So what is Bitcoin? It’s not a coin. Instead, it’s “cryptocurrency”, a digital form or payment that is produced (“mined”) worldwide by many people. It allows peer to peer transactions instantly, anywhere in the world, and at very low costs. After decades of research into cryptography, Satoshi Nakamoto, a software developer, created Bitcoin and introduced it to the world in 2009. His identity is still unknown. This currency is not backed with a tangible commodity, such as gold or silver; bitcoins can be traded online which makes them a commodity.
Bitcoin is an open-source product that anyone can access. To get started, you only need an email address, Internet access, money, and a bank account. It comes from where? Bitcoin is mined by a distributed computer network that runs specialized software. It solves certain mathematical proofs and searches for a specific data sequence (“block”) that results in a particular pattern when it is applied to the BTC algorithm. A match is what produces a bitcoin. It is time- and energy-intensive, and complex.
Only 21 million bitcoins have been mined, while approximately 11 million are in circulation. It becomes increasingly difficult for the network computers to solve the math problems that are required to maintain a steady supply and mining operations. The network also validates transactions using cryptography.
How does Bitcoin work?
Internet users can transfer digital assets (bits), to each other over a network. Bitcoin is not an online bank, but rather it is an internet-wide distributed ledger. Bitcoin can be purchased with cash or sold as a product or service. Bitcoin wallets store and manage this digital currency. This virtual ledger can be sold to another user by trading Bitcoin. This can be done by anyone, from any part of the world. There are many apps that allow you to conduct mobile Bitcoin transactions.
Additionally, there are numerous Bitcoin exchanges available on the Internet. How is Bitcoin valued Bitcoin is not controlled or held by any financial institution. It is completely decentralized. It cannot be devalued by banks or governments, unlike real-world money. Bitcoin’s value is not in its acceptance by users as a method of payment, but rather its finite supply. Its global currency value fluctuates according to market speculation and supply and demand. As more people create wallets and store and spend bitcoins, the Bitcoin’s value will rise.
What are the benefits of Bitcoin? This payment option has many benefits for both merchants and consumers.
- Bitcoin transactions are fast – Bitcoin can be transferred instantly via the Internet.
- No fees/low fees — Bitcoin can be used without any fees or charges, unlike credit cards. There are no authorizations or fees required. This increases profit margins and sales.
- Eliminates fraud risk The network knows that the transaction has been made and can validate it. They cannot be challenged or retracted. This is important for online merchants, who are often subjected to credit card processors’ assessments as to whether a transaction was fraudulent or businesses that have to pay the high price for credit card chargebacks.
- Data is safe — The Internet is not always a safe place for private data. This is evident from recent hacks on payment systems of national retailers. Bitcoin users don’t have to give away any private information. They have two keys: a public key that acts as the bitcoin address, and a private key that contains personal data. Digital transactions are signed by combining the private and public keys. A mathematical function is applied to generate a certificate proving that the transaction was initiated. Digital signatures cannot be re-used and are unique for each transaction. Your secret information (name and number, physical address, etc.) is not visible to the merchant/recipient. However, it can be traced (to the public key).
- Convenient payment system — Merchants have the option to use Bitcoin as a payment system. They don’t need to own any Bitcoin currency, since they can convert it to dollars. Merchants and consumers can trade in and exchange Bitcoin and other currencies at will.
- International payments – Bitcoin can be used all over the world. E-commerce merchants as well as service providers can accept international payments. This opens up new markets for them.
- It’s easy to track — Every transaction in the Bitcoin blockchain (the database) is tracked and permanently logged by the network. It is easier for law enforcement officers to track these transactions in the event of suspected wrongdoing.
- Micropayments are possible – Bitcoins can be divided down to one one-hundred-millionth, so running small payments of a dollar or less becomes a free or near-free transaction. This could be a boon for convenience stores and coffee shops as well as subscription-based websites (videos and publications).
Are you still a little confused? The payer scans a QR code using a smartphone app. This will allow him to transfer bitcoin to the retailer. The transaction is completed by tapping the “Confirm” button. If the user does not have Bitcoin, the network will convert the dollars in his account into digital currency. If the retailer wants to convert the Bitcoin into dollars, there are no or very low processing charges (instead of 2 to 3% percent). No hackers can steal consumer information and there is no risk for fraud. For guests who want to pay in Bitcoin for their room or dining reservations online, hotels can accept Bitcoin.
A third-party BTC merchant processing processor can help with the transaction clearing over the Bitcoin network. These clients are installed at the front desk of the establishments or in restaurants for users who have BTC smartphone apps. There are no money or credit cards that need to be changed. These cashless transactions are quick and the processor can convert bitcoins to currency and make a daily deposit into the establishment’s bank account. In January 2014, it was announced that two Las Vegas hotel-casinos would accept Bitcoin payments at their front desk, in restaurants, and in their gift shop.
What’s the Catch?
It sounds great, but what’s the catch? Businesses should think about cost, security, and participation.
- Bitcoin is only used by a small percentage of consumers and merchants. Global adoption is growing and new technologies and tools are being created to make it easier. Hackers are a threat to exchanges because it’s the Internet. According to the Economist, a Bitcoin exchange was compromised in September 2013. $250,000 worth of bitcoins was taken from users’ online vaults. Bitcoins can be stolen just like any other currency. Therefore, it is important to ensure that your network, server, and database security are all secure.
- Users should protect their bitcoin wallets that contain their private keys. It is important to have backups or printouts of your bitcoin wallet.
- Bitcoin is not insured or regulated by the US government. This means that there is no insurance to protect your account in the event that the exchange goes out-of-business or is hacked. Bitcoins are quite expensive.
The online exchanges offer current rates and selling prices. Although the virtual currency isn’t yet widely accepted, it is growing in popularity and acceptance. A business might decide to accept Bitcoin as a way to save money on bank fees and to test whether it can increase sales or decrease costs. Are you considering accepting Bitcoin? Are you using it? We would love to hear your thoughts and experiences.