How to accept Bitcoin payments: A 2021 guide for small businesses

Bitcoin is perhaps the best-known type of decentralized cryptocurrency. Not long ago, many considered it more of a joke than an investment. But as its value and notoriety have increased, businesses big and small have taken note. If you’ve been considering accepting Bitcoin or other cryptocurrency payments, here’s what you need to know.

• What is cryptocurrency?
• Why is cryptocurrency important? Trends in cryptocurrency payments
• How to accept Bitcoin payments
• Other cryptocurrency payment options for small businesses
• Should small businesses accept cryptocurrency? Pros and cons to consider
• Benefits of cryptocurrency payments
• Disadvantages of cryptocurrency payments

What is cryptocurrency?

Cryptocurrency is a digital form of payment that can be used to buy goods and services. Most forms of cryptocurrency use a technology called blockchain, first introduced in 1991 by researchers Stuart Haber and W. Scott Stornetta.

In order to understand how cryptocurrency works, it’s helpful to know a little about blockchain. Namely, that blockchain is a type of database that can record and distribute digital information while preventing it from being edited. This tamper-proof design is what makes cryptocurrency so secure.

The world’s first decentralized cryptocurrency—Bitcoin—was introduced in 2009. Since then, over 10,000 cryptocurrencies have been developed, including Ethereum, Litecoin, and Dogecoin. As of 2021, Bitcoin is the largest cryptocurrency by market cap, with millions of investors and counting.

Why is cryptocurrency important? Trends in cryptocurrency payments

Cryptocurrency is important because while there are still some barriers to widespread adoption of cryptocurrency, there are some important benefits associated with cryptocurrency payments. These include speed, ease, and security of payments. These benefits have made cryptocurrencies attractive to many businesses, both big and small.

In February 2021, electric vehicle and clean energy company Tesla made headlines when it announced it had bought  $1.5 billion worth of bitcoin . For a short while, the company even began accepting payments in Bitcoin, in exchange for its products. By May 2021, however, that was no longer the case. While the company has stated an intent to accept cryptocurrencies in the future, such forms of payment are currently on pause, due to environmental concerns.

But Tesla isn’t the only company keeping cryptocurrency in mind. As of August 2021, plenty of other big names accept Bitcoin, including AT&T, Overstock, and the Wikimedia Foundation.  Research by QuickBooks  shows 15 percent of U.S. small businesses now accept cryptocurrency. That includes nearly a quarter (23 percent) of millennial-owned businesses.

Some businesses may use company-specific cryptocurrencies—a payment strategy in which a company issues its own currency, called a token. Customers use the company’s tokens to “pay” for goods and services provided by the company. It’s a little like a casino chip.

Of course, many businesses are accepting more conventional cryptocurrencies, including Bitcoin.

How to accept Bitcoin payments

Once you’ve decided to start accepting Bitcoin payments, it’s easy to get set up. Here’s what you need to do:

1. Determine how you’ll use Bitcoin in your business

Because Bitcoin is so volatile, some business owners like to exchange their Bitcoin for cash shortly after it’s received. Others hold on to their Bitcoin, in the hopes its value will continue to climb. Believe it or not, these strategies will impact what kind of technology you want to employ for receiving and managing cryptocurrency.

2. Find a Bitcoin wallet

Folks new to cryptocurrency may be surprised to learn that there are lots of options to consider when it comes to wallets. It’s not just a choice of brands; there are actually different types, too, though many of the names you’ll hear do overlap. Here are some of the names you’ll come across in your search: hard wallet, soft wallet, cold wallet, hot wallet, mobile wallet, and digital wallet.

• Hard wallet: Also called a “hardware wallet.” A hard wallet is essentially an offline storage tool—sort of like a thumb drive. They’re considered the most secure method for storing Bitcoin, which makes them suitable for business owners who plan to hold on to their Bitcoin for a prolonged period of time. Hard wallets may also be a good idea for business owners who plan on accepting large amounts of Bitcoin.
• Soft wallet: Also called a “software wallet.” Soft wallets are less secure than cold or hard wallets, but may be a good option for business owners who plan to immediately exchange their Bitcoin for cash. Most digital wallets are also software wallets.
• Cold wallet: Cold wallets are wallets not connected to the internet. If you have a hard wallet, it’s probably also a cold wallet.
• Hot wallet: Hot wallets are connected to the internet, which makes them more vulnerable to online attacks. That said, being connected to the internet also makes it easier to trade or spend Bitcoin. That may be appealing to business owners who plan to pay others with the Bitcoin they’ve earned.
• Digital wallet: Digital wallets are typically more user-friendly than hard or cold wallets. Well-known brands like Coinbase and BitPay have sophisticated integrations that easily link up to major e-commerce platforms. Business owners can send invoices, accept cryptocurrency payments, issue refunds, and more, all from a digital wallet. Users can also generate reports to help manage taxes.
• Mobile wallet: Some cryptocurrency wallets are only available as mobile apps, but any crypto wallet you keep on your phone is a mobile wallet. Business owners who run their business on the go should probably consider a wallet they can access both on their phone and on the computer.

