Bitcoins: Gold 2.0 or a Mirage?

The debate over Bitcoins is heating up. While the Winklevoss brothers call them “Gold 2.0”, Warren Buffett labels them a “mirage”. So what exactly are Bitcoins?

In simple terms, Bitcoins are a form of digital currency that can be transferred online directly between two parties. Bitcoin payments do not involve the third parties commonly associated with credit card payments, such as association networks, front- and back-end payment processors, issuing banks, and acquiring banks.

All Bitcoin transactions are recorded in a public ledger known as the block chain. The block chain is managed and validated with strict cryptographic rules in a process called “mining.” Mining also generates Bitcoins for those engaged in mining work. The average person, however, obtains Bitcoins by purchasing them through online exchanges or special ATMs.

There are currently 12 million Bitcoins in circulation, with the system designed to cap at 21 million. Outside of this self-imposed regulation, the U.S. government has also come up with its own rules. For example, the Financial Crimes Enforcement Network (FinCEN) issued a guide requiring Bitcoin administrators and exchangers, but not users, to register as money services businesses and to be subject to anti-money laundering laws. FinCEN subsequently clarified that retailers that accept Bitcoins for the sale of goods and services are users and, thus, are exempt from those regulations.

Many businesses have already begun to accept Bitcoins as payment. From online sites such as WordPress and Overstock, to brick and mortar shops such as Thelonious Monkfish, to hotels and sports teams, Bitcoins have appeared in expected and unexpected ways. Before your business joins this growing list, here are some disadvantages and advantages you should take into account:

Disadvantages:

  • Bitcoins are extremely volatile. In 2013, the value of a Bitcoin ranged from $13 to $1200. As of March 31, 2014, it was valued at around $450.
  • Bitcoins are not federally insured. Unlike deposits in your FDIC-insured bank, Bitcoin deposits are not protected if lost or stolen, which is a very real risk. The news is filled with stories of Bitcoin banks and exchanges losing millions of dollars in customers’ Bitcoins due to theft.

Advantages:

  • Bitcoin payments are faster and cheaper than debit and credit card payments. By eliminating most third parties, Bitcoin payments reduce transaction fees. Bitcoins also facilitate micropayments (transactions involving a very small amount of money) and international transfers. Moreover, the transactions are nearly instantaneous. Once a person clicks send, the payment is in the recipient’s Bitcoin wallet within a matter of minutes.
  • The barriers to entry are low. There is no need to change or upgrade your point-of-sale terminals in order to accept Bitcoins. You can accept them through a desktop program, a smart phone application, or a web browser.
  • Bitcoin transactions are irreversible, which means no more chargebacks.
  • Bitcoins avoid the need to collect and secure credit card data and, thus, reduce exposure for security breaches.

If you decide the pros outweigh the cons and want to start accepting Bitcoins, here are some important points to keep in mind:

  • Use up-to-date exchange rates to quote Bitcoin prices and do an immediate exchange to dollars once you receive payment to guard against sudden drops in Bitcoin value. Consider setting a time limit, like Overstock does, on when a customer can send its Bitcoin payment to your digital account.
  • Just like sales conducted with foreign money or gold, sales conducted with Bitcoins need to be reported as income.
  • Think about what refund and exchange policies you want in place and how they might affect the customer shopping experience.

While the popularity of Bitcoins appears to be on the rise, it remains to be seen whether they will ultimately prove to be Gold 2.0 or a mirage. Regardless of the final outcome, at least some retailers have already decided that the benefits of Bitcoins outweigh their risks.

Related topics: Banking, Finance, Retail, Retail Sales