If you still haven't heard of Bitcoin, you will soon. Bitcoin generated a lot of buzz in 2013, and experts say the talk won't be dying down anytime soon. As analysts debate the digital currency's value and viability, new Bitcoin trading platforms, marketplaces and startups are launching every day. The latest such Bitcoin marketplace comes from online retailer Overstock.com, which announced last week that it had begun accepting Bitcoin for purchases. For many small businesses, however, Bitcoin remains a mystery — one that, once debunked, may actually help grow their business.
What is Bitcoin?
For small businesses that sell online, Bitcoin provides an alternative way to accept payments in addition to credit cards and digital wallets. "Bitcoin is a type of digital currency — also known as a cryptocurrency — that relies on peer-to-peer technology for instant payments," said Mark Faggiano, CEO of TaxJar. That means it's not backed by any type of central bank or government, unlike established payment processors like PayPal and digital wallets like Google Wallet, he said.
As a digital currency, Bitcoin is primarily used for online purchases, Faggiano said. Whether a merchant is selling clothes or digital products and services, Bitcoin can be accepted as a form of payment. "There aren't really limitations on what you can buy or sell online with Bitcoin," Faggiano said. "However, the early adopters tend to be merchants selling items that have a closer tie to high tech, like electronics, games or even digital goods like music." [Guide: How to Start an Online Business]
Accepting Bitcoin also gives more power to consumers, which can mean higher revenues for merchants.
"Providing consumers with more ways to pay can increase sales, as you give consumers more options and make the buying process easier," Faggiano said. "This is why many merchants have grown to accept PayPal, for example."
Risks of using Bitcoin
One of the main advantages of Bitcoin is that it gives merchants ultimate control over their funds. This freedom, however, comes at a cost: Unlike highly regulated payment processors that count actual dollars and cents, dealing in Bitcoin currency is a high-risk venture for small businesses.
Although the peer-to-peer technology behind Bitcoin makes online transactions easier by eliminating the red tape, restrictions and costs associated with accepting payments through financial institutions, the absence of regulations can be detrimental to merchants. This is because Bitcoin is highly volatile, making its value very unpredictable.
For starters, Bitcoin is its own currency, meaning it must be converted to the merchant's currency in order to turn a profit. However, as an unregulated currency, Bitcoin lacks a reliable exchange-rate system.
"The exchange rate between Bitcoin and government-issued currencies is not driven by any official entity," said Vaclav Vincalek, president of IT consulting firm PCIS Ltd. "You can lose a significant amount of money."
Bitcoins can disappear overnight, such as when exchange rates plummet or when marketplaces get shut down by authorities, Vincalek said. "Just remember when Bitcoin reached $1,000 and, a day later, dropped to $500, and when the Chinese government banned Bitcoin," Vincalek said.
Furthermore, like users of any online system, Bitcoin users are vulnerable to cyberattacks. But because Bitcoin is a decentralized system, its users are not afforded the same protection as that offered by bank-based payment processors. For instance, in the event of theft, Bitcoin wallet owners have no recourse, Vincalek said. "When somebody steals your Bitcoins, you are out of luck," Vincalek said.
Should small businesses accept Bitcoin?
Bitcoin is not for everyone. For risk-averse businesses, it's best to hold off on adopting Bitcoin, Vincalek said.
"At this moment, Bitcoin is a highly speculative investment," Vincalek said. "It is not suitable for day-to-day operation, especially for a small business."
On the other hand, for businesses that want to explore possibilities and be on the cutting edge of technology, the benefits of accepting Bitcoin outweigh its risks, said Matthew Branton, founder of Coinlock, an e-commerce platform that lets users sell digital content using Bitcoin technology.
"2014 is promising to be a blockbuster year for the Bitcoin ecosystem, and small vendors shouldn't be afraid of jumping in," Branton said.
Right now, there are very few barriers to entry, thus allowing moderately tech-savvy small businesses to widen their payment options in order to cater to consumer preferences, Branton said. "It is remarkably easy to accept [Bitcoin] through existing services, such as Coinbase or Bitpay," he said. Major e-commerce sites, such as Shopify, now also offer Bitcoin integration, he added.
Services like Coinbase also assume and mitigate risks, such as by setting an exchange rate before a Bitcoin payment is made and immediately converting it into dollars. There are also additional security features, for instance, Coinbase's bank level security, encryption and backups.
"At the end of the day, there is no reason to delay, as embracing this technology will open up your products to a worldwide audience in a way that existing payment systems cannot," Branton said.
Keep in mind, however, that customer preferences may not apply to all types of businesses. Offering Bitcoins as a payment method may give customers more choices to pay for their purchases, but this assumes that there are enough people actually using the currency, Vincalek said. "The number [of people using Bitcoin] is so insignificant that the only reason why small businesses would accept Bitcoin is for marketing purposes," Vincalek said.
Tips on using Bitcoin
Although Bitcoin is highly volatile, there are several things businesses can do to minimize its risks. Faggiano offered the following advice for small businesses thinking about accepting Bitcoin as a form of payment.
Get your tech ready
Bitcoin will likely require new technology for your shopping cart and additional back-end processes to enable you to track your sales, profits and taxes in Bitcoin.
Schedule frequent dollar conversions
Business owners will also need to find ways to frequently exchange Bitcoins into dollars to limit the volatility risk. If you don't want exposure to the variability in Bitcoin value, you need to be ready to make frequent — possibly, even daily —exchanges between Bitcoins and dollars.
Keep an eye on your financials and taxes
When it comes to Bitcoin, it's imperative to consider tracking and accounting. Understanding the flow of your business financials will lead to informed decisions on payment gateways all the way through to your tax reporting.
Treat Bitcoin as you would if the transactions were occurring in dollars. Plan on collecting and paying sales tax where appropriate, and treat your profits the same way for annual taxes.
When it comes to paying taxes, you can't pay the IRS in Bitcoins, so you'll have to calculate the equivalent dollar price of your Bitcoin transactions to charge the necessary sales tax. The dramatic Bitcoin price fluctuations can make figuring out taxes not just difficult, but potentially punitive as well. The conversation rate at the time of quarterly tax payments may be quite different from what it was at the time of the original sale.
Originally published on BusinessNewsDaily.