Since its birth nearly a decade ago, businesses worldwide are increasingly embracing Bitcoin. Given the moniker “digital gold” by some, Bitcoin is a cryptocurrency – an entirely digital form of money – invented in 2009 by an anonymous individual who uses the pseudonym Satoshi Nakamoto. Although it exists exclusively in cyberspace, Bitcoin is, at least according to a recently-decided federal case (U.S. v. Murgio et al.), money. That is, it is a means of payment for goods and services. Today, many businesses, small and large, accept Bitcoin.
How Does Bitcoin Work?
One of the most unique features of Bitcoin is its decentralized structure, which eliminates the need to rely on an intermediary, like a bank, a central reserve, or other government agency to process transactions. Instead, Bitcoin is powered by a technology called blockchain: a public, digital financial ledger that keeps a record of every Bitcoin transaction. Each transaction is encrypted, and each new encrypted transaction must be linked to a previous one in order to be accepted into the ledger, and subsequently added as a new “block” to the chain of existing transactions.
This encryption process takes the place of a centralized financial institution, and thus renders the Bitcoin network immune from third-party hacking or tampering. But, without the central authority, of course, someone must do the work of adding transactions to the chain. These are “miners,” or anonymous individuals from all around the world who collaborate to maintain and operate Bitcoin’s blockchain technology. Miners secure every new block of transactions so that they can be subsequently verified as unique and added to the chain. In return, these miners are, unsurprisingly, paid in Bitcoins. Thus, mining plays an essential role in the Bitcoin network: it is not only the bedrock of Bitcoin’s blockchain technology, but also the process by which Bitcoins are created and circulated.
More importantly for business owners, Bitcoins can also be bought and sold for traditional currency – referred to in the Bitcoin community as “fiat” – through marketplaces called Bitcoin exchanges. Once acquired, Bitcoins are stored in a “digital wallet,” which exists either in the cloud or on a user’s computer, and functions like a virtual bank account, allowing users to send, receive, spend, or save Bitcoins. However, unlike bank accounts, Bitcoin wallets are not insured by the FDIC.
Today, more than 100,000 businesses, including industry giants like Microsoft, accept Bitcoin. However, the decision to accept Bitcoin poses several advantages and potential drawbacks to small businesses that are worth considering.
Advantages of Accepting Bitcoin
1. Very Low Fees
Small businesses often pay fees from two to four percent to accept credit card payments. In comparison, Bitcoin processors, such as BitPay and Coinbase, only charge fees of one percent or less on Bitcoin transactions. The difference is nominal on a per-transaction basis, but could be substantial in the aggregate.
2. Quicker Processing
As discussed earlier, Bitcoin’s unique, decentralized system eliminates the centralized clearinghouse. New Bitcoin transactions are often processed in roughly ten minutes, while it can take days for a merchant to receive funds from credit card transactions.
3. All Transactions Final
Because there is no central authority to reverse a transaction, Bitcoin transactions are final and cannot be contested. This protects business owners from meritless customer credit card disputes and chargeback fraud.
4. Investment Potential
Accepting Bitcoin may present an investment opportunity. In December, 2016, a single Bitcoin could be bought for less than $900. In mid-January of this year, a single Bitcoin cost roughly $13,600. The price is currently approximately $8,400.
5. Ease of Payment
Bitcoin presents another way to comply with what should be Rule Number One for business owners – “Make it Easy for People to Do What You Want Them to Do.” If a customer wants to pay in Bitcoin, your business is likely well-served by being able to accept. Setup takes mere minutes, and the fees are transaction-based, so it costs your business nothing to establish the capacity.
Drawbacks of Accepting Bitcoin.
1. Risk of Loss
Because of the lack of a central authority or clearinghouse, proving ownership of Bitcoin is virtually impossible if a Bitcoin wallet is lost or hacked (stolen). While it is possible to insure certain online holdings, such policies are both rare and new, making them risky on their own.
2. Potentially Huge Fluctuations
The most significant risk of accepting Bitcoin is probably price fluctuation. Rapid drops in the Bitcoin-to-fiat exchange ratio can pose a significant risk to businesses accepting and holding Bitcoin. In the fall of 2017, Jamie Dimon, CEO of JP Morgan, referred to Bitcoin as a scam and a fraud, and described it as the worst asset bubble in history. He recently said publicly that he regretted those comments. So, smart people and savvy investors can, and do, disagree about the prospects for Bitcoin holdings, sometimes even with themselves!
Recently, several major banks and credit card issuers have announced that they will no longer allow cryptocurrency purchases via credit card, due to the volatility and risk that such purchases involve.
3. Legal Uncertainty
Bitcoin is currently unregulated, making its legal landscape uncertain. Bitcoin’s anonymity, and lack of a centralized clearing house meant that it was originally used largely for illicit, or even illegal, transactions. Because of its somewhat checkered past, it may well face aggressive regulation in the future.
4. Tax Risks
In 2014, the IRS issued a notice stating that Bitcoin is treated as property, rather than currency, for tax purposes. Thus, businesses that do not immediately exchange Bitcoin for cash may face capital gains or other tax implications if Bitcoin increases in value before being converted into currency.
Bitcoin is still a relatively young and new currency, presenting potential advantages and disadvantages to business owners. It has evolved, though, from being virtually unknown outside the dark web, to a recognized currency. Bitcoin and other cryptocurrencies are now traded at the same daily volume as are stocks on the New York Stock Exchange. Customer demand likely will, and should, determine for most business owners whether doing business in Bitcoin is worth thetrouble and the risk, just as it once did for then new-fangled payment systems like credit cards and electronic payments.