5 Things Businesses Should Know About Bitcoin

The digital currency features low transaction costs but is highly volatile and attracting regulatory scrutiny,

1. The digital currency fluctuates. The bitcoin network launched in 2009 to little fanfare, but it has gained momentum due in part to periodic price surges. Bitcoins are essentially secret numbers transferred from one software client to another using public key cryptography. The virtual currency is traded on international exchanges, which determine its value according to demand. No bank or government controls bitcoin, making it a digital alternative to national currencies.

2. Transactions are cheap. Online retailers fear they may lose money if a credit card transaction is reversed due to fraud. But bitcoin transactions are as good as cash: Transactions can't be reversed by a third party, and due to cryptography, bitcoins are impossible to fake. The extremely low transaction fees--a fraction of a cent--means bitcoin offers significant savings over credit cards, which charge retailers upwards of 4 percent of a sale.

3. Regulators are watching. Bitcoin is legal, but if its economy continues to grow, regulators may get involved. No U.S. state has published digital currency guidance, but state regulators generally say that bitcoin businesses should be licensed, says Marco Santori, chair of the Bitcoin Foundation's Regulatory Affairs Committee. But state rules don't fit bitcoin's borderless system. "Thus, a global bitcoin business seeking to service customers in the United States must endure a grueling and byzantine state-by-state process of obtaining licenses for every state--even those in which they have no physical presence," he says.

4. You need to keep an eye on your wallet. The main focus of security concern is the software used to store bitcoins, called wallets. Bitcoins are transferred using public key cryptography, so if a private key for a stash of bitcoins is obtained by hackers, they have your money. Efforts are underway to create more secure wallets. Still, in an era when enterprising cybercriminals perform jaw-dropping data thefts, businesses may be uncomfortable leaving $30,000 worth of bitcoins on their laptop. Some security-minded people print the private key for their bitcoins and keep the paper in a safe deposit box, says Gavin Andresen, chief scientist for the Bitcoin Foundation.

5. It's not mainstream. The currency's early adopters are mostly high-tech businesses, including VPN providers, online merchants and well-known websites such as Reddit and WordPress. The Chinese search engine Baidu is accepting bitcoins as payment for its computer security services. In the U.S., however, big companies have stayed away so far, perhaps due to regulatory concerns.

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