The founder of membership drink app Hooch, Lin Dai, says yes. In fact, he says operators can set themselves up to increase revenue tenfold and retain guests by hopping on the crypto train. That’s a bold claim, one that he made and stood by at the 2018 Nightclub & Bar Show during his session titled "Smart Data & Crypto 101."
Before an owner or operator makes a decision to accept or reject Dai’s claim they must come to at least a cursory understanding of the blockchain and cryptocurrency.
Let’s dive in.
So, what’s cryptocurrency?
Contrary to what many people think when they hear or read the word Bitcoin, cryptocurrency isn’t new. That is to say, it wasn’t created two or three years ago. Sure, the hype around it grew about a year ago, but it was conceived in 1983 by David Chaum. Twelve years later, Chaum founded an electronic money company and created cryptographic protocols.
Researcher and mathematical scholar Jan Lansky would eventually develop a set of criteria to define cryptocurrency1. As you’ll see, it’s more than just a buzzword:
- The system does not require a central authority, its state is maintained through distributed consensus.
- The system keeps an overview of cryptocurrency units and their ownership.
- The system defines whether new cryptocurrency units can be created. If new cryptocurrency units can be created, the system defines the circumstances of their origin and how to determine the ownership of these new units.
- Ownership of cryptocurrency units can be proved exclusively cryptographically.
- The system allows transactions to be performed in which ownership of the cryptographic units is changed. A transaction statement can only be issued by an entity proving the current ownership of these units.
- If two different instructions for changing the ownership of the same cryptographic units are simultaneously entered, the system performs at most one of them.
Merriam-Webster added “cryptocurrency” to the dictionary this year and defined it as “any form of currency that only exists digitally, that usually has no central issuing or regulating authority but instead uses a decentralized system to record transactions and manage the issuance of new units, and that relies on cryptography to prevent counterfeiting and fraudulent transactions.”2
The bolded portion of the definition above is of particular importance when discussing cryptocurrency. In 2008, Bitcoin was invented by Satoshi Nakamoto. Not only did Nakamoto invent what is still the most important cryptocurrency in the world, this unknown person or anonymous collective of people created a decentralized digital cash system. That’s right—the woman, man or women and men who developed bitcoin and the blockchain has/have not been identified.
A centralized electronic currency system would be controlled by the central banks (think the United States’ Federal Reserve System a.k.a. the Fed, or the European Union’s Eurosystem). The decentralized nature of cryptocurrency means that no third party or government is involved in trading electronic money; the system is peer to peer.
So, what is cryptocurrency in simple terms? A form of digital cash that can be traded in a manner similar to peer-to-peer file sharing. Digital cash is just like the money in a Bank of America or Wells Fargo account. As blockchain community BlockGeeks explains in their guide What is Cryptocurrency: Everything You Need To Know4: “If you take away all the noise around cryptocurrencies and reduce it to a simple definition, you find it to be just limited entries in a database no one can change without fulfilling specific conditions. This may seem ordinary, but, believe it or not: this is exactly how you can define a currency.
“Take the money on your bank account: What is it more than entries in a database that can only be changed under specific conditions? You can even take physical coins and notes: What are they else than limited entries in a public physical database that can only be changed if you match the condition than you physically own the coins and notes? Money is all about a verified entry in some kind of database of accounts, balances, and transactions.”
Okay, but what’s the blockchain?
So, cryptocurrency is money. Awesome. What does the word “blockchain” mean? The simplest definition comes from Merriam-Webster5: “a digital ledger in which transactions made in bitcoin or another cryptocurrency are recorded chronologically and publicly.”
When Nakamoto developed Bitcoin, the first blockchain was created. And when the first blockchain was invented, the Internet was recreated. Digital cash wouldn’t work without the blockchain. Nakamoto solved a fundamental problem when Bitcoin was created: the double-spending problem. That problem is defined as spending the same currency on two or more transactions. No currency is viable if the double-spending problem isn’t solved.
Just like Bitcoin solved the problem of double spending, the blockchain solved the problem of trust in the system responsible for recording transactions.
Safety is the most attractive and important element of the blockchain. It offers a high degree of security because certified, recorded transactions can never be tampered with or altered. There are millions of blockchain users worldwide, making alterations possible but ridiculously infeasible. The blockchain is so secure it’s being adopted by industries other than digital currency trading.
How does this apply to bars?
Technical understanding aside, most operators are concerned with real-world application when it comes to technology, trends and money. It boils down to a simple yet complicated question: Should operators accept cryptocurrency or reject it?
Every bar owner and operator will have to decide that for themselves. Dai’s findings can help operators make their choice. According to the Hooch app founder and CEO, roughly 35 million Americans—one in 10—own cryptocurrency. Of those 35 million Americans, one in three Millennials will own crypto by the end of this year.
This is when the value of collecting guest data truly becomes evident. Smart data helps business owners make intelligent decisions. Operators need to know the demographics of their guests, including what demographic groups contribute the bulk of revenue. If it was known to an operator that Millennials were that high-value group, they would know that one-third of those guests have cryptocurrency and adjust accordingly.
Dai explained during his Nightclub & Bar Show session that if an operator had chosen to accept crypto from just 10 percent of their guests 12 months ago, they would have landed on the positive side of the 5x Rule. That is, they would have earned $5 for every $1 spent on growth. If an operator were to accept crypto from a greater percentage of guests who have it, they’d be well on their way to 10X their revenue.
The first step in accepting cryptocurrency is deciding which cryptos to choose as payment. The top 10 cryptos6 in descending order at the time this article was published, according to CoinMarketCap.com, are:
- Bitcoin Cash
Operators should keep in mind that CoinMarketCap.com maintains a top 100 list of cryptos based on market capitalization. The cryptos and rankings will change, and there are well over 1,500 different cryptos recognized worldwide. Part of an effective cryptocurrency strategy is keeping informed.
Step two is creating a merchant wallet. A cryptocurrency wallet is a secure desktop, mobile or web/online (considered least secure) wallet used to store public and private keys that make it possible to receive or spend crypto. There are also hardware wallets like the Ledger Nano S and Trezor One. Such wallets are considered the most secure as they’re a physical device that’s never connected to the Internet unless the owner is transferring currency.
Examples of POS cryptocurrency solutions or merchant wallets with POS integration are CoinPayments, Blockchain Merchant, Coingate, BitcoinPay, Paytomat, BCHPLS.io and MiniPOS. Operators will need to research which crypto solution best suits their needs, considering security, ease of use, fees, etc.
Step three for those who choose to accept crypto as payment is, as Dai put it, to reward, retain and re-engage guests who pay with this form of currency. That means adopting a crypto-based loyalty program along with making it simple to use crypto inside their venue. Many articles written about the broken nature and failures of traditional loyalty programs have focused on how crypto may be poised to be an effective solution. Again, operators will have to do some research to decide which solution is best suited to their needs.
The choice to accept cryptocurrency isn’t necessarily an easy one. If an operator decides to take payment in the form of crypto, they need to educate themselves and understand there is risk involved. The temptation to open a new revenue stream can be incredibly strong but it’s not a decision that should be rushed into.
Disclaimer:Neither Nightclub & Bar nor the author received no compensation for this article. Publications, websites and companies in this article are mentioned solely as resources. Readers who choose to invest in, receive and/or trade cryptocurrencies do so at their own risk.