The internet has changed the way we all live, work, play, buy and sell. The web has no borders, but currencies do. Business is increasingly conducted in a virtual world. Now there are virtual currencies to match. Of these, Bitcoin is the best-known and most successful. As it becomes more popular, businesses are starting to ask: Should I take Bitcoin? And if so… how?
Let’s take a look at what Bitcoin is, how you can accept it, and whether you should consider taking it at your business.
- What is Bitcoin?
- How are Bitcoins stored?
- How much is Bitcoin worth?
- Bitcoin Exchanges – Converting to Dollars
- Bitcoin Fees and Payment Processing
- How does accepting Bitcoin work?
- Deciding Whether to Accept Bitcoin
What is Bitcoin?
Bitcoin is a cryptocurrency. The term sounds cloak-and-daggerish, but it refers to a digital currency designed to exchange information via encryption techniques. There is no physical coin in a Bitcoin.
The pseudonymous Satoshi Nakamoto posted a paper online outlining the Bitcoin in 2008. The following year, the first Bitcoins were issued. Whoever Nakamato is, he never met online collaborators in person and was last heard from in 2011.
Bitcoin is decentralized, with a peer-to-peer structure. No one actually runs it, and users collectively make decisions regarding structural changes by majority rule. Conventional financial networks conduct business using a national currency as a basis. Bitcoin is a currency and monetary unit unto itself. It functions on a proof-of-work system, dependent on the work done by Bitcoin “miners.” Such work creates a community around the currency.
Going through a Bitcoin transaction is referred to as “mining.” Bitcoins are actually created by “miners,” or individuals processing and verifying transactions via the secured network and receiving new Bitcoins in return for their work. An algorithm ensures that Bitcoins are created at a fixed rate, which will decrease over time. Every year, the creation of new Bitcoins automatically halves. Currently, 12 million Bitcoins exist, or have been mined. In 2040, the number will reach 21 million – and the creation of Bitcoins will stop. At that point, miners will receive fees for processing transactions.
How are Bitcoins stored?
Bitcoins are stored in “wallets” consisting of files to which the owner has the personal codes or encryption keys which allow their transfer. If the owner loses the wallet, or dies and does not leave codes or keys to the heirs, the Bitcoins remain in a permanently dormant state. That’s because without the key, bitcoins cannot be spent.
Bitcoin’s blockchain is a decentralized ledger, accounting for every transaction made with the currency. It verifies each transaction, eliminating the need for a central regulator – roles usually provided by banks and other financial institutions. The blockchain is always available for public inspection. About 127 million transactions have been completed as of May 2016.
How much is Bitcoin worth?
Bitcoin’s value is extremely volatile. As of the time of publication, one Bitcoin was worth about $462. In 2012, one Bitcoin was valued at $10, and then it skyrocketed. By November, 2013, each Bitcoin was worth $1,242 USD. The value soon plummeted, and one year later, a Bitcoin was worth just $366. Those fluctuations over just a few years should give you a good idea of how quickly and dramatically the value of Bitcoin changes.
Bitcoin.org warns that it is a high risk asset, and “keeping your savings with Bitcoin is not recommended at this point.” It adds that money a person cannot afford to lose should never be stored in a Bitcoin wallet.
Bitcoin Exchanges – Converting to Dollars
Most companies accepting Bitcoin payments do so through exchanges, such as Coinbase and Bitpay. The companies convert the payments to dollars. That’s how virtually all of the well-known companies that accept the cryptocurrency operate. So while Microsoft, for example, may technically accept Bitcoin, it wants the money in dollars. It’s the exchanges that actually accept Bitcoin and make the conversion. In return, they receive a transaction fee or sell such services as part of a subscription. According to Money magazine, Bitpay’s major clients all want instant cash conversion. Because of the currency’s volatility, doing otherwise is foolish. A stable currency is vital for commerce, and Bitcoin does not yet have that stability.
Bitcoin Fees and Payment Processing
There are not a lot of payment processors that currently enable businesses to accept Bitcoin, but the numbers are growing. Braintree, partnering with Coinbase, is perhaps the best-known. Its website assures businesses that “instant settlement alleviates fear of currency fluctuation.” As of May 2016, the Coinbase integration is only available to U.S. through U.S. merchant accounts. The first $1 million in Coinbase processing with Braintree is free. Once that amount is exceeded, there’s a 1% fee to exchange Bitcoins into dollars or Euros. Coinbase passes a $0.15 fee for every batch disbursement to a bank account, less than some credit card fees.
How does accepting Bitcoin work?
Companies accepting Bitcoin receive payments via a unique Bitcoin address. It’s imperative that customers send payment to the correct address, because Bitcoin payments are not reversible. A transaction typically takes 10 minutes, and is confirmed in the blockchain.
International payments offer Bitcoin an advantage. Wiring money across borders isn’t just so 20th century – Western Union started out in the 1800s. International transfers are still more difficult and costly than they ought to be. As an international currency, Bitcoin doesn’t have these issues.
While not a lot of payment companies allow Bitcoin acceptance yet, ones that do generally provide the option alongside other payment options on the business’ website. For example, a customer opting for Bitcoin payment through a business using Braintree may connect to a conversion service via a pop-up which requires signing in. After authentication, the website send them back to the business’ site, and the transaction amount appears in the currency and the user’s wallet. Once the transaction is finished, the Bitcoin is transferred from the customer’s wallet to the business. The “instant exchange” option automatically converts the Bitcoin to dollars, minus any Coinbase or Braintree fees.
In case of a refund, the seller is protected in the event of currency fluctuation. The business deals with the original transaction amount, while the buyer’s refund amount depends on Bitcoin’s current valuation.
Deciding Whether to Accept Bitcoin
Although use is growing and more companies are accepting the currency, Bitcoin.org warns that it is still experimental. “During these growing pains you might encounter increased fees, slower confirmations, or even more severe issues,” according to the site. While many people haven’t heard of Bitcoins or don’t use them, the current user base is very loyal to the cryptocurrency. Some businesses may find that their target audience includes Bitcoin users, so accepting it may help with your bottom line. For other businesses, it may not matter.
If you think your business and Bitcoin are a good fit, make sure to consult experts in the field before taking the plunge. Bitcoin may be the wave of the future, or it could land in the dustbin of history.
Do you take Bitcoin at your business? Tell us about your experience in the comments!