• Regulatory and Security Concerns: The technology behind crypto is relatively new, and the lack of centralized regulation makes it a target for cybercriminals. Businesses investing in crypto may face additional security threats and scams.
• Complex Setup: Setting up crypto transactions requires extra time and effort. Businesses may need to set up a company crypto wallet or engage third-party service providers, adding complexity to their financial operations.
• Accounting and Tax Challenges: The accounting treatment for cryptocurrencies can be complex. In the US, for example, companies may need to account for writedowns of losses but are not permitted to "writeups" of gains, which can impact how investors perceive the financial statements. Additionally, the tax rules for crypto can be complicated and vary across different countries.

In conclusion, while investing in crypto may offer potential benefits to businesses, it is essential to carefully consider the advantages and disadvantages. Educating yourself about the world of cryptocurrency and seeking advice from financial advisors is crucial before making any investment decisions. The decision to invest in crypto should align with your business plan and financial goals while also being aware of the risks and challenges associated with this volatile asset class.

Crypto's value proposition

Cryptos Value Proposition

Value Proposition #1: Substantial corrections offer better entry points for those who believe in cryptos

The market sent an unambiguous signal in early February 2022 that another in a long series of corrections was coming after a host of digital tokens moved to new record highs. This presented an opportunity for investors who believed in cryptocurrencies' future as a mainstream asset to buy at lower prices.

Value Proposition #2: Buying dips has been the optimal approach

Volatility in cryptocurrencies has resulted in explosive rallies and implosive corrections. Buying on price weakness has been the optimal approach to the asset class.

Value Proposition #3: Fiat currencies are not what they used to be

The tidal wave of central bank liquidity and government stimulus during the global pandemic lit an inflationary fuse that erodes all fiat currency values. As the faith and credit in governments decline, cryptocurrencies offer an alternative. The ascent of cryptocurrencies over the past years is a barometer of falling confidence and credit deterioration.

Additional Value Propositions

• Crypto may provide access to new demographic groups. Users often represent a more cutting-edge and tech-savvy clientele with disposable income for luxury goods and services.
• Introducing crypto now may help spur internal awareness in your company about this technology and position the company for the future, which could include central bank digital currencies (CBDCs).
• Crypto furnishes certain options that are simply not available with fiat currency, such as programmable money, which can enable real-time and accurate revenue-sharing while enhancing transparency to facilitate back-office reconciliation.
• Crypto provides a new avenue for enhancing a host of more traditional Treasury activities, such as enabling simple, real-time, and secure money transfers, helping to strengthen control over the capital of the enterprise, and managing the risks and opportunities of engaging in digital investments.
• Crypto may serve as an effective alternative or balancing asset to cash, which may depreciate over time due to inflation. Some cryptocurrencies have performed exceedingly well over the past seven years.

While there are unknown dangers to investing in cryptocurrencies, there are also strong incentives. Businesses should carefully consider the potential benefits and drawbacks before deciding to adopt crypto and ensure they have a clear understanding of why they are doing so.

Tax implications of holding Bitcoin as a company

Holding Bitcoin as a company has several tax implications. Firstly, it's important to understand that the Internal Revenue Service (IRS) classifies Bitcoin as property, not currency. This means that any gains or losses from the sale or exchange of Bitcoin are treated as capital gains or losses for tax purposes.

When a company accepts Bitcoin as payment for goods or services, it must record the transaction as income using the fair market value of the Bitcoin on the date of receipt. The fair market value is determined by the market price of Bitcoin on the day it is bought or sold, which can change by the minute. This is important because if the value of the Bitcoin increases after it is received, the company may have to pay income taxes and capital gains taxes when it eventually converts the Bitcoin into dollars or uses it to pay business expenses. On the other hand, if the value of the Bitcoin decreases, declaring the loss can be complicated.

Another tax implication of holding Bitcoin as a company arises when the company pays employees using Bitcoin. In this case, the company must report the employee's earnings to the IRS on W-2 forms, using the US dollar value of each Bitcoin payment on the date it was made. The employee must then report their total W-2 wages in US dollars, even if they were paid in Bitcoin.

Additionally, if a company mines Bitcoin, it must report the gross value of these earnings as income on its taxes, based on the US dollar value of the Bitcoin on the day it was received.

When it comes to tax season, companies that accept Bitcoin are expected to keep accurate and up-to-date records showing the fair market value of Bitcoin when it is received, sold, exchanged, or used for payment. This includes information such as the date of the transaction, the number of units received or sold, the US dollar value of the crypto payments, and any fees associated with the transaction.

Finally, when reporting crypto revenue and losses to the IRS, companies should use Schedule C of IRS Form 1040. Any gains or losses from holding cryptocurrency should be reported on IRS Form 8949, and then summarized on Schedule D for Form 1040.

Pros and cons of investing in crypto

Cryptocurrency is becoming an increasingly popular way for businesses to accept payments. It is also a viable investment option. However, there are several pros and cons to investing in crypto that businesses should be aware of.

