In recent years, there has been a firestorm of media attention devoted to the cryptocurrency known as bitcoin. While it at first seemed to fall firmly into the domain of only the most tech-savvy people, “Bitcoin” as a name has made it into the mainstream buzz. Does that mean you should begin to accept bitcoin at your business?
Exactly What Is Bitcoin?
Many initially dismissed bitcoin as a flash in the pan. Others worried that it was untrustworthy or too complicated for the general consumer or business owner to understand. Bitcoin is a virtual currency used to transfer payments or conduct business over the internet. It is known as a cryptocurrency because it depends on cryptography to authenticate payments. In fact, there is no entity that oversees bitcoin in the same way that, for example, the U.S. government has authority over the dollar.
Because bitcoin is not legal tender in any jurisdiction and is not accepted by any financial institution, it only has value within its own ecosystem. The value of all bitcoins is kept in a master database called the “block chain” which is maintained on a peer-to-peer network. Those who furnish the hardware and software to verify transactions and host the database are known as “miners” and are rewarded for their work with bitcoins.
How to Make a Payment with Bitcoins
If you are a bitcoin holder, you have both a public key and a private one. Your public key is a long series of digits; your private one, another large grouping of numbers, is kept confidential and is cryptographically associated with it. Most users store this information in a piece of software known as a wallet that is kept in the cloud, on a personal computer or on a mobile phone.
When you want to make a payment using bitcoin, you sign a transaction using your cryptographic credentials. Then you submit it to the block chain. Miners make the calculations necessary to validate your payment, with acceptance taking only two or three minutes. As for the value of bitcoin, it has fluctuated wildly over the years. In the beginning, it was only worth a few cents relative to the U.S. dollar. At its peak towards the end of 2017, it reached $20,000 against the dollar but since has dropped to less than half that value, with continued fluctuations up and down. Business owners should be aware that bitcoin is inherently volatile, and this is a risk that anyone accepting bitcoin implicitly agrees to bear.
Because of the volatility of bitcoin and the complications this can lead to at tax time, many business owners wishing to accept it use a bitcoin merchant services provider (BMSP) such as Coinbase or BitPay. These entities act as middle men, accepting bitcoin from the customer and furnishing dollars, pounds or other relevant currency to the merchant. Once you have signed on with one of these providers, you simply put a “pay with bitcoin” button on your checkout screen. The provider does the rest, notifying you when the transaction is complete. The BMSP thus takes on holding and accepting bitcoin, freeing you from the accounting burdens. That being said, it is vital to do your homework and hire only an established, registered and trustworthy BMSP that is in compliance with all federal and state regulations.
Should You Consider Accepting Bitcoin?
Now that you have a basic idea of what bitcoin is and how it works, you are probably asking yourself if it makes sense to incorporate it into your business model as a method of accepting payments. Here are some things to keep in mind:
- Bitcoin won’t make or break you. Today, less than 1 percent of the population uses bitcoin. While this number may increase in the future, for now there is no need to rush into making bitcoin acceptance a priority.
- It’s confusing, but BMSPs can take most of the guesswork away. As stated above, assuming you find a legitimate provider, the process of accepting bitcoin can become less confusing.
- There’s risk, but bitcoin price volatility probably won’t affect you. When your customer pays with bitcoin via a BMSP, their bitcoin is instantly converted into your currency of choice. Therefore, you will receive the price you charged for the product the customer is buying regardless of what the fate of bitcoin values will be tomorrow.
- While small, you could attract customers in the Bitcoin community. Bitcoin fans like to patronize businesses that use their cryptocurrency of choice.
So should your business accept bitcoin? Quite simply, bitcoin is still a work in progress. The fact that only a tiny fraction of the population even understands it means that it still faces an uphill battle if it is to become a mainstream way to pay.
That being said, as a novelty, bitcoin acceptance may have value, so you would need to assess your customer types to determine if setting up bitcoin acceptance is worth the effort. Whatever your decision, bitcoin likely will continue to be a compelling topic of conversation and speculation for the foreseeable future.