Are you a Bitcoin early adopter? Here's how you can minimize risk

Bitcoin has significantly shifted from being a commodity traded by investors towards being used as an actual currency used to pay for goods and services. Exponentially growing transactions in the past year as well as increased involvement from businesses and government figures suggest that cryptocurrency adoption will only continue. The British Chancellor of the Exchequer, George Osborne, stated his desire for the UK to become a "global center of innovation for financial technology" before the end of 2015, and has taken steps to both regulate Bitcoin exchanges as well as provide guidelines for organizations who deal in the currency. On the business side, the number of merchants accepting Bitcoin have already hit 100,000 this year -- this number is expected to reach 140,000 by the end of this year.

It is common knowledge that there are clear business benefits and opportunities to utilizing Bitcoin and other cryptocurrencies. For example, any existing market currency can be converted to a cryptocurrency through the use of online portals. Once held, cryptocurrencies can be stored in an electronic "wallet" without the need for a bank account. If a company manages most of its assets in bitcoin, this will naturally result in a reduction of third-party costs, and represent an alternative to managing multi-currency risk -- however, this option is not without its own risks.

You will need to consider the following if you are looking into Bitcoin or other cryptocurrencies:

Price risk: because there are no derivatives markets to support cryptocurrencies, companies accepting Bitcoins and other cryptocurrencies will experience price volatility on a daily basis with no means to protect against extreme losses in value of their holdings.

Liquidity risk: due to the lack of market infrastructure supporting cryptocurrencies, trading tends to be of relatively smaller quantities than corporates would need to transact on a daily basis. As a result, exchanging large amounts of Bitcoins, for example, may incur large bid/ask spreads. This often results in a loss of value or the need to spread out transactions over periods of time, incurring more costs and increasing price exposure.

Counterparty risk: payment systems using Bitcoin are not regulated nor do they provide any guarantees. If a $100M payment "doesn’t go through" then what is the recourse and to whom? Even if the result is positive, treasurers need payments to go through immediately and be certain of their outcome

If the benefits of cryptocurrencies outweigh the risks for your organization, you can take the following measures to minimize said risks:

Minimise your Bitcoin holdings: Be effective with your cryptocurrency management and only hold the quantity of Bitcoins needed to meet forecasted Bitcoin obligations. Holding more will expose your company to unnecessary "Virtual Currency" (VX) risk.

Diversify by using multiple counterparties: Given the lack of central bank backing and protection against counterparty risk, should anything go wrong with your Bitcoin wallet, payments or exchange provider, you may risk losing everything. If you have large cryptocurrency transfers to make, consider spreading the risk by using multiple counterparties.

Stay current on regulations: Given how new Bitcoins and other cryptocurrencies are, the regulatory landscape is still only taking shape. In the US, Bitcoins have been designated a commodity, so any price fluctuations while you hold Bitcoins generates capital gains and losses. Other markets have their own unique nuances, so stay informed.

Establish strong audit and controls: One of cryptocurrencies’ biggest benefits and challenges is the level of anonymity and lack of audit trail it provides. For example, any payments made with Bitcoin are irreversible. To counter this, you need to ensure that your organization's internal processes and audit trails are more detailed than for regular payments.

While Bitcoin remains unstable, its increasing acceptance in the business world will only help overcome the pains of early adoption. It is inevitable that Bitcoin and other cryptocurrencies will continue to evolve and develop into a legitimate financial tool. Until then, exercise caution in all your Bitcoin dealings.

Photo credit: Lightboxx / Shutterstock

Tim Wheatcroft is director of corporate communications at kyriba. He has spent more than 15 years in the PR trenches on both sides of the Atlantic, having started his career in London before moving to San Diego in 2001. He has worked on a diverse range of technology and consumer campaigns, ranging from start-ups to major global players. Tim’s PR experience ranges from the world’s largest technology firm to a chain of hamburger restaurants, both of which have their unique benefits.