3. Find a Bitcoin payment processor

Once you’ve begun accepting Bitcoin payments, you’ll likely want a way to convert your Bitcoin into cash. That’s where Bitcoin payment processors come in. Payment processors allow users to convert their cryptocurrency into fiat (government-issued currency) like dollars or euros.

Some digital wallets have an advantage here, too. For instance, BitPay is both a wallet and a payment processor. Customers can automatically convert their cryptocurrency payments into dollars, then transfer their earnings from BitPay into their business’s bank account.

4. Accept Bitcoin payments

There are a few different ways to accept Bitcoin payments: invoicing, adding a Bitcoin payment option to your website, or accepting Bitcoin in person.

Depending on your digital wallet, accepting Bitcoin on your website could be as easy as enabling a plug-in. When customers get to the payment portion of the check-out process, they’ll see an option to pay in Bitcoin.

For crypto-savvy business owners interested in taking Bitcoin during in-person transactions, QR codes can help. Customers simply scan your offered QR code with their digital wallet app. The required information, including your bitcoin address and the requested payment amount, should autofill. The customer sends the funds, and the payment is complete.

Other cryptocurrency payment options

Bitcoin may be the best-known cryptocurrency on the market, but it’s certainly not the only one. If you’re going to accept Bitcoin in your small business, you might want to add these other cryptocurrencies to the list of payment options.

1. Ethereum: According to ethereum.org, Ethereum is the “community-run technology” behind the cryptocurrency Ether (ETH). It’s currently the second largest cryptocurrency by market capitalization (preceded only by Bitcoin).
2. Litecoin: Litecoin (LTC) is very similar to Bitcoin, though presently it costs a great deal less. One benefit of Litecoin is its speed. Litecoin is mined faster than Bitcoin and has a quicker transaction throughput.
3. Bitcoin Cash: Bitcoin Cash is another spin-off of Bitcoin, created several years later. Like Litecoin, Bitcoin Cash processes transactions quicker than the Bitcoin network. Because of this, transaction processing fees tend to be lower than those associated with Bitcoin.
4. Cardano: Cardano (ADA) is another new cryptocurrency, launched in 2017. Despite being the fifth largest cryptocurrency by market capitalization, its value is currently much less than Bitcoin. On August 21, 2021, one Bitcoin was worth $49,250.50 U.S. dollars, while one Cardano was worth $2.46.

Should small businesses accept cryptocurrency? Pros and cons to consider

Like any investment or financial decision, it pays to proceed with caution. Cryptocurrency is highly volatile and prone to extreme advantages and risks. Here are a few of the pros and cons you should consider.

Benefits of cryptocurrency payments

• More diverse payment options: More ways to accept payment could attract new customers—particularly a younger generation.
• Opportunity to win: The cryptocurrency you receive could increase in value by the time you exchange it for cash.
• Global commerce: Cryptocurrency makes it easy to accept payment from customers all over the world (but do check your local laws for legal guidance).

Disadvantages of accepting cryptocurrency payments

• Security risks: Digital wallets can be hacked, and cryptocurrency is difficult to recover.
• Opportunity to lose: Cryptocurrencies are highly volatile and can have big swings in their value, sometimes in a matter of hours. The cryptocurrency you receive could decrease in value before you have a chance to exchange it for cash.
• Awareness and reputation: While most people today know what cryptocurrency is, a lot of people still view it as more of an investment than a payment option. And of those who do know it’s a payment option, many associate it with money laundering and other criminal activity.
• Environmental impact: Mining cryptocurrency takes a great deal of energy—much of which is powered by coal. For that reason, eco-friendly brands may want to steer clear.
• Expense management: Keep in mind that many of your business expenses will need to be paid in cash. Before you decide to hold cryptocurrency, ensure you have a cash flow plan to manage your expenses and have a way to easily and quickly convert cryptocurrency into cash. If cash runs short, you may be required to do withdrawals and exchanges just to keep the lights on.

Tax implications: If you thought your regular taxes were complicated, just wait. The Internal Revenue Service (IRS) views cryptocurrency as property. As  IRS Notice 2014-21  explains, “A taxpayer who receives virtual currency as payment for goods or services must, in computing gross income, include the fair market value of the virtual currency, measured in U.S. dollars, as of the date that the virtual currency was received.” For each payment. For that reason, it’s a good idea to talk to your CPA prior to accepting Bitcoin payments.