Why Some Merchants Accept Bitcoin Despite the Risks

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Many merchants are still wary about accepting bitcoins, but new vendor partnerships and a maturation of the companies that handle bitcoin exchanges address some of the virtual currency's riskier aspects.

Bitcoin is a decentralized cryptocurrency, offering users cash-like traits online. The digital currency has struggled to vindicate its bad reputation and suffered extreme price fluctuations as a result of exchange hacks.

Even Bitcoin devotees like BeesBros, a bee-keeping family business in North Logan, Utah, recently got stung.

"Bitcoin is a significant chunk of our sales … some of the sales that happened when the price was high we kept in bitcoin so it was a bit of a loss," says Craig Huntzinger, who owns the company with his wife and children.

Huntzinger estimates that 25% of BeesBros business is done in bitcoins annually.

"Our sales are small so it's kind of an exciting roller coaster ride," he says. "We're just happy to have a front row seat to see what's going to happen."

Payments using the virtual currency are quicker than ones using credit cards, and the cost of accepting bitcoins is lower than accepting credit cards, Huntzinger says. 

The company uses BitPay, a bitcoin payment processor. For a fee around 1%, BitPay and other processors will take the currency risk for their clients, immediately converting bitcoins received from shoppers into dollars at a guaranteed exchange rate. Last year, BitPay announced it had signed on 1,000 online merchants to its platform.

BitPay also works with Gyft, which sells virtual gift cards for large merchants such as American Eagle, Nike and Burger King. Consumers who wish to use bitcoins at these merchants can now indirectly do so by purchasing a virtual Gyft card, but the mega-merchants don't take bitcoins themselves.

"Until bitcoin gets to where it's extremely stable and a currency with very low volatility, retailers don't have the margins to price in bitcoin," says Vinny Lingham, CEO of Gyft.

Partnerships with intermediary companies that do business with large retailers, like BitPay's arrangement with Gyft, are one way to get more merchants comfortable with bitcoins.

BitPay and services that allow for indirect bitcoin acceptance "are essential to get bigger companies involved that are worried about some of this volatility," Huntzinger says.

And once merchants don't have to worry about losses, they can focus on the benefits of using bitcoin.

Bitcoin "is a viable way to transfer money from one place to another … in a very low-cost and efficient way," Lingham says.

But Lingham says there's still a lot more to be done before Bitcoin becomes a stable currency. "The only way Bitcoin goes from a $1.5 billion market to a trillion dollar market is if there's regulation which the government is comfortable with," he says.

The U.S. federal government has just this year started clarifying regulation for digital currency. In March, the Financial Crimes Enforcement Network issued guidance on virtual currency. While not specifically naming Bitcoin, FinCEN explained that businesses and exchangers that handle virtual currency should be regulated as money service businesses and money transmitters. 

And last week, the Department of Homeland Security seized funds from Dwolla's Mt. Gox account. Mt. Gox is the largest Bitcoin exchange and is based in Tokyo. DHS cited Mt. Gox operating as an unlicensed money transmitter as reason in the warrant. Funds were also seized at Wells Fargo.

Lingham says the activity surrounding Mt. Gox could be a good thing for Bitcoin, in that it serves as a cautionary tale about relying too much on one exchange.

Bitcoin entrepreneurs seem to be thinking the same thing, as several new exchanges are springing up, bringing Wall Street foreign exchange tools to the Bitcoin economy.

"First and foremost we want to provide a good alternative to Mt. Gox," says Jesse Powell, CEO of Payward Inc., the company that owns Kraken.com, a new Bitcoin exchange offering shorts and margin trading. Kraken.com launched for testing on May 2.

A similar exchange, focusing on the arbitrage opportunities in the Bitcoin ecosystem, is Crypto Street. The exchange launched on April 23 for testing and hopes to open up to the general public by the end of May. Crypto Street aims to make it more difficult for individual players to manipulate the market.

A greater diversity of Bitcoin exchanges could stabilize the market.

"If it's going to be for anything other than speculation the price needs to be stable," says Powell. "Wherever it's not stable someone is taking a currency risk."

And that risk is something merchants will be unlikely to accept, he adds.

The few prominent companies that accept bitcoins directly have done so for very specific reasons. Wordpress accepts bitcoins to provide services in regions of the world where other payment methods are blocked. Humble Bundle, which raises funds for charity through name-your-price software sales, began accepting bitcoins this month because it was "our most requested payment option," according to a May 9 blog post. The top donor for Humble Bundle's current software bundle is SatoshiDice, a Bitcoin casino.

The bitcoin price fluctuation several weeks ago stemmed from factors such as hacks on Mt. Gox, says George Burke, chief marketing officer at Crypto Street. This caused panic-selling and drove the price down. During this time the price per bitcoin dropped from $260 to around $70 in one day.

Because it's difficult to filter bitcoins between exchanges, most users will pick one exchange, usually one with a lower price such as the BTCE exchange, to hold their bitcoins and then another to sell bitcoins, usually one with higher prices such as Mt. Gox, says Burke. Prices fluctuate because of this, he adds.  

Crypto Street "is a way for users to deposit with us and easily transact across all platforms," Burke says. "It's a way to recursively make a play with the arbitrage opportunity which just might depending on the volume be able to stabilize the currency across all of the exchanges."

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