Pros

• Secure and decentralized technology: Crypto is supported by blockchain technology, which is independent of traditional banking systems. Blockchain is a decentralized data-storage ledger that tracks every transaction. Once an entry is made, it can never be erased, and because the blockchain is stored across multiple computers, no hacker can access the entire chain at once.
• 24/7 trading: The crypto markets are always open for trading, meaning investors can generate returns outside of regular working hours.
• Potential for high returns: The high risk associated with crypto can also mean the potential for high rewards. The price of Ethereum, for example, roughly doubled from July 2021 to December 2021.
• No intermediaries: Cryptocurrencies allow users to participate in the financial markets and make transactions without the need for third-party intermediaries.
• Anti-inflation: Cryptocurrencies are introduced with a predetermined quantity, and the number of each currency is specified in the source code. For example, there are only 21 million Bitcoins issued globally. As demand grows, its value rises, keeping pace with the market and preventing inflation.
• Decentralized: Many cryptocurrencies are controlled by their developers, those who own a large quantity of the currency, or by an organization that develops it before it is released to the market. Decentralization keeps the currency monopoly-free and in check, so no single entity can decide the flow and value of the coin, keeping it stable and safe.
• Self-managed and regulated: Developers and miners hold bitcoin transactions on their hardware and receive a transaction fee as a reward. Miners are incentivized to maintain accurate and up-to-date transaction records, preserving the cryptocurrency's integrity and keeping data decentralized.
• Accessible and inclusive: With just a smartphone and internet access, anyone can participate in the global financial system, opening up opportunities for economic empowerment and inclusion.

Cons

• Extremely volatile: Cryptocurrencies can be extremely volatile, with prices spiking to highs and crashing to lows. This makes it difficult to make stable returns and can wreak havoc on the value of coins.
• Unproven long-term investment: Cryptocurrencies have only been around for just over a decade, so it is uncertain whether they will remain viable in the long term.
• Scalability issues: Cryptocurrencies can run into major issues when trying to roll them out on a large scale, which can cause frustration and potential financial losses for transaction participants.
• Security risks: New investors are more vulnerable to security risks such as hacking, phishing, and other malicious attempts to gain control of their crypto.
• Lack of regulation: The regulatory landscape around cryptocurrencies is still evolving, creating uncertainty for investors and businesses operating in the space.
• Learning curve: Understanding cryptocurrency takes time and effort, and investing in something you don't fully understand is risky.
• Illegal activities: The high level of security and anonymity of bitcoin transactions makes it difficult for authorities to track down users or their data, which can facilitate illegal activities.
• No recourse: If something goes wrong with your crypto investment, such as a technical issue with your wallet, you have no recourse for claiming losses as no company controls this currency.
• Difficult to predict: The crypto market is highly volatile, making it challenging to predict when values will rise or fall.

While there are benefits to investing in crypto, there are also significant risks that businesses should carefully consider before making any investment decisions.

How to buy Bitcoin as a company

Investing in Bitcoin can be a daunting task for companies, especially for those that are new to the world of cryptocurrency. Here is a detailed, step-by-step guide on how to buy Bitcoin as a company:

Sign up for a corporate crypto exchange account:

The first step to buying Bitcoin as a company is to sign up for a cryptocurrency exchange that offers dedicated corporate accounts. Examples of such exchanges include Gemini, Kraken, Coinbase, and River. It is important to use a corporate account instead of a personal account to avoid any tax-related complications. Corporate accounts also typically offer higher funding limits and better customer support.

Place the order:

Once you have set up your corporate account, you need to transfer funds (in your desired currency) from your corporate bank account to the exchange. It is important to note that some business bank accounts may block transfers to and from crypto exchanges, so it is advisable to check your bank's stance on crypto exchanges beforehand. After transferring the funds to the exchange, you can place your order. There are generally two types of orders: a 'market order' where you buy at the current Bitcoin price, and a 'limit order' where you buy at a specific price.

Keep your Bitcoin safe:

Once you have acquired Bitcoin on an exchange, you have two options for storing them: third-party custody or self-custody. With third-party custody, you leave your Bitcoin in the custody of the exchange where you purchased it. Top-tier exchanges have invested in the security of their storage systems, and many also have insurance policies in case of hacks. However, it is crucial to analyze the security measures of the crypto exchange before making a decision. Self-custody, on the other hand, involves withdrawing your Bitcoin from the exchange and storing it in your own Bitcoin wallet. This gives you more control over your private keys, but it also comes with the responsibility of safe storage and security.

Understand the tax implications:

Before investing in Bitcoin, it is essential to understand the tax implications, which can vary depending on your jurisdiction. For example, in the United States, purchasing Bitcoin is not a taxable event, but selling Bitcoin for fiat currency is. In the UK, if a company holds cryptocurrency as an investment, the disposal of the cryptocurrency will result in a chargeable gain/loss, and the company will pay corporation tax on the profits.

Choose a safe storage method:

When storing your Bitcoin, you can choose between hot wallets and cold wallets. Hot wallets, or online wallets, are apps on devices such as computers or phones that generate private keys to your coins on internet-connected devices. While hot wallets are convenient for small amounts of cryptocurrency or active trading, they are more susceptible to hacking. Cold wallets, on the other hand, are offline wallets that store your private keys on a device that is not connected to the internet, such as a hardware wallet or paper wallet. Cold wallets are more secure but may require technical knowledge to set up.

Frequently asked questions