In a recent hearing held by the US House of Representatives Small Business Committee discussing the potential impact that widespread Bitcoin adoption could have on small businesses, it seems to have been taken for granted that the digital currency doesn’t have any actual value on its own.
“Bitcoins are a form of virtual currency first introduced in 2008 that allows users to exchange value digitally through the Internet,” the Committee wrote in its summary yesterday. “Despite not being backed by a government or holding any intrinsic value of their own, Bitcoins are growing as an alternative payment system.”
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Committee Chairman Representative Sam Graves (R., MO) concurred, saying that he was “pleased with our thorough discussion of this alternative payment method.”
Framing assumes Bitcoins won’t be held
Graves isn’t alone in this assessment – even Warren Buffett said that he views Bitcoin as a promising payment method (while also calling it a ‘mirage’ as an investment vehicle), but advocates who see Bitcoin as an alternative currency and a store of value would likely object to comparing the digital currency to credit card or PayPal transactions, implying that businesses that accept Bitcoins are turning them back into hard currency when the transaction finishes.
While that may not be true for early adopters, as Bitcoin gains wider acceptance, it seems reasonable to expect less tech-savvy companies to look for services that automate the process of accepting Bitcoins and turning it into local currency.
Bitcoins avoid forex fees, but not exchange-rate risk
Coinbase director of business development and sales Adam White testified at the hearing, telling the Committee that making the jump to Bitcoins allows merchants to expand into new markets because “a Bitcoin payment made by customer in New York looks identical to a merchant as a Bitcoin payment made by a customer in London, Buenos Aires, or Tokyo.”
He also claimed that “there are no international currency conversion fees associated with Bitcoin payments so merchants can sell low margin items just as profitably abroad as they do domestically.”
While it’s true that Bitcoin avoids currency conversion fees when making a payment, that doesn’t mean transactions are executed without cost. The Bitcoins still have to be bought and sold on an exchange that uses broker-dealers like any other (though without an outside spread), and because volatility is sky-high, both sides of the transaction have a good deal of exchange-rate risk.