In the recent years, the term “bitcoin” has become more prominent in business discussion. If you are technically savvy, you probably have an understanding of this cyber currency. If you are like most, you probably have no clue. Have any of your customers asked if they can pay by bitcoin? If not, that probably answers the question about whether your business should take them or not. The day is likely coming that your customers probably will ask about these payments so consider this blog to be a basic tutorial.
What Is Bitcoin?
Bitcoin is a virtual currency used to transfer money or make payments using the internet as the mechanism to move the money. It is also known as “cryptocurrency” because it uses cryptography to authenticate payments. What makes it unique and mysterious is that no one oversees the money or has true ownership. If you think of the dollars you have in your pocket, they belong to the U.S Treasury who has oversight of our entire United States monetary system. In Mexico, pesos are owned by Mexico. There is no such government oversight of bitcoins. It is not legal tender in any jurisdiction and it is not accepted by any financial institution. These facts make consumers skeptical about bitcoin who view the system as untrustworthy or complicated to understand. It only has value on the internet. The value of this “virtual money” is kept in a master database known as the “block chain”. The block chain is maintained on a peer-to-peer network of computers. Those people who furnish hardware and software that are able to verify each transaction and host the master database are known as “miners” and they are paid with bitcoins.
Making Payments with Bitcoin
If you own a bitcoin, you are provided with two “keys”. One is public and the other is private. They are both long strings of numbers, much like a password or an account number. These numbers are stored in software known as a wallet that is usually stored in the cloud. To make a payment using bitcoin, you would sign the transaction order using your keys that are submitted to the block chain. Miners make calculations needed to validate your payment much like using your credit card on the internet. Acceptance takes about two to three minutes. The value of bitcoin fluctuates wildly. When first introduced, a single bitcoin was worth only a few cents compared to a U.S. dollar bill. However, owning a single bitcoin at the end of last year was worth about $20,000. It has since dropped to less than half that value and continues to fluctuate. This is why buying a bitcoin is a bit of a gamble.
Think of this as being similar to the daily fluctuations of international money exchanges. These fluctuations are handled by bitcoin merchant services providers such as Coinbase or BitPay. These entities act as a middle man and accept a bitcoin transaction from a customer and pay out dollars, pounds, yen or other country based currency to the merchant. If you sign on with one of these providers, you can add a “pay with bitcoin” logo button on your checkout screen just like you would PayPal or other non-traditional payment method. The merchant service provider does the rest the same as Chosen Payments does for you today by placing the incoming funds in your bitcoin wallet. You can use this same money to pay someone else that accepts bitcoin.
Should You Consider Accepting Bitcoin?
Now that you have a basic idea of how bitcoin works you can decide for yourself if this is something you want to add. Here are some considerations:
- Less than 1% of the world population uses bitcoin. While this number may increase in the future, for now it is relatively obscure.
- It can be very confusing and without a Bitcoin Merchant Services Provider to be your middleman you are placing your business in a volatile risk situation.
- The volatile nature of bitcoin won’t leave you holding the bag. The value you receive is instantaneous based on the value at transaction time.
- If you charged your customer a predetermined price, that is the amount you will receive even if the bitcoin value plunges tomorrow.
- Bitcoin users love to do business with companies that accept bitcoin. But, remember it’s only 1% of the world population.
Quite frankly, bitcoin is still a work in progress and being developed. The fact that only a tiny fraction of the world population understands the currency makes it fairly pointless at the present time. We consider it to be a novelty at the present time. We don’t see an immediate need to accept this form of payment but concede that it may become a viable option in the future. We will continue to monitor the development of the bitcoin system and provide updates to the technology as significant changes occur within the industry.