Bitcoin in Business: Risk Management
Any business knows that holding volatile assets involves some degree of risk. In fact, there are several aspects of everyday business in which management is required to constantly assess risk and take action based on findings. Since Bitcoin acts as a mixture of currency, commodity, and property, the risk involved with Bitcoin is different than a lot of other things that have risk associated with them.
For example, businesses that sell goods or services to another company on a credit basis must risk the fact that they could have a bad debt expense, an expense that happens when an account cannot be collected for some reason. The chance of a bad debt expense is a necessary risk of doing business on a credit basis, but is mitigated by the fact that analysts evaluate how likely it is that a company will be able to pay if they are given goods or services on credit.
Also read: The Bank Of Canada Is Siding With Bitcoin
Bitcoin is quite different from credit-based business. First off, in order to send Bitcoin, the user must actually control those funds, there is no credit. For businesses that deal mostly with companies that are purchasing parts to assemble products, their customers are going to want to do business on a mostly credit basis with terms such as n30 or n90 (net 30 or net 90, this means that the balance due will be paid within 30 or 90 days of receiving the goods.) For companies like this that don’t sell to individual consumers, accepting Bitcoin would not be worth the cost of implementing it and they likely would get very few to no sales at all with Bitcoin.
Companies that sell goods or services for Bitcoin either need a way to cash out to fiat instantly, or securely store some of their Bitcoin should they choose to hold. If a company chooses to hold Bitcoin, they will need to constantly assess the risk of holding it and be sure it is securely held. Risk assessment is more difficult with Bitcoin due to the volatility and therefore most companies or businesses that choose to accept Bitcoin convert most or all of it on the spot in order to avoid losses and maximize profit margins on their sales. For companies that choose to invest in Bitcoin, knowing when to take a small profit and when to cut losses is very important, that company will also need to report capital gains or losses as a result of holding, “Hodling” as it’s known in the Bitcoin community, and be sure to accurately track the results of their investment as opposed to just a direct sale for fiat currency. Taxation with Bitcoin can be very complicated for companies that choose to speculate on Bitcoin rather than instantly convert it, creating more risk and requiring a larger investment of time to accurately report earnings and losses.
Overall, most companies that choose to accept Bitcoin choose to instantly convert it to fiat due to the additional risk that accompanies holding onto the cryptocurrency and the extra time it takes to accurately record everything for taxation purposes.
What do you think about Bitcoin and risk management? Let us know in the comments below!
Images via Pixabay