Practice Management Small Business

Digital Currency – Are Bitcoins Here to Stay?

Written by Doug Sleeter

Mock bitcoinOver the past few years, the concept of digital currency has become a very hot topic, and for good reason. As you’ll read here, digital currency is one of the most disruptive technologies that has come about since the silicon chip. And digital currencies will disrupt banking systems and governments in ways that no one ever imagined.

Here’s a quick look at Bitcoin, the leading digital currency.

Warning: Many companies who are providing Bitcoin services have been shut down or are having difficulty keeping up with transaction volume. As I write this, there seems to be a frenzy of activity in the Bitcoin market that’s causing the underlying value of Bitcoin currency to fluctuate wildly. In fact, Reuters reported February 10, “The price of the digital currency bitcoin slid to its lowest level in nearly two months . . . after bitcoin digital marketplace Mt. Gox said a halt on withdrawals it announced on Friday [February 7] would continue indefinitely after it detected ‘unusual activity.’” Banks and governments are struggling to figure out what to do about regulating bitcoins, so the future of this entire sector is still very much unknown. You could lose some or all of your money that you convert to bitcoins, so buyer beware.

I first got introduced to the concepts of digital currency in 2003, when a friend of mine, Todd Boyle, was developing a global, Internet-based “web ledger” concept that expanded on what NetSuite (then known as NetLedger) was doing. Todd’s goal was to create a public, global accounting and payments system where all transactions between buyer and seller would be in a shared transaction repository. It’s a fascinating concept, and in many ways, it’s quite attractive, although scary. The software guy in me likes the elegance of having a single transaction that both parties share, as opposed to having two different sets of books where each party has to separately create and store each transaction. But the accountant in me struggles to see how to get the world to change. What if one trading partner is on this new system, but the other trading partner has old-world books.  But still, I think there are interesting and compelling benefits to going in this direction.

Todd was sort of a mad scientist type who was obsessed with eliminating governments and central banking systems, so he struck me as a very intelligent guy who was so far out there that nobody was really listening.

But here we are, 11 years later, and many of his ideas are starting to come to life. I don’t think he’s involved in digital currency any longer, but everything he wrote about digital currency looks eerily similar to Bitcoin.

What Is Bitcoin?

Although the foundation technology that makes Bitcoin possible is advanced mathematics and computer encryption technology, you can think of Bitcoin as the digital version of the cash you have in your wallet. You use your bitcoins by sending and receiving digital messages (think encrypted email) as opposed to initiating a bank transaction like a check, credit card, or cash payment.

Getting Started with Bitcoin Digital Currency

To get started, you need to create a Bitcoin “wallet” and then purchase bitcoins with normal currency. Most likely, you’ll transfer from your bank account into a digital wallet using a service like Coinbase. You could also download an application onto your computer that creates and stores your bitcoins in a secure encrypted wallet, but there’s no way to fill the wallet on your computer unless you receive bitcoins from someone else. You can send or receive bitcoins from your wallet to other people or companies as long as they have Bitcoin wallets. WeUseCoins has lots of in-depth information about getting started and using bitcoins.

How Do You Purchase Bitcoins?

You can purchase bitcoins from any of several brokers or exchanges that are listed on this site: http://howtobuybitcoins.info/us.html. The price of bitcoins fluctuates, similar to the way a stock fluctuates in the stock market, and you can purchase less than a full bitcoin (say .10 bitcoins). Today’s Bitcoin price is about $670 per bitcoin, but in the past six months, the price has fluctuated from about $94.00 to as high as $1,124.00. So purchasing bitcoins is a risky thing in the current market. Check out this chart for recent prices.

How Do You Trade with Bitcoin?

If you want to purchase something with bitcoins, the seller must agree to accept bitcoins as payment. If they do, you’ll send money to their email address or to their special Bitcoin address. If you’re interested in the full story, there are several technical details about private keys and public key addresses. Read more on the Bitcoin foundation site: https://bitcoin.org/en/bitcoin-for-individuals.

Can Your Business Accept Bitcoins? Merchants that accept bitcoins

Merchants can accept bitcoins from customers by “requesting money,” a transaction at a time, or by using services like Coinbase, which give you a merchant tool kit that includes links for your website or shopping cart checkout pages. As long as your customers have a Bitcoin wallet (somewhat similar to a PayPal account), customers can send you bitcoins instead of cash, check, or credit cards. And there are NO FEES to send or receive bitcoins.

The fees come when you buy bitcoins or when you convert them into your local currency. For Coinbase, you pay a 1% fee plus $0.15 per transaction, but 1% is WAY less than the fees you pay with credit cards or even PayPal. However, keep in mind, the underlying value of bitcoins is constantly changing with the market, so whatever amount you accept in bitcoins may be quite different when you go to convert it into your local currency. To mitigate this issue, you can set up automatic “cash outs” to eliminate the exchange rate risk. Coinbase sends payouts to your local bank account once per day when you enable automatic payouts. You can also manually sell bitcoins at any time.

