If you’re like three quarters of the American populace, you’ve probably heard about something called bitcoin or another similarly named e-currency, but you don’t know exactly what it is. Here’s an explanation of what the cryptocurrency actually is and what its increasing popularity means for small business owners.


What is bitcoin?

Answering this question is a bit complicated because bitcoin refers to both a payment system and a unit of decentralized e-currency. By using the bitcoin network, users can exchange bitcoins via digital wallets that can be installed on a mobile device or computer. Records of all bitcoin transactions are maintained on a heavily encrypted public ledger called a block chain. As such, users exchanging bitcoins can validate that the people they are transacting with actually possess the money they claim to have. This Bitcoin.org page has a more elaborate explanation of how the bitcoin network operates.


Why is it so popular?

As pointed out in this Forbes article, bitcoins have become popular because the currency is extremely difficult to counterfeit and was created with an algorithm that guarantees users anonymity and security. As a decentralized e-currency, bitcoins can be used to pay for goods and services anywhere in the world and are classified as property, not currency, by the U.S. government. The protocol used to create the currency also specifies that only 21 million bitcoins will ever be created, so the inflation issues that have plagued other currencies will not affect bitcoin.


What are the disadvantages to accepting bitcoin?

Since bitcoins are not maintained by a single repository, its exchange rate can fluctuate dramatically on a daily basis. You could accept a bitcoin payment for an item that costs $20 and find out the next day that what you were paid equals less than half that amount in U.S. dollars. Bitcoins became the subject of media fascination in 2013 when the U.S. Department of Homeland Security seized assets belonging to the Mt. Gox bitcoin exchange as it was acting as an unregistered money transfer system. Mt. Gox, which during its peak handled 70 percent of all bitcoin transactions, later became insolvent in 2014 after 744,408 (roughly $375 million) of its customers’ bitcoins were stolen by hackers.


Should small business owners accept bitcoin?

The answer to that question is a bit ambiguous right now. Bitcoin proponents like venture capitalist Barry Silbert believe that bitcoin has the potential to become the new gold. The e-currency has also intrigued finance industry giant Citibank, which recently told the International Business Times that it is developing its own version of digital currency called Citicoin. So, with all that information in mind, should small business owners accept bitcoins as payment? Online financier Kabbage argues that they should because bitcoin payments have nearly nonexistent transaction fees, and sales made using bitcoin can be processed very quickly. By promoting the fact that you accept bitcoins, you could also tap into a lucrative demographic. However, the currencies fluctuating exchange rate, lack of regulatory oversight and ambivalent relationship with the U.S. Treasury Department suggests that a wait-and-see approach might be the most prudent course of action.

This article was written by Mario McKellop of Examiner.com for CBS Small Business Pulse.


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