Dollar bill and bitcoin

Amidst all the Bitcoin hype, a client asked for advice about whether or not to accept cryptocurrencies for donations. I’m by no means an expert in cryptocurrencies or an investment professional (so don't take my advice as investing recommendations), but I have been following the industry for several years and provided some thoughts on their questions. I tried my best to provide my thoughts in language that someone less familiar with crypto would understand. 

 

Should nonprofits consider taking cryptocurrencies as a form of donation?

Why you might want to

I’d consider whether you are missing out on potential donations by not accepting them. There was a time when organizations required people to mail in checks rather than accept online donations. Eventually, donors were so comfortable paying for things online that some donors chose not to donate rather than have to go through the process of writing and mailing a check. Organizations that were late to make that switch probably suffered. What I’m less certain of is whether organizations that were very early adopters saw a benefit that outweighed the cost and effort to set up the process. At this point, very few people are actively using crypto as a currency – most are viewing it as an investment, so they would still likely convert their crypto to dollars and then donate as usual. The one other consideration is whether accepting crypto benefits your brand. For example, overstock.com has long accepted Bitcoin, but I suspect that is because the owner of the company is a proponent of the cryptocurrency and wants to be seen as an innovator.

 

Why you might NOT want to

There are a lot of reasons why you might not want to accept them at this point. First, the market is highly volatile. For example, if someone donated $100 worth of Bitcoin to you on December 25, 2017, that is probably worth $60 as of January 17, 2018. On the flip side, if someone donated $100 on January 1, 2017, that would be worth $1,000 today. So if you are going to accept Bitcoin and keep it stored in Bitcoin, you need to be okay with that risk. On the other hand, if you planned to accept it as Bitcoin and quickly convert to cash, you are paying higher transaction fees than if you simply took cash in the first place.

The other big risk is ensuring that you can collect and store the crypto safely. It is uninsured, anonymous, and technology dependent, so many of the normal safeguards that are in place don’t apply. This is something I counsel people interested in investing in Bitcoin to consider – even if you make a bunch of money on Bitcoin, that is all lost if you aren’t savvy enough to take proper precautions and your account is hacked and the money is gone forever with no recourse. So again, your organization needs to have a good plan for securing these funds and willingness to take on the risk if something goes wrong.

Lastly, there aren’t very easy and 100% proven ways to take these donations. It will require some research and possibly custom work on your side to begin accepting crypto and I’m not sure that the return would be worth the investment. Compare this to the decision to take credit cards and dropping a PayPal widget on your website in 5 minutes.

 

What are the advantages and disadvantages of cryptocurrencies?

First, there are different and more definite advantages from the underlying technology (blockchain) than from cryptocurrencies themselves. I can explain more about the difference, but people often mistakenly view them as one thing. It is possible that the world benefits greatly from the blockchain but cryptocurrencies don’t see the same long-term success.

As for crypto, the underlying benefit is for a faster and more efficient transfer of money around the world that also potentially takes the big banks and governments out of the equation. To oversimplify, why do we need to have big banks taking big money to help transfer money between people if we have the technology as a society to do it ourselves?

As for the disadvantages, the biggest is that it is still immature and volatile, so it’s hard to invest or pay for something with a currency that you aren’t certain will be worth anything (or might be worth 100X more) in the future.

 

What is considered (as of today) the future of cryptocurrencies?

There are a lot of currencies on the market and in the past few months the newer “alt-coins” generated a lot of interest as people starting looking for the next Bitcoin. For example, Bitcoin had nearly 90% of the market in January 2017 and is now closer to 30%. The biggest rival is Ethereum and many companies are actively involved in that underlying technology. Additionally, since these currencies are supported by the “community,” they have disagreed on development paths and forked at times. Bitcoin forked into Bitcoin Cash and Bitcoin Gold and Ethereum forked into Ethereum Classic. The other alt-coins that people talk a lot about are Litecoin and Ripple. Litecoin is called “silver to Bitcoin's gold” and Ripple aims to be the “Bitcoin for banks." At this point, it is similar to the .com boom of the 90s where currencies spring up every day. However, at this point I’d focus on Bitcoin & Ethereum mostly.

 

How are cryptocurrencies processed?

The underlying technology is called the blockchain. The general idea is that rather than have the banks record and manage all the data from transactions, this is done via open-source code distributed across countless computers (called miners). Every transaction is recorded (everyone can see it and hacking all the data becomes impossible), but also anonymous. You can send money via direct transaction (think PayPal payment to a friend, but from one long string of data to another) or use an exchange (like Coinbase) that helps make the buying/selling/storing easier.

 

Who is using them now?

For donations, I’m not sure. As for payment, slowly more ATMs or companies are accepting payment, but more so in Asia than the US. In the US, it has become more of a store of money (think gold) than a currency.

 

What should nonprofits know about cryptocurrencies?

The underlying technology (blockchain) has a lot of potential beyond currency. The potential for cryptocurrency is high, but its future is also murky (what happens when governments regulate more?) and it is hard to know how much of the recent rise is due to its actual potential vs. FOMO.


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