Bitcoin came onto the scene in 2009, and although its source remains anonymous it has become a major form of currency in the global market. Bitcoin’s validity was debatable at first, but skeptics were quieted when its value rose quickly; it has fluctuated greatly since then, yet it is still becoming an increasingly popular payment method for e-commerce businesses and online sales.
Is accepting bitcoin right for your business? The answer for most businesses will be yes, however there are important considerations to make when thinking about accepting bitcoin for online purchases. Let’s hold the digital magnifying glass up to bitcoin and see if it’s right for you.
First things first: what is bitcoin?
Bitcoin is a digital decentralized peer-to-peer cryptocurrency.
Wow - now that’s a very cryptic description. Let’s break it down. When we say bitcoin is decentralized, that means it doesn’t belong to a particular country or bank, and thus is not subject to a single administrator or governing body. For example, there is the U.S. dollar, which belongs to the United States and falls under the jurisdiction of the Federal Reserve; there is the pound sterling, which belongs to the United Kingdom and is controlled by the United Kingdom government; then there’s bitcoin, which belongs to no particular country and follows no set rules.
Bitcoin was created as a decentralized currency to allow users to have greater freedom with the way they stored and spent their money, and also to prevent a person or group of people from enforcing nefarious control over its value. Erik Voorhees writes for Bitcoin Magazine, “Consider: since every CoinBase [one of the major bitcoin transacting platforms] user can opt out and leave the platform, this presents a natural check on CoinBase's ability to act with impropriety, and makes coercion impossible.”
Next in that bitcoin definition: bitcoin is fully digital. You will not have a smattering of bitcoins at the bottom of your sock drawer after an international vacation. There are no printed notes or minted coins; bitcoin exists solely as numbers on a screen. All transactions are completed online, following the increasing trend of the digitization of companies by fintech companies and major banks alike.
Bitcoin transactions are peer-to-peer, meaning they are sent directly from one individual to another. Your transaction doesn’t have to go through a bank, but is rather sent from one person or organization to another using a unique, encrypted code. This means that fees are very low, with some companies not charging any fees at all. An individual holds their bitcoins in what’s known as a wallet, and there are multiple companies that offer these wallets to consumers and businesses.
Finally, regarding bitcoin being a cryptocurrency, this has to do with the way transactions are processed. The codes that are used to facilitate the exchange of bitcoins employ cryptography to ensure their safety. The individuals’ identities are not revealed, but a public record of the transaction is available, making this a highly secure yet fully transparent monetary system.
The big question: should I accept bitcoin at my e-commerce site?
There are both pros and cons to accepting bitcoins, but currently the good outweighs the bad.
Your first consideration should be the size and number of transactions your business tends to make. If you are a large company and your transactions are few but large, bitcoin may not be advantageous in the current currency environment (although, of course, that may change). However, if you’re a small company or your transactions are frequent and in small amounts, bitcoin could offer huge savings in transaction fees.
Credit card companies charge fees to businesses that tend to be between 2% and 3%. As mentioned previously, bitcoin’s transaction fees are between 0% and 1%, netting a potential total savings of 1% to 3%. If you’re a small business owner, you know that 1% to 3% can make a huge impact on your bottom line, thus the savings from accepting bitcoin on your e-commerce site could be substantial. Since small businesses do not operate on the same scale as larger companies, they do not have the bargaining power to negotiate lower rates with credit card companies. Therefore, they stand to save a massive amount by accepting bitcoin.
Another benefit to using bitcoin is that bitcoin transactions complete very quickly, in a matter of minutes, as opposed to days as with credit cards. Getting paid quickly is very important for small and medium businesses who require a steady cash flow to maintain operations. The nuts and bolts of how transactions are processed is where things can be somewhat difficult to understand, but we’ll give it a try: after a bitcoin transaction is initiated, it needs to be verified by a bitcoin miner – that’s someone whose job it is to process bitcoin transactions. Since this is an individual and not a company, financial institution, or governing body, it keeps with the decentralized model of the bitcoin currency. Once a miner verifies, or “solves,” a bitcoin transaction the funds are then transferred from one account to the other.
