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Two months ago, we asked a not-so-simple question: Should you accept bitcoin for your services? The answer, for at least two firms, was a resounding yes.
Two firms, a Houston DUI and drug defense firm and an Illinois and New Mexico small business law firm, recently announced that they will accept Bitcoin for services. While the move may pay dividends in the short-term as a publicity stunt (they got our attention, after all), we can't help questioning the wisdom of the move long-term.
Bitcoin Basics, Revisited
Bitcoin is a crypto-currency, which is geek speak for computer-created funny money. It's valuable solely because the masses say it is, much like the gold and silver that has been used as money for much of human history. It may sound like a scam, but ask yourself this: What backs your U.S. dollar? The full faith and credit of the U.S. government.
Functionally, it's not significantly different than any foreign currency. It has an exchange rate, it can be cashed in for U.S. currency, and it can be accepted for payment (assuming a willing recipient).
But Bitcoin has a number of problems. For one, it has no backing nation -- only a backing peer-to-peer network. It's literally a currency created out of thin air (or out of computer processing, called Bitcoin mining). The amount of coins able to be mined is limited by a fixed equation. This creates a limited supply of currency, which causes hoarding, and consequently, a volatile currency.
It also greatly complicates your tax preparation. How do you report Bitcoin? Do you use the exchange rate at the time of the service rendered, at the time of payment, or at tax time? (Answer: Not sure, but here is the IRS' take on foreign currency. Enjoy!)
The volatility of the exchange rate is, even more than the currency's shaky foundation, its biggest weakness. If one takes Bitcoin for legal services, the exchange rate could collapse overnight, leaving the lawyer billing the equivalent of $20 per hour; or if the rate jacks up, the lawyer ends up billing an unconscionable rate of $1,000 per hour.
In the last few months, according to Bitcoin currency trader Mt. Gox, the exchange rate (USD to BTC) has dropped as low as $50/1BTC and as high as $160/1BTC.
A currency collapse could put the lawyer out of business. A spike in value could put him in front of a disciplinary committee, or at a minimum, leave him with a very angry client. Bitcoin's volatility has already wreaked havoc on the online illegal drug trade marketplace "The Silk Road," according to The Telegraph. It could do the same for the lawyers that defend the drug dealers.