5 things to know about bitcoin (before accepting it)

5 things to know about bitcoin (before accepting it)

By Rachel Hartman

Debating whether to accept bitcoin? In recent months, restaurants, travel-related companies and even law firms have started to accept this new virtual currency as a form of payment.

And in September 2014, PayPal announced it will make it possible for some merchants in North America to accept bitcoin.

This announcement may appear to be a growing acceptance of bitcoin as payment. PayPal, however, noted it is proceeding gradually into this arena. PayPal has been monitoring bitcoin since early 2012, according to a company statement, and is "taking a step-by-step approach."

PayPal's recent move is focused on those selling digital goods, such as music, ebooks, apps and games, to customers.

If you sell merchandise that falls into a digital category, accepting bitcoin could be a natural step. That's because your customers are likely familiar with purchasing items online, and using digital merchandise. Given that they're already comfortable in the digital world, they might be interested in trying out a virtual currency such as bitcoin.

So what does this mean? Is bitcoin becoming more widely used, and should you follow suit?

Here are five things you should know before accepting bitcoin:

1. There are fluctuation risks.

Bitcoin is a digital currency used for electronic purchases and transfers.  

As such, its value relative to the U.S. dollar has widely fluctuated over time. At the end of November 2013, a single bitcoin was valued at more than $1,100. At the end of September 2014, however, one bitcoin was equivalent to less than $400, as noted by Coinbase.com, a bitcoin payment processing firm.

This means accepting bitcoins as a form of payment and hanging on to them could be a risky endeavor. 

"Virtual currency valuations can fluctuate dramatically and are more volatile than currencies like the Euro or the British pound," explains Steve Kenneally, vice president of the Center for Regulatory Compliance at the American Bankers Association.

2. Your "coins" could disappear.

Heads up: "There is no FDIC insurance on virtual currency," says Kenneally. If the processor you are using to store your bitcoin goes bankrupt, you'll most likely be out of luck.

And if you store bitcoin on your own computer setup, they could also go missing for good. "If someone hacks your system and steals your passwords, your money could be stolen and there is no recourse," warns Kenneally. The funds could also disappear if they are stored on your computer, and the hard drive crashes. This can occur if you have installed software, such as Bitcoin-Qt, which allows you to have a bitcoin wallet. Your wallet, then, holds digital keys that can be used to access bitcoin addresses and sign transactions.

3. Turning them into dollars will require an extra step.

If you don't want to store bitcoins or use bitcoin after accepting it as payment, you'll need to transfer them into a different currency you can use, such as cash.

Some payment processors will allow you to do this quickly to avoid the risks associated with holding on to bitcoins. Coinbase allows you to immediately sell bitcoins you receive as payment for cash.

4. If you're looking for rules, you won't find them -- yet.

"One benefit that legacy payments systems have, like check, credit and debit cards, and ACH transactions, is that there are existing rules and regulations in place that apply when things go wrong," notes Kenneally.

If you accept bitcoin, however, and there is a dispute over payment, it could be difficult to find an authority to help you solve the problem. "These rules are still being worked out in the world of virtual currency," explains Kenneally.

5. It's not going to take off in a big way, yet.

While PayPal notes that it has always embraced innovation, it adds that it has always done so in ways that make payments safer and more reliable for its customers.

"Bitcoin is very new, it's relatively unique, and we want to make sure it gains significant end user understanding," according to a PayPal statement.

Key issues surrounding bitcoin, including price volatility concerns and a lack of regulation, could take time to get resolved. Until bitcoin is considered a reliable, stable currency, some merchants may find it best to follow PayPal's hesitant advance into this new realm.

See related: Bitcoin: Another option for merchants

Published: October 30, 2014