Is Using Bitcoin Safe?

Bitcoin transactions are secured by military grade cryptography. Nobody can take money from you or make a payment on your behalf as long as you take the required steps to protect your wallet.

Security is the key benefit we haven’t been able to achieve with our current banking, credit card, or cash systems. Fraud is rampant across all of our payment technologies, and this is why I believe digital currency is here to stay. Governments and banking systems are extremely nervous about these systems and struggling to catch up with regulation and legal frameworks, so the next several years will be very interesting to watch.

For now, I’m checking it all out, experimenting with an account, and seeing how it all works. Are you jumping into digital currency? Why or why not?

Want to learn more about Bitcoin? See Greg Lam’s Bitcoin 101 article.

About the author

Doug Sleeter

DougSleeter (@dougsleeter) is the founder and former CEO of The Sleeter Group, an international network of accounting software consultants, and the former producer of SleeterCon, an annual conference and tradeshow for accounting professionals.

In 2015, he sold The Sleeter Group to Diversified Communications (www.divcom.com) and the company has since become The Accountex Network.

He is a passionate leader of innovation and change in the small business accounting technology world. As a CPA firm veteran and former Apple Computer Evangelist, he melded his two great passions (accounting and technology) to guide developers in the innovation of new products and to educate and lead accounting professionals who serve small businesses.

Always in search of the next big thing, he is currently focusing on digital currencies and blockchain technology. He believes these technologies will change virtually everything in global commerce.

The CPA Practice Advisor recognized Doug as one of the "Top 25 Thought Leaders" in the accounting profession and he has been named to Accounting Today's "Top 100 Most Influential People in Accounting" each year 2008 through 2015. In 2013, he was recognized by Small Business Trends with the Small Business Influence Champion award.

In the early 1990s, Doug was a pioneer in developing the first QuickBooks seminars in the country and has since built the largest group of accounting software consultants in the small business accounting profession. Doug serves on several advisory boards for technology companies and has consulted with numerous industry leaders including Intuit, Sage, Apple, and Adobe Systems. 

Doug is the author of numerous books and courseware materials including The QuickBooks Consultant’s Reference Guide, and QuickBooks Complete, a college textbook.
 
Doug attended both the University of California Santa Cruz and Santa Clara University and holds a Bachelor of Arts degree in Computer Information Systems. Doug and his family live in Pleasanton, CA. Doug's hobbies include woodworking, golf, and lifelong learning.

14 Comments

  • For sure, the volatility is scary right now. But like many innovations, it takes time for details to be worked out. In this case, I think the challenge is to figure out how to provide some stability in the underlying value of Bitcoins while not giving any special interest (like a government) control.

    Also, a big challenge is to get people to let go of our concepts of currency that exists today. The concepts that a government must print and control the circulation of currency. While we might think the current system is “stable,” in reality it’s very controlled by the Fed, and other central banks who can manipulate at will.

    There are tradeoffs of course, and tons of debate about whether this whole thing is good or bad.

    But for sure, this is a great example of how technology can and will disrupt things in ways we could not have imagined.

    I’m watching this with great interest.

  • The apparent collapse of the Mt. Gox Bitcoin exchange (see http://www.latimes.com/business/la-fi-bitcoin-collapse-20140226,0,5968430.story#axzz2uRlw0nlJ ) illustrates the point I’m making – this still has to be considered a risky investment. Working with Bitcoin at this time is similar to playing in the stock market or currency exchange markets, rather than just being a normal way of handling payments for business transactions.

    That’s fine, as long as you understand what you are doing, and know what the risks are. My investments are in the stock market (both US and foreign) and that has a lot of risk, also, but I understand the risk and I’m aware of what I’m doing there.

    In the long term I can see that systems like Bitcoin could become valuable business processes. It is just at THIS time, there is a lot of risk.

  • I’ve tried to experiment with bitcoins as a means to easily transfer money between countries (I’m a Canadian who lives and works in Japan and does business around the world). My first hurdle has actually been to get bitcoins in the first place. A Canadian exchange didn’t work for me, since I didn’t have a Canadian I.P. A Japanese exchange, Mt. Gox, recently went down (as Charlie has mentioned).

    So I’ve spent maybe a half day worth of time trying to started with bitcoin (including downloading digital wallet software) and have so far come up empty. The point I’m trying to make is that there’s still a bit of friction to what bitcoin is partly trying to solve, which is to take out the middle man and friction from monetary transactions. If everyone dealt with bitcoin then this friction probably wouldn’t exist, since I could be entirely paid and pay others in bitcoin. I wouldn’t need to deal with exchanges and the fees, hassle, and time associated with converting money back and forth between bitcoin and other currencies.

    That being said, I’m still very interested in the concept of crypto-currency and want to do some more investigation into it. There’s still a lot of work to be done to make the use of the currency simpler.

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