Although this process may sound time consuming, it usually takes about 10-20 minutes from start to finish, or up to an hour if network connectivity is below par. This is exponentially less time than credit card transactions or wire transfers, which take days to complete, and this time saving can prove hugely beneficial to small and medium businesses. After all, time is money.
The next benefit to bitcoin transactions is that they are final, which means that the chargebacks or returns that sometimes occur with credit card transactions cannot and do not happen with bitcoin. Customer disputes can delay credit card payments and disrupt cash flow, and can also be quite costly, charging the merchant a fee between $5 and $20 per chargeback. If chargebacks occur too frequently, a business can be placed in a chargeback monitoring program, the fee for which is a costly $5,000. Bitcoin’s rapid transaction speed negates the possibility of chargebacks entirely: when a customer makes a purchase, it happens in a matter of minutes and with no room for second thought. This does not, however, mean businesses can be foolhardy with their practices, as online reviews are still alive and well, so business ethics are not to be sacrificed.
Businesses that have international customers also stand to benefit by using bitcoin; in addition, companies that have been unable to go global due to size restrictions or foreign transaction charges will find accepting bitcoin an easier way into the international market. No matter the financial institution or country, banks that facilitate purchases across borders will find a way to get their cut of the deal in one way or another – after all, those fees should be going to the business and not the bank. On the other hand, because bitcoin is decentralized, businesses will never have to pay foreign transaction fees.Businesses will, however, need to consider fluctuations in currency rates.
Finally, businesses that accept bitcoin can enjoy an improved public perception by being on the cutting edge of technology. Bitcoin is the new kid on the block when it comes to currency, and carries with it the appeal of being the coolest and most hip type of currency today. By accepting bitcoin, businesses piggyback on bitcoin’s state-of-the-art feel and will be thought of by their customers as a pioneer in e-commerce.
What are the risks associated with accepting bitcoin?
As with any online exchange of funds, there are risks to take into account when considering bitcoin as an online payment method. While bitcoin’s being decentralized is one of the key benefits bitcoin users will proselytize, on the flip side that may scare some merchants. Even though almost all major countries accept bitcoin as payment, some do not, reflecting market uncertainty. Some argue that bitcoin being decentralized means it is more likely to fluctuate, while others insist that its decentralization is precisely the reason it will not fluctuate, since it does not depend on a single country or institution to determine its stability.
Bitcoin has seen massive fluctuation since it was created, which also means it can be difficult to price goods accurately without knowing the current exchange rate of bitcoin with local currency. This could be a significant challenge for an accounting department, as businesses may need to be able to change the price of their goods or services almost daily to correspond with bitcoin fluctuation.
How can I get started with using bitcoin?
If a business would like to start accepting bitcoin payments but expects small numbers of transactions, it might want to begin by simply by creating a bitcoin wallet and advertising on the website that it accepts bitcoin, and to contact the business directly to facilitate payments on a case-by-case basis. This is an easy entry into the bitcoin platform.
For businesses that want to really get the ball rolling, they will want to use a bitcoin payment company. There is a handful of these companies on the market today, and each one offers a slightly different solution to accept bitcoins. Check out Bitpay, Coinbase, and Stripe to see which one works best for your online business.
Despite its anonymous cloak-and-dagger beginnings, in just eight years bitcoin has become a legitimate, internationally recognized global currency, not only with huge investment potential but also with multiple potential benefits to e-commerce businesses. Bitcoin’s positive attributes are many, although they must be tempered with the risks of a currency that has fluctuated a lot in its short life. Accepting bitcoins as a payment method is relatively straightforward, and can have great benefits for a company’s market perception. If bitcoin is the future of online payment systems, consider this article your crystal ball: we see bitcoin in your future.