Online electronics store Adafruit began accepting bitcoin as a payment method in November 2013. Just over a week later, sales surged.
The DIY electronics merchant raked in tens of thousands of dollars that month alone, boosted by the annual shopping surge known as Bitcoin Black Friday. While sales have been up and down since, site founder Limor Fried says that, as a small business owner, she loves the cryptocurrency despite its potential pitfalls.
“Our community of makers, hackers, artists, engineers and crypto [currency] enthusiasts really like it, and that’s what mattered most to us,” she said. “We’d do it again and we’re glad we were doing it during peak bitcoin [value].”
More and more retailers are accepting bitcoin as a form of payment these days. But is it a viable option for your small business? Here’s what to consider.
Lower fees. Credit card fees have long been a thorn in the side of small business owners, who have to fork over 2% to 4% of a sale each time they swipe a customer’s plastic. That’s not the case with bitcoin. There’s no credit card company charging merchants to facilitate the transactions, and third-party bitcoin vendors generally charge fees of 1% or less per sale. Such vendors process bitcoin transactions for retailers, and allow them to either store their bitcoins on a server or immediately exchange them for cash at the daily exchange rate.
Lower fees are a good thing whether a transaction is large or small, says Stephanie Wargo, vice president of marketing for BitPay, the world’s largest bitcoin payment processor.
Lower processing fees can help merchants do away with credit card minimums. They also save small businesses big money when it comes to jewelry, large electronics and other high-end items.
“When you’re paying 2.5 to 3% [in transaction fees] on a purchase that’s a couple thousand dollars, that’s a lot of money,” Wargo says.
Easy to process. Because bitcoin transactions are completed via smartphone or tablet apps, there’s no need to buy or rent special processing equipment, notes Stephen Lesavich, digital currency expert and founder of the Lesavich High-Tech Law Group in Kenosha, Wisconsin.
Irreversible transactions. All bitcoin transactions are final; as Lesavich points out, there’s no authority anywhere that can reverse a transaction. That, in turn, protects a small business from what’s known as chargeback fraud, in which a customer challenges a payment and the bank or credit card company forces the merchant to return the payment and often charges penalty fees.
However, this can also be a negative if, say, a customer wants a refund. Bitcoin’s value could have changed greatly since the original purchase, putting small business owners in a bind and at risk of complaints or even litigation.
International exposure. Besides generating buzz and gaining market share over competitors who don’t use bitcoin, the digital currency may also open up international markets for small business owners. While credit card rules vary by country, bitcoin is treated the same way wherever it is accepted worldwide, with no foreign transaction or currency exchange fees.
“Especially if you’re doing business online, it opens up the chance to transact with people in South America or Africa,” Wargo says.
Volatility. One of the biggest drawbacks to bitcoin is the fluctuation of its value. Bitcoin isn’t backed by any nation or central bank, so it can’t always readily be turned into cash. Because its value is wholly dependent upon online market dynamics, which can push its price up or down rapidly, a holder’s wealth can rise or fall dramatically.
Last year, the value of bitcoin plummeted as much as 80% in a single day, according to the Consumer Financial Protection Bureau, and the trend has been downward over the past year. The currency was valued at $764 on Jan. 1, 2014, had dropped to $297 on the first day of this year and slid to less than $220 in February.
“At this point, consumers are stepping into the Wild West when they engage in the market,” CFPB Director Richard Cordray said in a 2014 press release.
Theft and hacking potential. Security is an issue for bitcoin. Bitcoins are typically stored in either a cloud-based “wallet” held by firms like BitPay and Coinbase, or saved to the hard drive of a computer.
Choose the latter, and you could be out thousands if you forget your password or lose your laptop. Outside companies aren’t a guarantee of safety either. They’re prime targets for hackers, as the popular bitcoin exchange Mt. Gox discovered early last year.
Bitcoin is not typically recoverable, so if you’re hacked, the money is gone.
Tax questions. Last year, the Internal Revenue Service classified bitcoin as “property” rather than “currency” for tax purposes. Because of that, merchants who accept bitcoin are subject to capital gains taxes based on an increase in value from the time they collected payment to when they traded it in for cash. This won’t make a difference for merchants who use an exchange service to immediately swap bitcoin for cash, but it could have a big impact on those who process bitcoin transactions on their own and hold onto the currency for a while.
Big Brother’s watching. Like other cryptocurrencies, bitcoin has a somewhat murky history. It’s struggled because of an association with an Internet black market in which drugs and other illegal goods and services are sold, and where digital currency is preferred because of the anonymity it allows.
As a result, using bitcoin can make a small business subject to more government scrutiny, Lesavich says. If your business is legitimate, it shouldn’t be an issue. But it may be something some small business owners just don’t want to deal with.
The decision to use bitcoin can be a tough one for small business owners. While it can save you money in fees and open your business to international markets, it’s not fraud-proof and is extremely volatile. Be sure to carefully weigh the pros and cons, and make a decision based on your small business and its needs.
Learn more about small business by visiting NerdWallet’s Small Business Education Center.