How Bitcoin Could Power a New Wave of Small Business Innovation

Bitcoin payments are dramatically underutilized – and transacting in bitcoin introduces more ways for a small business to capitalize.

AccessTimeIconJun 9, 2022 at 12:50 p.m. UTC
Updated May 11, 2023 at 6:46 p.m. UTC
AccessTimeIconJun 9, 2022 at 12:50 p.m. UTCUpdated May 11, 2023 at 6:46 p.m. UTC
AccessTimeIconJun 9, 2022 at 12:50 p.m. UTCUpdated May 11, 2023 at 6:46 p.m. UTC

A few months ago, I wrote about how bitcoin (BTC) is the best form of money we’ve had access to historically. Now I’m looking closer at where the rubber meets the road when it comes to bitcoin and cryptocurrency: the impact they can have on small businesses.

According to the U.S. Small Business Administration (SBA), small businesses of 500 employees or fewer make up 99.9% of all U.S. businesses and 99.7% of firms with paid employees. Most financial advisers work with small business owners and are often sought-after clients. The following explains how bitcoin can affect them, drive margin growth and save them more capital.

Bitcoin has many different use cases, and often beauty is in the eye of the beholder. Block (SQ) recently published a report called “Bitcoin: Knowledge and Perceptions.” The report found that higher-income individuals see bitcoin primarily through an investment lens and its “potential to make money,” whereas those in lower-income brackets see through a payments lens or an “easy way to send money to others” (think underbanked and unbanked populations). The item that had almost equal weighting between both and finished second for both segments was “to purchase goods and services.”

I believe that it’s through the payments lens that small businesses can start to see a better financial future.

Fighting fee creep

Earlier this year, while at a local restaurant, I began talking to the owner about bitcoin and payments. He mentioned that 35%-40% of his transactions were once in cash; now they’re 5%. He said that he pays almost $100,000 a year for processing charges – all while his food prices are increasing double digits. His options: Raise prices and risk losing patrons, buy lower-quality food and risk reputational risk, or find some way to regain margin.

As consumers have shifted toward more credit card use, fees to merchants have increased in kind. A typical fee is 3.25%, and so for a business with $1 million in revenue, that’s $32,500 that’s just burned away. That’s significant, especially when you consider that the average or standard small business in the U.S. has a 10% profit margin, according to the Corporate Finance Institute, and only 40% of small businesses are profitable.

One solution: Small businesses could begin accepting bitcoin and add a “fiat surcharge.” This would both encourage bitcoin adoption and protect margins.

Putting your bitcoin to work

In addition, holding bitcoin allows a small business owner to better save for future purchases. A business that accepts bitcoin would be dollar-cost averaging (DCA) daily. The compound annual growth rate (CAGR) of bitcoin will fluctuate, but even with poor timing, it’s historically been 48%.

But wait, there’s more. The cost to process payments in bitcoin is less than for credit cards, and so you not only have “better” money, but also a lower cost to accept payment. OpenNode allows for payments on both the bitcoin blockchain and the Lightning Network (which was created as a way to scale bitcoin payments), charging 1% of each transaction.

Also, Stripe and OpenNode recently announced a partnership that will allow businesses to convert credit card payments directly to bitcoin as well, beefing up the dollar-cost averaging side of things.

To really go all the way with this, business owners could create their own self-sovereign ability to collect bitcoin payments using free open-source software like BTCPay Server. You don’t even have to run your own bitcoin node (though you could if you wanted to) because that part of it can be outsourced to a company like Voltage. OpenNode even offers a plug-and-play option that would handle the ability to have liquidity on the Lightning Network.

The BTCPay Server and Voltage setup requires more work, but it’s also remarkably efficient and inexpensive. I see a massive business opportunity around utilizing the Lightning for small business owners. Accessing liquidity via Lightning will drastically improve over the coming months with offerings like Flow, Magma, and Zero-Fee-Routing.

The taxman goeth

What about taxes? Today, in the U.S., the customer would have a capital gain or loss on any payments they make in bitcoin. The fantastic news is that some tools offer the ability to toggle between dollars and bitcoin (mainnet or Lightning), allowing this potential snag to be a nonissue. The biggest and most popular option is Strike. Strike allows a customer to connect to a legacy bank and then pay with a Lightning Network bitcoin on-chain invoice without having any tax implications.

I believe the taxable event attached to bitcoin payments will be removed soon. The Responsible Financial Innovation Act from Sen. Cynthia Lummis (R-Wyo.) would provide tax exclusion for payments up to $600. If passed, this would exempt almost all small business transactions, given the average again is $84, according to Experian.

What small business wouldn’t want an extra $15,000 to $30,000 annually in profit, with savings scaling as they grow? And what if they saw their business account compound, gaining purchasing power instead of losing it? What decisions and innovations would that bring? How many jobs could they create? I believe bitcoin will be not only a way small businesses can ease the pain of the current economy – but also a means for them to power a new wave of entrepreneurial growth.

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Isaiah Douglass

Isaiah Douglass, CFP®, CEPA, is a partner at Vincere Wealth Management. He is a contributing writer for CoinDesk’s Crypto for Advisors newsletter.