Touted to small businesses as, among things, a low-cost alternative to the high fees of credit card transactions, Bitcoin today is demonstrating the flipside of its promise: a steep fall and wildly fluctuating currency value. For the second time since December 1, the value of the “virtual currency” was in a free-fall earlier today. The price has fallen to below $600 from a price last week of $800 (it has recovered since its low). Its price was $1,100 on December 4.
Today’s fall is a continuation of a drop that began at the end of last week when Mt. Gox, a Japanese company that was previously the largest Bitcoin exchange in the world, halted all customer withdrawals. According to NYTimes.com’s DealBook Blog, “Mt. Gox said its problems were caused by a previously undetected glitch in the basic Bitcoin protocol that made it possible for users to falsify transactions.”
While Bitcoin has shown that a virtual currency can build a large user-base, the price fluctuations raise doubt that Bitcoin will be embraced by mainstream small businesses. In our December 31 predictions for 2014 small business trends, we noted that while Bitcoin has demonstrated a market desire for non-governmental-tied virtual currencies, we don’t believe that small businesses will embrace a currency that is subject to wild fluctuations in value.
While Bitcoin has been tied to a string of illegal activities including drug transactions, money laundering and other criminal activities, there are still uses of a currency like Bitcoin that could be quite legal and very attractive to small businesses. The most obvious is the ability to provide financial transactions outside the high-priced processing channel dominated by the credit card industry. “A virtual currency won’t find a critical mass of small business merchants willing to accept it if they believe it is a game of musical chairs played with their cash flow,” we wrote.