Five years into its existence, the virtual currency bitcoin has
survived a host of headline-grabbing controversies and is gaining
legitimacy with major U.S. retailers. Small-business owners may
find new opportunities in joining them, but should carefully
consider the risks before jumping in.
First, a little background. Bitcoin is a digital currency that
works on a peer-to-peer network. It's not backed or controlled by
any government. You keep bitcoins in a digital wallet and spend
them by exchanging public and private security keys.
Bitcoin gained considerable notoriety in 2013 because of its use
by Silk Road, an online black market shut down by the FBI for
offering, among other things, illicit drugs, fake passports and hit
men contracts. The currency once again made headlines when the
world's largest bitcoin exchange, Mt. Gox, filed for bankruptcy in
February 2014, claiming hackers had stolen 850,000 bitcoins worth a
Wild speculative swings in the value of bitcoins have added to
their Wild West aura. In the past year, one bitcoin has gone from
$105 to a rate of around $541 as of mid-August 2014.
Despite all that, bitcoin is gaining legitimacy as a mainstream
payment source. Apple added bitcoin wallets back to its app store
this summer after removing them for undisclosed reasons in
February. California has reversed a ban on currencies other than
the U.S. dollar, making bitcoin a legal form of payment. And
perhaps most important, major companies such as Dell, Dish TV,
Expedia and Overstock.com now accept bitcoin payments.
Overstock.com says bitcoin payments have averaged $15,000 a day
since it began accepting them in January.
The number of small businesses that take bitcoin has been
growing, too. If you're considering joining them, there are a few
things to keep in mind.
Do your customers want to pay with bitcoins, or even know what they
The average bitcoin user is a 32-year-old male, according to an
informal survey by the Simulacrum blog
. Anecdotal evidence suggests he is also libertarian-leaning and an
early adopter of technology.
If you have or seek that kind of tech-savvy customer, bitcoin
acceptance can give your business cutting-edge credibility, says
David Mondrus, co-founder of the Bitcoin Association,
a nonprofit group working on fostering wider adoption of such
Pittsburgh-based digital marketing firm The Content Factory is
just that type of business. Owner Kari DePhillips works remotely
from Concord, New Hampshire, where she saw bitcoin becoming
increasingly popular. Nearby Manchester, New Hampshire, is home to
a large bitcoin Meetup group. She attended out of curiosity, and
saw that businesses there needed her firm's services. Looking for a
competitive advantage, she offered them the opportunity to pay in
bitcoin beginning in January 2014.
The firm now receives roughly $8,000 per month in bitcoin
revenue. "It's made us appealing to startups who need our services
and use bitcoin as a preferred method of payment," says DePhillips.
"We've definitely attracted certain clients in part because we
Probably the biggest fear for most businesses in accepting bitcoins
is their constantly changing value. Those price fluctuations
represent risks, says Jeff Born, finance professor at Northeastern
University's D'Amore-McKim School of Business. He advises
companies, especially small businesses, to quickly cash out
bitcoins they receive as payment. "I wouldn't want to keep an
inventory of these things for very long because their value is so
volatile," he says.
It was certainly something DePhillips thought about when mulling
over pros and cons of the currency. "I worried about the
volatility," she says. "If I invoiced for $5,000 in bitcoin, it
could be worth $3,500 the next week, depending on how the price was
Much of that volatility can be controlled these days by using a
bitcoin processor such as BitPay, CoinBase or Coinkite. Such
services deposit your funds in bitcoins or convert them to cash,
sometimes immediately. For example, BitPay can instantly convert
bitcoin payments into U.S. dollars and deposit the money into the
merchant's regular bank account.
That solved the problem for DePhillips. "BitPay came out and
allowed you to accept bitcoin without having to touch bitcoin," she
says. "You could convert all or part of the payment to cash right
Consumer Financial Protection Bureau is warning
consumers to be aware of threats posed by hackers, who could drain
a bitcoin account if they get access to a user's private keys.
Fraudsters may also set up fake bitcoin exchanges or other
intermediarie, then steal customers' funds. The bureau notes that
virtual currency accounts are not insured by the Federal Deposit
Insurance Corporation or National Credit Union Share Insurance
Fund, so the government will not cover losses if a virtual currency
If you have problems with bitcoin or other digital currencies,
you can now
submit a complaint
to the CFPB, which will try to get a response from the company in
question. But it's always important to first research any bitcoin
provider you're considering using to make sure it is legit. Make
sure you know how to contact the company in question, and read the
fine print so you kow your rights. If something goes wrong, "the
company may not offer the kind of help the consumer would expect
from a bank, debit card or credit card provider," the CFPB said in
a written statement.
On the plus side, one bonus for merchants accepting bitcoins is
that transaction fees are lower than those for credit card
payments. A merchant who accepts charges of $1 million each year at
a 3 percent credit card transaction fee is paying $30,000 in fees
each year, explains Mondrus. In contrast, many bitcoin payment
processors charge 1 percent -- or less. BitPay has removed all
merchant costs for its entry-level plan, and Coinbase doesn't
charge for the first $1 million in monthly sales.
Bitcoin is also not subject to the costly chargebacks that come
with credit card payments. The only way bitcoin payments can be
reversed is if the merchant chooses to issue a refund, eliminating
an element of financial risk for businesses.
Still, integrating bitcoin payments into your existing
infrastructure does require an investment of time and money,
including finding a processor and making the necessary website
programming changes. New York City-based LegalAdvice.com, which
offers online legal advice, decided against adopting bitcoin
payments for that reason.
Although Chief Operations Officer David Reischer was familiar
with alternative currencies and had invested in them, he saw
neither the demand for nor the benefits of accepting bitcoin. "It
seems like a novelty. Even if bitcoin does have some long-term
possibilities for surviving for a number of years in the future,
the costs to implement the protocol to accept it on our website
don't seem worth it," he says.
In addition, even with the recent California decision, Reischer has
questions about whether each state or country will allow bitcoin to
continue, he says.
In March, the Internal Revenue Service issued a notice declaring
that bitcoin payments worth at least $600 will be treated as
property rather than currency. Therefore, in the eyes of the tax
agency, every change in value of the bitcoins you hold is
essentially a short-term capital gain or loss if they are not held
for more than one year.
"In theory, firms should be keeping track of the price paid --
the value of goods transferred -- for each coin and the value
received and expense paid when each coin is disposed," says Born.
"In short, it will be a record-keeping nightmare to accept bitcoins
since the IRS ruling."
The ruling worries DePhillips, who hasn't quite figured out how
to best track each transaction. She's relying on her accountant to
sort it all out at the end of the year. "That's obviously a
concern," she says. "Do we put it in as an asset like cash? That
has to get nailed down this year."
For people who hold bitcoins and sustain capital losses, there
is not much relief. The IRS limits deductions for such losses to
$3,000 per year on personal tax returns.
Those types of limitations have prompted financial consultant
Chris Byrne, former chief architect of Wells Fargo Bank's retail
banking division, to advise clients in heavily regulated industries
to stay away from bitcoin and other alternative currencies. He
tells banks, investment firms and publicly traded companies to be
cautious about accepting such forms of payment because they
engender too much risk.
For others, he says it's important to do a cost-benefit
analysis. "Understand your market and understand your customers and
make your best risk-benefit assessment based on that
understanding," he says. "If you're at all uncomfortable, if you
don't see that upside with your customer base and your market, it's
not worth the risk."
Can my business add a surcharge for card-paying
How can I protect my point-of-sale system against