Bitcoin: How will this new “currency” affect you?

The other day I was making a purchase online and listed along with the other payment options– pay pal and credit card– was bitcoin…. What’s a bitcoin?  Can you actually use this to make purchases? Is this form of payment secure? How do I get bitcoins?

What is a Bitcoin?
 

A bitcoin is a form of virtual currency that only operates in cyberspace.

A virtual currency can be defined as a type of unregulated, digital money, which is issued and usually controlled by its developers, and used and accepted among the members of a specific virtual community. In 2009, the “Bitcoin” network was launched, introducing a worldwide virtual currency.

Bitcoin permits buyers and sellers to interact anonymously to facilitate instantaneous payments for goods and services, without the involvement of a third-party such as a bank. Bitcoin may be purchased to start but you must “mine” bitcoins. Mining is a resource-intensive processes where miners use special software to solve math problems and are issued a certain number of bitcoins in exchange.  Here are a few interesting facts about Bitcoin:

  • Bitcoin is typically stored on a user’s personal computer or in cloud based accounts called “wallets.”
  • Bitcoin wallets do not meet the UCC’s definition of a deposit account as they are not maintained with a bank.
  • Bitcoin wallets are not insured by the FDIC.​
  • Bitcoin has a high likelihood for extreme value fluctuations.
  • Bitcoin is gaining popularity.
 
The Warning!
On March 11, 2014, FINRA issued an Investor Alert to caution investors of the “significant risks” of buying and speculating in bitcoin and other digital currencies, as well as the risk of fraud and cybercrime related to online bitcoin exchanges and other bitcoin-related service providers.
Specifically, the alert outlines several risks surrounding the usage of and speculating in bitcoin, including:

  • Bitcoin and other digital currencies are not legal tender and if the trust built up among individual users and businesses should vanish, bitcoin would be valueless.
  • Online exchanges that allow users to buy and sell bitcoin and digital wallet services that allow users to store bitcoin are magnets for cyberthieves.
  • Because bitcoin transactions are essentially anonymous, users must take extra care to avoid fraudsters posing as legitimate services.
  • Bitcoin has been used for illicit transactions and such activities could impact users and speculators if an online exchange or service is shut down by law enforcement.
  • Price volatility has been bitcoin’s hallmark in recent years, and there is no uniform value of bitcoin across the various exchanges.

Is bitcoin the future?
Given the variable nature of bitcoin, it’s hard to foresee the future. Many questions remain: How will state or federal legislators regulate the bitcoin system?  Will volatility and data security destroy confidence in bitcoin?  Will bitcoin emerge as a standard payment option, remain a niche product, or otherwise become less interesting, but more predictable under new regulations? Will the average consumers embrace this new currency?

 
​Should Small Business Owners Use Bitcoin?
I would caution against it if your company will not survive the associated risks and building the necessary infrastructure. Accepting bit coin will necessitate updates to refund and exchange policies, calculation of sales tax, when to lock in the rate, etc.  Additionally, users will need to monitor developing regulations and consumer perception of bitcoin.  This volatility can be hard on sellers especially small sellers that rely on every dollar to survive and thrive. 
 
The retailers and other businesses that have announced that they are accepting bitcoin as payment are not established “brand” names that perhaps have a higher risk tolerance. One exception may be Overstock.com.  The major brands may soon follow. We have seen Vegas casinos, and Congressman accepting bitcoin.  But it seems the major brands are waiting to see how legislation develops,how consumer opinion develops, if the value will stabilize, etc before dabbling in a currency that offers little to no stability. The companies using bitcoin are predominately brands that have the benefit of anonymity, are seeking publicity or have a consumer base that is actively using bitcoin and will understand the volatility. Unless you run a tech business that caters to the bitcoin-savy, use caution when exploring new payment options. Your budding company may not bounce back from a dive in the value or new regulations that may emerge. Build a strong brand and strong consumer base then consider taking risks. Bitcoin may not be going away anytime soon but asses legal/regulatory, commercial/financial, and reputational risks before deciding whether to make bitcoin a part of your business.

 

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