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Bitcoin: Another option for merchants

Bitcoin has been gathering more and more media attention over the past year or so, but when the price of a bitcoin unit went up to $266 on April 10, 2013 -- only to fall to $125 the next day -- many merchants and consumers started paying a little more attention to this virtual currency. The controversy surrounding bitcoin giants Mt. Gox and Bitfloor have kept Bitcoin in the headlines as well.

You're not alone, however, if you're confused about exactly what bitcoins are and about whether you should include them among your payment options in your store or online business.

Here's a quick overview of where bitcoins came from, how they work, their advantages and disadvantages for merchants and consumers, and how you can accept them at your business.

What are bitcoins?
Bitcoins (BTC) are a virtual currency that is not regulated or backed by any government. They are an attempt -to create a stable, worldwide currency for the Internet, launched by technologically savvy individuals and groups back in 2009. A purchase made using bitcoins is the equivalent of a digital cash transaction, since it doesn't go through any centralized bank for processing. Unlike credit card transactions or transactions made through banks, Bitcoin transactions are relatively anonymous.

Bitcoins are like currency because they can be used to make purchases. They're work similarly to commodities (such as gold), whose prices fluctuate, ase there's no fixed price for a bitcoin; it's a matter of supply and demand. Basically, at any given moment, bitcoins are worth whatever someone is willing to pay for them. It is a universal currency as anyone in any country can buy and sell bitcoins. bitcoin

Bitcoins come into existence via process called "mining." When Bitcoin was created, its creators "hid" bitcoins in blocks of data that can only be unlocked by solving extremely complex mathematical problems. Individuals -- or, more likely, large groups pooling their computing resources, use their computers to solve these problems, and, when they do, they're rewarded with Bitcoins. Today more than 11 million bitcoins have been mined; the total 21 million won't be mined until 2140. The rate at which bitcoins are mined is controlled by the complexity of the mathematical problems; if too many are being mined, the difficulty of the problems increases.

How do bitcoins work?
Because mining bitcoins is getting more difficult as more are mined, many buy bitcoins at a bitcoin exchange. The largest and most well-known of these exchanges is Mt. Gox. You can exchange bitcoins for currency at these sites as well.

To store bitcoins, the merchant or consumer must have a bitcoin wallet, which can be created on your computer or on a website that hosts them. That bitcoin wallet is given a bitcoin address, which is used to withdraw or deposit money into your account. The transaction is encrypted to make it more secure, and you can get a new bitcoin address for every transaction you make.

Bitcoin transactions are public, but those public logs display only the bitcoin addresses, so the transaction is not easily traceable to you. Transactions are validated through the Bitcoin network of computers; it can take 10 minutes or so to get that validation.

What are the pros and cons of Bitcoin?
There are several advantages to Bitcoin from a merchant standpoint. First, the cost to process transactions is much lower than with credit or debit card transactions, sometimes running less than 1 one percent, according to Bitcoin's merchant page.

Second, a bitcoin transaction, once validated, is final. There are no chargebacks, which will come as a relief to merchants who often get chargebacks from a credit card 120 days after a transaction is made. Bitcoin also says there is less risk of fraud, because a transaction is confirmed or validated by an entire network of computers.

Third, because Bitcoin is a universal currency, available to anyone anywhere throughout the world, it's easier for merchants to accept payments from customers in other countries without the customer having to pay a foreign transaction fee.

Purchasers, however, may not like the fact that they have very little protection against a fraudulent merchant because they do not have the ability to dispute a charge (as they could with a credit card).

In addition, bitcoin wallets must be protected carefully. If you store your wallet on your computer, forget to back it up and then your hard drive fails, you've lost all of those bitcoins. The same thing can happen if you store your wallet on a bitcoin exchange site and the site closes unexpectedly before you can exchange the bitcoins to dollars and have them deposited in your merchant account. Your bitcoins could also be at risk if someone hacks into your business's computer system.

How can I start accepting payments in bitcoins?
Although Bitcoin hasn't exactly gone mainstream, there are hundreds of merchants (mostly online ones) around the world currently accepting payments in this online currency. Some bars, restaurants and other small retailers in the U.S. have also begun experimenting with the currency, allowing customers to pay in bitcoins via an app. In May 2013, online mobile gift card platform Gyft began accepting the currency.

Merchants who want to accept payments in bitcoins can set up specialized accounts with online companies such as Bitpay.com, Weusecoins.com, MtGox.com and Walletbit.com. These sites' services vary, but they generally offer automated payment tools for online and point-of-sale transactions and will usually either forward customers' payments in bitcoins to your bitcoin wallet or convert the bitcoins to dollars and place them in your bank account.

Weusecoins.com suggests that merchants ask these questions before selecting a bitcoin processor:

  • How is the bitcoin exchange rate calculated, and what is my exchange rate risk?
  • How fast are payments approved?
  • How do I receive the funds
  • Are there any fees involved?
  • How can I see a listing of my sales?

There are bitcoin payment solutions available for both online and brick-and-mortar retailers.

Is Bitcoin here to stay?
No one really knows. It's possible that this virtual currency will continue to be viable, and may even prove to be a good investment over the years, but there are no guarantees.

Two of the largest exchanges have run into trouble lately. On May 15, the Department of Homeland Security shut down Mt. Gox's account with payment processor Dwolla, claiming that Mt. Gox hadn't properly registered its American money transmitting and currency exchange operations with the Treasury Department. As a result, customers can no longer use Dwolla to buy bitcoins on Mt. Gox. Another popular exchange, Bitfloor, stopped operations in April, when its bank shut its business account down.

Practical eCommerce points out that, if governments have reason to believe criminals are taking advantage of the currency's anonymity for illegal purposes, they might crack down on Bitcoin.

Bitcoin itself cautions: "Bitcoin should be considered as a high risk asset, and you should never store money that you cannot afford to lose with bitcoin. If you receive payments with bitcoin, many service providers allow you to convert them instantly to your local currency." To protect your business and its assets, that's a step that you should consider if you want to start accepting bitcoins.

See related: Technology lets customers skip the checkout line, Mobile gift cards give small businesses an edge

Published: May 17,2020

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