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Should your business start accepting Bitcoins?

Will the alternative currency make or break the bank?

Few phenomena have been so widely discussed yet remain so puzzling as the world of Bitcoins. Businesses galore are now asking themselves whether Bitcoin is something they need to take seriously, even though most have absolutely no idea what it is.

First, a primer.

Bitcoins are, in the words of the Bitcoin Project, open-source, peer-to-peer digital currency. For those accustomed to dollars and cents, almost none of that makes any sense at all. Boiling it down: Bitcoins are a synthetic currency that are kept in a "digital wallet" on your PC or mobile phone. Payments are sent from one wallet to another--similar to Paypal--and an in-depth cryptographic system verifies that transactions (such as purchases) are legitimate. These transactions are verified by other Bitcoin users (part of the P2P aspect of the currency), and as a reward, those transaction processors are eligible to receive newly minted Bitcoins. (These amount to free money, but they are exceedingly difficult to obtain. This has led to sophisticated Bitcoin mining operations sprouting up, as well as an entire industry based on supporting of those operations.)

The fever surrounding Bitcoins has created one of the most volatile investments you can find. A single Bitcoin was worth about $20 in February before climbing to a value of more than $230 by April 10. By April 17, they had dropped to $70. And as I write this on May 20, Bitcoins are trading for $122. Speculating on Bitcoins requires either incredible fortitude or a massive amount of blind faith.

Speculative swings aren't the only thing that make Bitcoin the wild west of the financial universe. Bitcoins have been stolen. Bitcoin trading exchanges have been shut down, and online digital wallet services hacked. The latest news involves the Department of Homeland Security raiding the world's largest Bitcoin exchange due to fears that Bitcoins are being used to fund illegal activities.

So, are you ready to sign up?

As crazy as it is, businesses galore are getting into the game, partly because the speculative nature of the currency means a $100 purchase could turn into $150 tomorrow, but also because of Bitcoin's less-tangible benefits. Processing fees are small to nothing, a contrast to the fees a business must pay when processing a credit card or even accepting a Paypal payment. Chargebacks don't exist because, by design, they can't. Once a Bitcoin has been handed over, it's permanent. And while sales involving Bitcoins are as taxable as those made using any other currency, in practical terms there is no paper trail for these sales, which some see as advantageous.

On the other hand, working with Bitcoins isn't easy. Pricing is the biggest challenge: With a currency this volatile, you must either update prices daily (or multiple times daily) or, as Josh Tordsen of Gigastrand does, let the shopping cart manage exchange rates in real time. And once you have Bitcoins, what do you do with them? Exchange them for dollars or hold on to them in the hopes the rollercoaster ride keeps getting better? (Most seem to be keeping them because they just want to see what happens.)

So far, businesses working with Bitcoins seem relatively happy. Domain registrar Namecheap has been accepting Bitcoins for its services for about three months. CEO Richard Kirkendall says, "We haven't had any problems at all," but notes that Bitcoin-denominated sales are still a tiny percentage of his company's overall sales. Even more experienced Bitcoin users report that only 1 to 2 percent of sales volume involve them.

Nonetheless, this is a real, happening thing and a growing phenomenon. A Forbes writer even lived exclusively on Bitcoins for a full week recently, and while it wasn't always easy, she made it through without starving. Total expense for a week of living in San Francisco: 4.85 Bitcoins.

For now, this is all fascinating stuff, but I'd be hard-pressed to suggest businesses jump on the bandwagon any more than they should start accepting euros or Canadian dollars. The work involved in accepting the currency isn't negligible, and you risk spending more time watching Bitcoin exchange rates than actually running your business.

On the other hand, if you're convinced this is going somewhere, why not? Sure, it's a gamble, but it might be a fun way to keep one eye on the future. And chances are you aren't going to make enough in Bitcoins for it to really matter anyway, at least not for now. As Tordsen puts it, "Whether we win or lose in the Bitcoin Market is not going to have much of an impact."


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