What You Need to Know About Bitcoin, Part 1

Is this controversial virtual currency viable for e-commerce?

by Brad and Debra Schepp
- Mar 14, 2014

Bitcoin has been all over the news lately. People are making a fortune with it; others are getting ripped off. It's been used to buy drugs, and now some merchants are accepting it as a payment option. The U.S. government and Bank of America have weighed in, and now view Bitcoin as a legitimate form of payment.

All this is true, and yet it does little to lessen the mystique around it. Just what is Bitcoin, and why should you care? In our two-part series, we'll give some background on this new currency, and describe how you can add it as a payment option to your website, should you decide to do so.

Let's start with the fact that Bitcoin is a virtual online currency, in some ways similar to PayPal. Some call Bitcoin electronic cash; digital coins you send through the Internet. But there's much more to it than that, especially from the viewpoint of online merchants.

Plenty of risk factors

Accepting Bitcoin costs virtually nothing in the way of fees. There's no central clearinghouse or bank involved, and transactions are made person to person

Accepting Bitcoin as a form of payment costs virtually nothing in the way of transaction fees. There's no central clearinghouse or bank involved, and transactions are made person to person. Users only need an Internet connection and application software (termed a Bitcoin miner) to use the currency. But Bitcoin has a shady past; then there's the question of whether it's even legal currency.

There's something else about Bitcoin, though, which is largely responsible for the spate of attention paid to it by the media. Bitcoins can be bought and sold, and can rise or fall in value. A lot. While Bitcoins are only worth half of what they were during their peak, they are still selling for 56 times the price of what they were selling for at the beginning of 2013.

Without a central bank or government owning Bitcoin, ownership is completely decentralized (peer to peer). As mentioned, accepting this form of digital currency is also cheap—any fees are a tiny fraction of what they are with credit cards or PayPal, for example, and chargebacks are not possible.

A shady past

Bitcoin's somewhat seedy reputation can be traced back to its use for buying and selling drugs online, according to Kyle Gladney, an e-commerce consultant and instructor at Florida's Lynn University. Silk Road, an underground online marketplace, was called the Amazon of drugs, notably because sellers and buyers on the site accepted and used only Bitcoin as payment. In time, according to Wikipedia, Silk Road had cornered the Bitcoin market, having collected 9.5 million bitcoins out of a total of 11.75 million bitcoins then in circulation.

We believe Bitcoin can become a major means of payment for e-commerce, and may emerge as a serious competitor to traditional money transfer providers

The U.S. government shut down Silk Road and since then, two notable things have happened: Legitimate merchants are accepting Bitcoin as a form of payment, and its value has continued to rise.

"Yet Bitcoin is still not regulated," Gladney says. "There's no central bank, however, the U.S. government has now recognized it as a currency." While Bitcoin may seem nothing more than the latest hot tech trend, Gladney predicts it will be "huge."

Recently, Bank of America added legitimacy to Bitcoin in a research report written with Merrill Lynch analysts.

"We believe Bitcoin can become a major means of payment for e-commerce, and may emerge as a serious competitor to traditional money transfer providers," the report notes.

Gaining traction

Yet questions about the currency remain. The New York Times recently referred to Bitcoin as the "soaring, slightly scary virtual currency that has beckoned and bewildered people around the world." The article describes a "pump and dump" scheme involving Bitcoin, designed to entice people looking for superfast and insanely large profits.

Still, e-commerce merchants have a special incentive to learn all they can about Bitcoin. The idea of miniscule transaction fees is certainly appealing. It's already gaining traction among some e-merchants, too. There was even a Black Friday site, where, according to PC Magazine, hundreds of vendors accepted the online cash including GSM Nation (sellers of unlocked smartphones), CheapAir.com (a travel site), a domain seller, gift card discounter Gyft, organic coffee company Bitbrew, and a Christmas tree site, ChristmasTre.es.

The federal government—for now—views Bitcoin as a legitimate form of payment and even issued a statement to that effect

Yes, Bitcoin has been all over the news lately, and not for a good reason. In late February, Mt. Gox.com, a large Tokyo-based Bitcoin exchange, filed for bankruptcy. Hackers reportedly stole more than 460 million in Bitcoins, with another 27 million unaccounted for. Yet even this development, while somewhat derailing the virtual currency, didn't throw it off track completely. The Los Angeles Times, for example, said it's "too early to write off Bitcoin." Other major media sources concurred.

While Mt. Gox is gone, you can still acquire Bitcoins at exchanges such as secondmarket. These exchanges will also allow you to trade in Bitcoins for cash. There are various denominations of Bitcoins, too. If you think of one Bitcoin as a dollar (of course it's likely worth a lot more than that), bitcents or centibitcoin are available too.

Legal sanction

Should you as a merchant accept Bitcoin? Gladney, who builds e-commerce websites, feels you should at least be looking into it, as interest in this form of currency is building very quickly. But is there a risk to accepting it as payment? Not as much as you might think.

The federal government—for now—views Bitcoin as a legitimate form of payment and even issued a statement to that effect through the Financial Crimes Enforcement Network (FinCEN). So given the building interest in the currency, and its acceptance as a legitimate form of payment by the U.S. government, perhaps you should explore adding the ability to accept Bitcoin to your site.

We've only touched on Bitcoin here, and may have raised as many questions as we answered. For more information, see the wiki about it, or visit this Bitcoin site, which has an excellent FAQ area. In our next article we'll discuss how to accept Bitcoin as a form of payment, and the experiences some e-merchants have had in doing so.

About the Author

Brad and Debra Schepp are the authors of 20 books, including eBay PowerSeller Secrets and The Official Alibaba.com Success Guide: Insider Tips and Strategies for Sourcing Products from the World's Largest B2B Marketplace. Their most recent book, which Deb co-authored with John Lawson, Kick Ass Social Commerce for E-preneurs: It's Not About Likes—It's About Sales, was recently named the 2015 Small Business Book of the Year in the social media category.

For further information, visit Brad and Deb's website, bradanddeb.com.

Opinions expressed here may not be shared by Auctiva Corp. and/or its principals.

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