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For many small business owners, the offer of low payment fees is a very attractive proposition.

Bitcoin – a digital currency that allows low-cost peer to peer payments – offers an interesting alternative to traditional payment methods. When you buy or sell with bitcoins, bitcoin users set the fees. Typically those fees are much lower than the 2-3% transaction fees incurred in a typical credit card transaction.

If you are considering Bitcoin as payment method for your small business, keep these pros and cons in mind.

How Bitcoin works

Bitcoin isn’t real money – it’s a form of digital or “crypto-currency”. To buy and sell in Bitcoin’s virtual economy you’ll first need to purchase bitcoins. The value of the Bitcoin fluctuates based on supply and demand, which can make some business owners uneasy. Stored in a digital wallet, you can use bitcoins to buy anything from anyone who belongs to the Bitcoin network.

Although you can sign up for a Bitcoin account for free, there are admin fees associated with spending bitcoins. If you choose to pay a bit more, your transaction completes faster than for someone who selects a lower fee.

Bitcoin’s merchant processors accept fees to help international businesses securely process transactions, convert bitcoins into their own currency, and deposit funds into their bank accounts.

What you need to know

At this time Bitcoin is by no means a mainstream alternative to other forms of online payment. As a business owner, you’re limited to trading bitcoins with people already a part of Bitcoin’s virtual economy. On the one hand, this can lead you to new customers worldwide; on the other, you’ll still need an online payment option to serve the majority of people who prefer to use their credit cards or PayPal.

Some other pros and cons to consider are:

• Security – Bitcoin users must take care to keep their digital wallets secure with advanced encryption and strong passwords. Transactions don’t contain customers’ personal information, so identity theft isn’t an issue. But you can lose bitcoins forever if you don’t have a back up. Security breaches can and do happen with online wallets, so it’s recommended users only leave small amounts accessible in their digital wallets at any time
• Government regulations – Although bitcoins aren’t standard currency, they are an asset. Business owners shouldn’t assume they won’t have to pay income, sales, payroll and capital gains taxes on their bitcoins. Talk to your accountant about your tax obligations when it comes to digital currencies.
• Bitcoin may become more widely accepted over the coming years, but it may not. Because the value of a bitcoin is attached to the number of people willing to exchange this digital currency, they may be a risky investment. It’s wise to transfer the value of your bitcoins to your bank regularly in case the system ever experiences a crash.

Final thoughts

Currency in the hands of the people rather than the banks may be an appealing concept for some business owners. Over the next few years it will be interesting to see whether Bitcoin catches on and becomes a must for business owners to accept them. At the moment, it may make more sense for the average entrepreneur to observe from the sidelines – or try Bitcoin as payment method on a small scale to see whether the benefits outweigh the costs.