Years ago, when we were on the cusp of mass usage of the Internet, folks liked to say we were in the “Wild, Wild West” of information technology: There were no rules, and all was fair. Today, within the context of finance and e-commerce, they’re saying the same thing about bitcoin.
You may hear bitcoin referred to as virtual currency, cryptocurrency, alternative payment, digital currency, “gold for nerds,” and the “currency of the future.” It has even been said that bitcoin is changing finance the same way the Web changed publishing.
But when you cut through the buzzwords and euphoria, what is bitcoin, really? More importantly, as an online retailer, should you consider accepting bitcoin as payment? What does it mean to the future of your business and finances?
Bitcoin does, indeed, represent a new frontier of sorts; it is a highly experimental, evolving form of currency that is in active development, and shows potential to be highly disruptive to commerce in the very near future. It is standardized, and it’s commoditized to the point that there is a limited supply. Yet it is different from familiar forms of currency in that it is decentralized and non-government-based. Therein lie both its advantages and its drawbacks, its challenges and its benefits.
To begin with, bitcoin (BTC is the common unit of bitcoin currency) differs from traditional currency in that only a limited number of BTC will ever be produced. Nobody controls the supply, besides an algorithm that issues only 25 new bitcoin every 10 minutes — and that will decrease over time, theoretically eliminating inflation, one of the biggest drawbacks of paper money.
That may be great for national and world economies, you say, but what value do BTC represent for my everyday transactions?
Bitcoin payments are easier to make and receive than any existing banking or credit card process. Users simply download a wallet application onto a computer or smartphone. The payer enters the payee’s address by scanning a QR code, touching two phones together with NFC technology, or by copy and pasting. The payer then enters the amount of the transaction and presses “send.” For the payee, accepting BTC is completely free, with no chargebacks or fees. It doesn’t matter where in the world the customer is — the method of transaction is the same across all borders, making international payments extremely fast and efficient.
To get your value back out of the bitcoin payment you received, you simply link your wallet to your bank account and enable it to purchase BTC. Your transaction will go through an exchange, and many exchange service providers allow you to instantly convert bitcoin into your local currency.
It sounds very straightforward, right? So what are the drawbacks of accepting BTC as payment?
One may be the difficulty they pose for accounting and bookkeeping. Bitcoin transactions operate similarly to cash transactions in the sense that there is no paper trail, so most accountants would currently scratch their heads at how to incorporate them into your income and expense statements. This will certainly rectify itself over time as more knowledge and education becomes available.
Another challenge is bitcoin’s volatility. The BTC is unpredictable and uninsured. The value can jump wildly in a matter of days. It’s possible those bitcoins you processed last week are now worth a fraction what they were when you received them. It is not a concept for the faint of heart.
Then there is security. Because bitcoin are technology-based, they are vulnerable to hacking and cyber attacks. You must secure your bitcoin “wallet” just as you secure your regular one, maybe even more so. Your wallet login information should be safeguarded always.
Also, bitcoin is not an official currency. However, most jurisdictions require you to pay income, sales, payroll, and capital gains taxes on anything that has value, including Bitcoin.
Lastly, it can be dangerous to accept this form of payment since bitcoin has recently been associated with money laundering.
Although you’ve been fairly warned about bitcoin security, the currency can be highly secure, if you use it correctly. Transactions are secured by military-grade cryptography, allowing for highly private online transactions. For this reason alone, bitcoin shows high potential for popularity, and an early adopter could stand to profit handsomely.
Bitcoin users tend to be very tech-savvy individuals. If that is your target market, accepting bitcoin can be a great way to become a preferred vendor and give your business the aura of a cutting-edge operation. Make it visually clear at first glance that you accept bitcoin happily. It will get you noticed, and you’ll attract the rapidly emerging market of new customers who are searching for ways to spend their newly acquired bitcoin.
That said, be cautious and use common sense when implementing new ideas like bitcoin into your business. Because of its newness, only do bitcoin business with people and organizations you know and trust. Because of its volatility, consider bitcoin a high-risk asset: Never store money you can’t afford to lose in bitcoin. Because of its unpredictability, have a mechanism in place to convert your bitcoin into your local currency regularly and quickly.
What about bitcoin in the long term? As we move rapidly into a more technology-based world, it makes sense that something like bitcoin will become very successful. Right now, bitcoin is a novelty — the reserve currency story online at the moment. Business owners should become familiar with novel ideas like this early on in their development then take full advantage if and when they do take hold in this “Wild, Wild West” world of ours.
[Illustration by Hallie Bateman]