The Winklevoss twins are big supporters of Bitcoin. This is all some people need to hear to determine whether they support or oppose the recently-invented currency.
But for those of you that remain undecided (about whether Bitcoin is a viable currency, not whether the Winklevoss twins have any business sense), a more analytical overview of how Bitcoin works and what its benefits and risks are may be in order.
Bitcoins are an electronic currency—a “cryptocurrency,” to be exact, which admittedly does all sound a little bit cryptic if you will excuse the pun.
If you are unsure of what bitcoin is and you need a layman's definition, then head over to this article written by the excellent Raghu Kumar who covers all the basics beautifully.
Here is the interesting part about Bitcoin: they don’t contain any personal information and aren’t managed by the Federal Reserve or routed through any banks.
So their main appeal is to the type of person who is really protective over their privacy, or who may be concerned that government intervention in the economy will lead to runaway inflation, or that want to be able to pay for things electronically without involving a credit card company.
You know, "shady types," or at least that's what the mainstream tends to think.
If you are a small business considering accepting Bitcoins as payment, there are a whole bunch of reasons why you should, which include publicity, reduced transaction fees and immunity from data security regulations like PCI DSS.
There are already thousands of completely legitimate businesses around the world that accept Bitcoins as payment, including Overstock.com, Wordpress, Tigerdirect, OkCupid, and even the Sacramento Kings. It's sort of a cool thing to do.
Of course, accepting Bitcoins as payment isn’t without risks. As a result of the instability, uncertain future and insecurity of the currency, should you decide that you are going to exclusively accept bitcoin in return for your wares or services, there is a good chance that you may accidentally bankrupt yourself through no fault of your own.
Wild price fluctuations can work in your favor, but do you really want to ride that horse?
For the most part, your serious choice for choosing to accept Bitcoin as payment is totally dependent on how likely your customers are to actually use the currency.
If you have plans to break into the rapidly growing botnet rental business, then Bitcoin could very well be your first port of call for transaction settlement.
First though, you have to get your hands on some Bitcoin to play.
One way to get Bitcoins is to purchase them from a Bitcoin exchange like Coinbase or Bitstamp. To be able to buy, spend or save the currency, Bitcoin users also need a form of software called a Bitcoin wallet.
These wallets, of which there are both local and cloud-based versions, store not Bitcoins but addresses, or strings of alphanumeric code, that have a definite number of Bitcoins ascribed to them.
This storing Bitcoins in multiple strings of code instead of in a monolithic account lets Bitcoin users maintain their anonymity during transactions. But do not think for a second that you are actually anonymous, the ecosystem is not big enough to carry your shady transactions without notice yet, you underworld player you.
The Bitcoin currency system is maintained by a network of Bitcoin “miners,” who compete with each other to process bundles of transactions. Yes, that's right, miners. They mine the Bitcoin.
Each bundle contains data about all of the transactions that have occurred in the last reporting period, as well as a complete history of every Bitcoin transaction that has ever occurred.
The miners’ job is to process all of this data. The first miner to successfully process all of this information is rewarded with 25 Bitcoins (depending on the total amount of currency in circulation).
The Bitcoin mining process is designed to be difficult enough to prevent inflation; easy enough to provide individuals with a realistic financial incentive to participate; and random enough that the person with the most powerful computer doesn’t automatically win all of the newly-minted Bitcoins, which seems fair when you think about it.
It also provides the Bitcoin system with all of the computing power it needs to process transactions and maintain records without any single person, organization or government having to manage or oversee it. Nobody is watching the watchers is the answer.
There are currently 12.4 million Bitcoins in circulation, and each Bitcoin is worth about $230 (the current price may be totally different when you read this article). The smallest possible denomination of a Bitcoin at the moment is one ten-millionth of a Bitcoin (.00000001 BTC).
Just as consumers that want to spend Bitcoins need a form of software called a Bitcoin wallet, businesses that want to accept Bitcoin as a form of payment will need an application called a Bitcoin merchant solution.
For the most part, these Bitcoin merchant solutions work just like regular payment processing software, and feature integration with e-commerce platforms and accounting software, simple Point-of-Sale transactions (customers just have to scan a QR code generated by the solution in order to pay) and email receipts.
Some of these solutions can also convert all of a business’s Bitcoin revenue into a more established and stable currency automatically, so as to protect businesses from fluctuations in the value of Bitcoin, which seems eminently sensible.
Businesses who take payment in Bitcopin aren’t responsible for refunding customers whose Bitcoins were stolen and used to buy something from one of their stores, as they are in instances of stolen credit cards that have been used to buy something from them.
Let's be honest here, with Bitcoin there is a really good chance that the Bitcoins you have in your possession have at one point been stolen from somebody else. It's sort of a tradition; Bitcoin people tend to steal from each other and the exchanges as much as they can.
But ignore that and think of all the publicity, your organization being viewed as a trendy and technologically advanced company and taking advantage of the enthusiasm around Bitcoin.
Perhaps even mention the country’s financial system as being overly centralized and lacking in privacy in your marketing materials. Libertarians will love that.
For SMBs in mainstream industries and businesses that serve customers with little to no interest in Bitcoin, it might be better to wait until the value of Bitcoin stabilizes and it begins to become widely accepted as a mainstream currency.
Although that being said, which came first, the chicken or the egg?
Though it’s true that Bitcoin has lower transaction fees than credit cards and doesn’t require businesses to comply with data security regulations like PCI DSS, these advantages are mostly negated by Bitcoin’s conversion fees; it ends up costing you more than you thought.
Then of course you have the challenge of incorporating Bitcoins into a bookkeeping and banking system set up for USD, but I will leave that for another chapter perhaps.
Chances are that small businesses that choose to adopt Bitcoin as a form of payment may very well attract the wrong sort of customers, get burnt on the exchange, lose their shirt on the fluctuations or have them stolen from you by a helpful member of the Bitcoin community who is teaching you how to properly manage and secure your Bitcoin wallet.
Don't say I didn't warn you!