Bitcoin is a digital currency and payment system that is created and exchanged electronically, outside of banks and governments. Using a virtual wallet, users can store, spend and receive bitcoins, as well as convert traditional currency into bitcoins.
Since Satoshi Nakamoto invented bitcoin in 2008 and released it in 2009 as open-source software, bitcoin has emerged as a popular form of virtual currency including bitcoin for small business use. Today, more than 100,000 merchants accept bitcoin.
Advantages of Bitcoin
Lower Transaction Fees
High credit card fees have dissuaded small businesses from accepting credit card payments, despite the fact that payment options beyond cash encourage customers to spend more, according to Forbes. In 2013, 55 percent of the nation’s 27 million small businesses did not accept credit cards.
Credit card transaction fees typically range from 2 to 4 percent. Fees can increase to as much as 5 percent for merchant accounts, which small businesses should consider as a convenient way to accept credit cards from customers, the U.S. Small Business Administration says.
Transaction fees for bitcoin are significantly less. Third-party bitcoin vendors generally charge fees of 1 percent or less per sale, according to personal finance and information service NerdWallet. CoinsForTech, a bitcoin-only electronics store in Australia, saved $17,000 in fees alone in one year. “We processed over $500,000 in transactions and paid nothing in processing cost,” founder Lee Marburg told U.S. News & World Report.
A bitcoin transaction processes in minutes and is completed within a few hours. Even when accounting for a third-party bitcoin vendor, bitcoin payments are received and able to be converted into cash much faster than credit card payments.
“The problem is, with credit cards, a lot of times your funds can be locked up for a week or more and they’re held in a sort of escrow in case someone requests a chargeback,” Adam White of Coinbase told Entrepreneur. A third-party vendor like Coinbase gives businesses access to payments in two business days.
All bitcoin purchases are final, offering businesses another way to save money. Buyers are unable to dispute a transaction or otherwise reverse a transaction, such as by claiming goods are defective or were never received. This also protects the business from chargeback fraud. Some customers purchase a product with the intent of initiating a chargeback to get free merchandise.
For a chargeback, the credit card company withdraws the money from the merchant account and deposits it back into the customer’s account. A chargeback fee of $5 to $15 is also applied.
Easy International Transactions
Although credit card rules vary by country, bitcoin does not come with foreign transaction or currency exchange fees. Small businesses can accept international payments without any additional costs or barriers.
“Bitcoin breaks down all of these invisible borders that previously existed,” White says. “When you accept bitcoin, you can accept payment from anyone anywhere in the world at the speed of an email.”
Combined with lower payment processing fees, avoiding currency translation saves retailers and consumers up to 8 percent.
Disadvantages of Bitcoin
Bitcoins fluctuate in value based on online market dynamics and a host of other factors. In 2013, the value of one bitcoin increased to more than $1,000 from $13. It dropped to $297 on January 1, 2015, from $764 on January 1, 2014.
Values can decrease rapidly, forcing small businesses to assume a loss. This risk can be relieved by quickly converting bitcoins into cash.
One of the biggest issues facing bitcoin in any context is security. Users who choose to manage their wallet may lose all of their money if they forget their password, lose their computer or face a breach. However, allowing an outside company to manage their wallet is no guarantee of safety either. One study found that 18 out of 40 analyzed bitcoin exchanges were closed, with customer account balances often wiped out by fraudsters.
Nearly a quarter of all financial malware attacks target bitcoin, according to a report from Kaspersky Lab. It found that 14 percent of all attacks came from bitcoin mining malware and 8 percent from bitcoin wallet theft.
Accepting bitcoin can be a tax headache for businesses that don’t immediately exchange bitcoins for cash. In 2014, the Internal Revenue Service classified virtual currency as property rather than currency, carrying tax implications that CNN Money called a “fiasco” for bitcoin users.
If bitcoins increase in value from the time they are collected as payment to when they are collected as cash, merchants are subject to capital gains taxes. This means that businesses need to keep records of every transaction and make calculations that account for the changing value of bitcoins.
Like stocks, bonds and other capital assets, merchants must keep track of bitcoin transactions and how values change. “If you’re not doing the accounting [on your digital currencies], you are on the line for tax evasion or misfiling,” Jake Benson, CEO and founder of digital currency accounting software company Libra Tax, told Forbes. “The reason you’d want to account for your bitcoin and the gains and losses is the exact same reason you need to do it when you trade stocks. If you don’t, you’re breaking the law.”
Staying Ahead of Business Trends
Business leaders need to know how to respond to trends in business. From bitcoin to ways to improve worker productivity and happiness, leaders can explore ways to add value to their organization.
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