How to Accept Cryptocurrency Payments as a Small Business
If you’re a small business owner, you’ve probably done your research on how to accept credit card payments. Whether it’s an option provided by a merchant account provider or a free version like Square, there are plenty of ways to get paid by plastic. But what about cryptocurrency?
You may have heard the word before but still don’t understand the concept. Or maybe you don’t think that accepting cryptocurrency is necessary for your business. Perhaps you’re even worried about potential drawbacks associated with accepting crypto.
There’s no doubt that digital currency has its pros and cons. But if you want to keep up with the changing landscape of payment options for consumers, it might be time to explore what this new world has to offer. And why customers may demand it from your business in the near future.
What Is Cryptocurrency and How Does It Work?
When most people think of cryptocurrency, they think of Bitcoin. With a price that skyrocketed to over $65,000 in February 2021, April 2021, and November 2021., it’s easy to see why. But there are over 1,800 different cryptocurrencies (also called “tokens”) available today—and new ones pop up in the market nearly every day.
You may have already heard of Bitcoin and Ethereum, but suddenly you will come across an altcoin called Polkadot and get bamboozled. Questions like how to buy Polkadot, what DOT is, and why I should buy DOT will occupy your mind. But fret not because it’s all simple.
At its core, a cryptocurrency is a form of digital money that isn’t controlled by a central bank or government. It may sound complicated at first blush, but the platform on which cryptocurrencies are built is pretty simple. Cryptocurrency transactions are centralized on what’s called a blockchain, which is just an online ledger that records all transactions made with each particular cryptocurrency.
On the Bitcoin blockchain (the most well-known one), for example, you can find transaction records for all transactions ever made using Bitcoin. This information has no association with real names or identities—only public account addresses are included. Each recorded transaction includes three essential pieces of information:
- The amount sent from one account address to another
- A unique cryptographic signature that identifies the sender
- The timestamp at which the transaction was initiated
Why Should Small Businesses Accept Cryptocurrency?
There are many benefits to accepting cryptocurrency as a small business. First, transactions are incredibly speedy. For example, bitcoin payments can be received in as little as ten minutes, no matter where a customer is in the world.
Second, transaction fees for cryptocurrencies are lower than for most other payment methods. Compared to traditional credit cards and debit cards which have associated fees of between 1% and 3%, cryptocurrencies charge significantly less. The fee is oftentimes just a fraction of a cent per transaction. These low costs benefit both business owners and customers by keeping more money within the cryptocurrency ecosystem instead of paying processing fees to intermediary third parties like payment processors and banks.
Third, because there is no need for an intermediary third-party to process transactions made in cryptocurrency, transactions are much more secure than with traditional payment methods. Usually, credit cards or checks require sensitive personal information to complete the transaction normally stored on centralized servers, making them vulnerable to hacking attacks.
What Are the Potential Drawbacks to Accepting Cryptocurrency?
Although cryptocurrency can be a viable alternative payment method for many small businesses, there are also some potential drawbacks to accepting it as payment. These include:
- Volatility: Unlike government-issued currencies, the value of cryptocurrency is not backed by any physical assets or the government. Instead, its value is determined by market demand and supply. This can make it very volatile in comparison to established currencies like the U.S dollar and the euro.
- Security: While cryptocurrencies are digital assets that allow you to complete transactions with minimal processing fees, they can pose security risks. This is true for both businesses and consumers due to malware attacks that seek out their private keys.
- Conversion: Cryptocurrency cannot be converted directly into cash at the point of sale (POS). As such, if you accept payments in cryptocurrency, you will have to convert them into your preferred currency before they can be used elsewhere or deposited into your business bank account.
- Regulation: The use of cryptocurrencies across different countries is still unregulated in most cases. However, some governments have started introducing laws that govern their use. Your business needs to understand the local laws concerning virtual currencies so that you know what steps may be required before accepting them as a payment method.
- Taxation: If your business accepts payments using cryptocurrency such as Bitcoin, you will need to pay taxes on these earnings. Taxes will be calculated depending on how much revenue your company generates as well as whether its activities fall under capital gains or ordinary income categories based on IRS guidelines.
Types of Cryptocurrency Payment Systems
There are two types of cryptocurrency payment systems available to small businesses:
- A payment processor that accepts Bitcoin payments and then converts those into dollars
- A wallet service where customers store their crypto, which is then transferred directly to you for a fee.
Payment processors like Bitpay and Coinbase convert customer payments into U.S. dollars and send the money to your bank account within 24-48 hours. The benefits of this system include the fact that business owners do not have to learn the technicalities of blockchain. You don’t need to get a new bank account or credit card processing equipment, and you can continue paying existing merchant service providers in dollars.
However, even though payment processors are free to set up with no monthly fees or minimum requirements, they do charge transaction fees as high as 1%. Additionally, if customers want refunds or chargebacks on their transactions, there’s no protocol for resolving such problems with cryptocurrency payment processors at this time.
Wallet services like Bitpay’s Copay Wallet allow customers to send bitcoin directly from their wallets for a flat fee of 1%. Benefits include zero transaction fees (apart from the miner fee), fast confirmation times (average 5 minutes), and blockchain transparency.
However, since this method involves accepting money directly in the crypto form, it’s not always ideal depending on what other kinds of payment systems you’re using (cash registers, invoices, etc.). There’s also no process through which to handle refunds or chargebacks yet, so be sure that all your processes are solid before accepting bitcoins directly into your wallet.
How to Accept Cryptocurrency for Your Business?
When accepting cryptocurrency payments, you have a few different options. You can set up your crypto wallet (or several), or you can use a payment processor that will handle all the details for you. If you opt to set up your wallets, here’s how to do it:
- Set up a hardware wallet and/or accounts with multiple cryptocurrency exchanges, such as GDAX, Bitstamp, and Bittrex. You want to be able to compare prices between exchanges at any given time and buy on the platform with the lowest price at the time of purchase.
- Transfer funds from your bank account into your exchange account. You may need to verify your identity before you can deposit money into an exchange account or make withdrawals from it. Generally speaking, it’s good practice not to store large amounts of cryptocurrency in any online exchange or wallet over which you don’t have direct control. So if possible, move cryptocurrency out of an exchange and into a personal wallet as soon as possible after buying it.
- Buy cryptocurrencies on these platforms via fiat currency (dollars) or other cryptocurrencies by making an order on the exchange platform.
How to Keep Your Business Secure After Accepting Cryptocurrency?
Once you start accepting cryptocurrency payments, you need to keep your company’s data secure. That means following best practices for data security, including using a password manager and using two-factor authentication. If you store customer information on your computer or in the cloud, consider using a virtual private network (VPN) to protect it.
Accepting cryptocurrency payments is a great way to stay competitive and reach a global audience. And once you’ve heard all the terms, it’s not too hard to get started. Just make sure that you take security precautions and are ready for anything. If you need help accepting cryptocurrency payments, you should reach out to a payment processor.