Management & Finance

Bitcoins: 3 Things Online Merchants Must Know

Bitcoin is a mostly anonymous, peer-to-peer electronic payment system that could allow online retailers to accept cash-like payments from anyone, potentially, opening up new market segments and reaching new customers. But bitcoin is not without risks.

Earlier this month, a single bitcoin was worth as much as $265. But that was before the currency took its most recent crash, dropping to about $88 per bitcoin at 10 a.m. Eastern U.S. Time on April 17, 2013, according to Mt. Gox, the leading bitcoin exchange.

Bitcoin explained from Duncan Elms on Vimeo.

Bitcoin’s rapid climb in value — and its equally rapid descent — have put it in many headlines, and, perhaps, left merchants wondering what bitcoin is and whether or not they should be accepting it. In the ecommerce context, there are at least three things that sellers should understand about bitcoin before making a decision to accept the digital currency or not.

Bitcoin Is Decentralized and Nearly Anonymous

Bitcoin is not governed. There is no central bank or U.S. Federal Reserve that seeks to regulate and stabilize the bitcoin economy. Rather, bitcoin depends on a virtual army of computers, a shared public transaction log — called the blockchain — and mathematics to self-stabilize and ensure the authenticity of every transaction.

When a bitcoin is exchanged, the transaction is securely recorded in the blockchain. Everyone and anyone may see the transaction, the amount of the transaction, and which bitcoin addresses where used. The bitcoin community verifies the transaction, ensuring the currency is properly exchanges.

In this way, bitcoin is not anonymous since an online merchant will actually have a customer’s name and that customer’s bitcoin address, thus every transaction that shopper has ever conducted using that same bitcoin address could be located and analyzed in the blockchain. But a single shopper can have many, many bitcoin addresses, and no personal identifying information is required to create a bitcoin address. Thus, a user could, in theory, use a different bitcoin address for every transaction, making his shopping about as anonymous as cash.

Another similarity to cash is that there are no transaction fees associated with bitcoins. A merchant does not have to pay any processing fees, exchange fees, membership fees, or similar.

Bitcoin Is Controversial

In 2011, during an interview with NPR’s Planet Money podcast, Columbia Law School Professor Ronald Mann said that he was not certain that bitcoin would even exist in five years. If Mann’s prediction is accurate, bitcoin will only last a few more years.

One possible reason for bitcoin’s demise could be a government crackdown. At the moment, there is nothing essentially illegal about trading in bitcoins, but that could change. One of the problems, if you will, with bitcoin is that it is the currency of choice for the so-called Deep Web’s Silk Road.

The Deep Web or Deepnet is the Internet’s dark alley, not indexed in Google, Bing, or any credible search engine, the Deep Web and its Silk Road bazaar is where bad guys and gals go to exchange drugs, illegal pornography, and even illegal weapons.

If legislators began to believe that bitcoins were facilitating illegal trade, those legislators could ban bitcoin, effectively killing the currency. China actually did something similar to a digital currency called Q Coin, which was becoming a popular alternative to the government-regulated yuan, but for different reasons.

Merchants thinking about bitcoin should simply remember that it is not without controversy. And remember, brick-and-mortar stores still accept dollar bills even though some people use them to buy drugs or tip strippers.

Bitcoin Is Volatile but Can be Safe

As mentioned above, the value of a bitcoin can be volatile. The most recent crash, as an example, from roughly $265 to $88 or less, was attributed to bitcoin’s success. On its Facebook page, Mt. Gox, the aforementioned bitcoin exchange, said that as bitcoin made headlines for rapid growth thousands of users created bitcoin wallets and tripled the number of transactions executed in a single day. The increase in volume slowed down the bitcoin network. New users interpreted the system slowdown as a significant problem and started to panic sell coins.

Volatility is certainly a concern, but also consider just two years ago a bitcoin was worth about $20. If a merchant had made a sale in 2011 and held those bitcoins, that merchant would have more than quadrupled the value of the sale in just two years, even at the lower $88 per bitcoin rate.

Bitcoin can also be safe. For example, when a store accepts bitcoin for a transaction, it can immediately exchange the collected bitcoins for a more familiar currency like dollars. The exchange can be done automatically via script, removing nearly all risk.

What’s more there are many tools available that make accepting bitcoin rather easy. Mt. Gox has a Magento extension available and an API that developers can use to easily integrate with any ecommerce platform.

Armando Roggio

Armando Roggio

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