Bitcoin. Bitcoin here. Bitcoin there. Everywhere you turn these days there’s another news story about Bitcoin, and depending on which stories you read it’s either the salvation of commerce or the end of the financial world as we know it. So which is it really, and should you consider accepting Bitcoin at your business?
What is Bitcoin
First and foremost, what is Bitcoin? Bitcoin is an encrypted electronic currency or “crypto currency.” It’s created by “mining” and is mostly anonymous in that you can transfer Bitcoins from one electronic wallet to another without having to provide any personally identifying information.
Bitcoins are not backed by any Government or financial organization. In fact the system that runs Bitcoins is a public open source project created to facilitate peer-to-peer financial transactions without the hindrance of exchange rates, Government scrutiny or high transaction fees. The value of a Bitcoin is determined solely by the market for Bitcoins. Exchanges, where Bitcoins can be bought and sold for “Fiat” or Government backed currency, set the value on a supply and demand basis. Supply is controlled by limiting the total number of Bitcons that are released each month. The number of Bitcoins released is reduced each month until a total of 21 Million Bitcoins total are in circulation. Demand for Bitcoins in circulation determine the value in the Exchanges and can fluctuate hourly.
Bitcoins are acquired by buying them on an Exchange, accepting them from another user in a transaction or by mining them. Anyone can mine Bitcoins. You just need to set up a computer as a Bitcoin mining computer and task it with solving complicated algorithms in exchange for Bitcoins. These algorithms contribute to the overall encryption and security of the Bitcoin Network so you can think of the Bitcoins earned in a mining operation as payment for service to the network. The catch, however is that as time goes on the algorithms get harder. Also there are fewer Bitcoins available for the mining pool to collect. As a “stand alone” miner it might take many years to mine a single Bitcoin.
So why all the fuss? Simply put, this virtual currency is the equivalent of using cash on the Internet. This cash like anonymity has led to some sensational headlines with sites like Silk Road being shut down by the FBI. However, as Bitcoins gain traction and value, sites like Mobile Nations and Overstock.com have begun accepting Bitcoin. As more mainstream sites start to accept Bitcoins the value has continued to go up.
What Does it Take to Accept Bitcoins?
There are numerous Bitcoin Merchant Service Providers available, most of the Exchanges also provide Merchant Services however there are also some Merchant Service only providers as well. Fees range from 0 – 1% of the transaction, some offer a flat monthly fee in lieu of a transaction fee, but if you think you want to accept Bitcoins you need to research the options of several Merchant Service Providers, just like you would for standard Credit Card processing providers.
Most providers have both Website interfaces and Smartphone apps that will facilitate the acceptance of Bitcoins in a retail environment. Transactions are near instantaneous and are irreversible.
So as a merchant, Bitcoin sounds like a really good deal right? It’s fast, cheap to use and irreversible. So where’s the catch.
What’s the Downside?
As with any financial instrument, there are things you should be aware of before jumping into a virtual currency. First, since Bitcoins act like cash, they can also be lost like cash. You need to be responsible for securing your Bitcoin wallet just like you would secure the wallet in your pocket. If you wallet is lost, so are your Bitcoins.
The value of a Bitcoin is at best volatile, it is purely market driven which can lead to some drastic swings. For example, in November 2013 Bitcoins were worth over $1,000 each, today they are worth roughly $590 each. A single news item can drive the value up or down depending on circumstances, so if you are considering using Bitcoins in your business, you need to have a strategy to get your Bitcoins into a Fiat currency you can pay your bills with. Many retailers cash out daily to ensure they don’t lose value on their transactions. Most Merchant Service Providers do provide a near real time currency conversion capability so you won’t have to spend your time watching the exchanges instead of running your business.
Bitcoins are still very young, even in Internet terms, and though there are no laws prohibiting Bitcoins or any other crypto currency, they have most definitely caught the attention of Governments worldwide. In the United States, several Bitcoin payment processors were put under tight scrutiny and one CEO has been arrested for money laundering and facilitating illegal transactions of Silk Road users.
As a merchant you need to realize that though Bitcoin transactions can protect a user’s identity, all transactions are permanently and publicly recorded. Will the Fed bang down your door for accepting “dirty” Bitcoins? Who knows, though the odds are as likely as the Feds busting down your door for accepting “dirty” cash.
There is also the reality that your Bitcoins could be placed in temporary limbo if a bug is found in the system. As I write this MtGox, one of the largest and oldest Bitcoin Exchanges, has been in a state of suspension for 15 days and counting.
Remember, Bitcoins are still “cutting edge” as far as electronic transactions are concerned, and sometimes it bloody on the cutting edge.
So, Is it Worth Accepting Bitcoin’s as a Part of my Business?
This is the $64,000 Question. Is Bitcoin right for you?
Is your business cutting edge in nature? Are you willing to weather the inevitable ups and downs of a new technology? If so, it may be the time to think about accepting Bitcoins.
If your business is more traditional and you are not willing to put even a fraction of your revenue at risk, then you may want to wait until Bitcoin and other crypto currencies mature a bit.
Many businesses will fall somewhere in the middle. We all want our customers to view us as trendy or advanced in some way, and no one wants to miss an opportunity when one is presented. So perhaps dipping a toe in the water wouldn’t be so bad. Find one product or service that would lend itself to Bitcoin payment and offer that service on a trial basis.
You are the only person who can answer these questions about your business. You are the one who ultimately needs to make the decision, but at least now you hopefully have a bit more knowledge about what you are making your decision about then you did before.
If you are currently accepting Bitcoins, or are thinking about taking Bitcoins in your business, please let me know in the Comments. I’d love to hear your experiences.
UPDATE 2/25/14: Reports from several sources today indicate the problems with the MtGox Exchange are worse then initially thought. Mark Karpeles, CEO of MtGox, has resigned his seat on the Bitcoin Foundation board of Directors, cleared his Twitter account and shut down the MtGox website. Other reports state that Bankruptcy may be next. Remember… It can be bloody on the cutting edge. (Source: CNN/Gizmodo)
UPDATE 2/28/14: MtGox’s Bankruptcy is official.