Should Your Small Business Accept Bitcoin?

Bitcoin may be on the receiving end of massive buzz, but small business owners really should think twice before accepting it as a payment method, according to Nick Vahalik, technical sales engineer at Commerce Guys, makers of Drupal Commerce.

“Right now, it’s a novelty,” says Vahalik, whose company provides an ecommerce framework for the popular Web content management platform Drupal. Bitcoin evolved in recent months from a computer hobbyist pastime to serious business as the digital currency’s value shot up.

Bitcoin Explained

First, it’s important to understand what bitcoin is. Here’s Webopedia‘s definition:

“Bitcoin is a digital payment currency that utilizes crypto-currency and peer-to-peer technology to create and manage monetary transactions as opposed to a central authority. The open source Bitcoin P2P network creates the bitcoins and manages all the bitcoin transactions.”

People generate bitcoins by using specialized software that devotes computing resources to record and verify bitcoin transactions in a process called bitcoin mining. Wallet apps on a PC or a mobile device store bitcoins and allow holders of the currency to transact in bitcoins.

Late last year, the bitcoin exchange rate topped $1,000 for a single bitcoin, a king’s ransom for early miners who hung on to their bitcoins and invested little more than their CPU/GPUs, time and the cost of electricity. (The difficulty of mining bitcoins increases over time.)

Rolling the Dice on Bitcoin

All of this bitcoin buzz may make it seem like a good time to jump in and perhaps profit from all the attention. Not so fast, warns Vahalik.

“You have to ask yourself, are you willing to gamble a little bit?” Huge swings in the currency’s value are the very definition of volatility. “Bitcoin has gone up and down so dramatically,” reminds Vahalik.

In the wake of a Dec. 18 decision by the Chinese government to officially ban bitcoins, the currency’s value plummeted to $500. As of this writing, the exchange rate for a single bitcoin hovers around $770.

Frankly, it doesn’t make financial sense for a small business owner to take such a gamble. “It’s still the Wild West,” says Vahalik. And for small companies concerned about paying the rent, let alone their employees, holding a currency that “could be [worth] $400 a week from now” can stand in the way of growing a business.

What about Overstock.com’s decision to accept bitcoins? “For the most part, it’s a marketing ploy,” opines Vahalik.

Vahalik suggests that small business owners play it safe for now and, in the meantime, educate themselves about bitcoin. “If nothing else, bitcoin has started a conversation about what currency is, and it’s helping people understand our currency system better. That’s a positive,” said Vahalik.

Pedro Hernandez is a contributing editor at Small Business Computing. Follow him on Twitter @ecoINSITE.