Okay, so what is Bitcoin?
It’s not a real coin, it’s “cryptocurrency”, a digital form of payment that is produced (“mined”) by many people around the world. It enables direct peer-to-peer transactions, worldwide, for free or at a very low cost.
Bitcoin was invented after decades of research into cryptography by software developer Satoshi Nakamoto (presumably a pseudonym), who designed the algorithm and introduced it in 2009. His true identity remains a mystery.
This currency is not backed by any tangible commodity (such as gold or silver); bitcoins are traded online, making them a commodity in their own right.
Bitcoin is an open-source product, accessible to anyone who is a user. All you need is an email address, internet access and money to get started.
Where is it from?
Bitcoin is mined on a distributed computer network of users using specialized software; the network solves certain mathematical proofs and looks for a certain data sequence (“block”) that produces a certain pattern when the BTC algorithm is applied to it. A match yields one bitcoin. It is complex and time consuming and energy consuming.
Only 21 million bitcoins will ever be mined (about 11 million are currently in circulation). The mathematical problems that the networked computers solve are becoming increasingly difficult to control mining activity and supply.
This network also validates all transactions through cryptography.
How does Bitcoin work?
Internet users transfer digital assets (bits) to each other over a network. There is no online bank; instead, Bitcoin has been described as an internet-wide distributed ledger. Users buy Bitcoin with cash or by selling a product or service for Bitcoin. Bitcoin wallets store and use this digital currency. Users can sell from this virtual ledger by trading their Bitcoin to anyone else who wants in. Anyone can do this, anywhere in the world.
There are smartphone apps for conducting mobile Bitcoin transactions and Bitcoin exchanges populate the internet.
How is Bitcoin Valued?
Bitcoin is not owned or controlled by any financial institution; it is completely decentralized. Unlike real money, it cannot be devalued by governments or banks.
Instead, Bitcoin’s value simply lies in its acceptance by users as a means of payment and because its supply is finite. Global currency values fluctuate depending on supply and demand and market speculation; as more people make wallets and hold and spend bitcoins, and more businesses accept it, the value of bitcoin will rise. Banks are now trying to value Bitcoin and some investment websites are predicting that the price of a Bitcoin will reach several thousand dollars in 2014.
What are the advantages?
There are advantages for consumers and merchants who want to use this payment option.
1. Fast Transactions – Bitcoin is sent instantly over the internet.
2. No Fees/Low Fees — Unlike credit cards, Bitcoin can be used for free or at a very low cost. Without the centralized institution as an intermediary, no authorizations (and fees) are required. This improves sales profit margins.
3. Eliminates Fraud Risk -Only the Bitcoin owner can send payments to the intended recipient, who is the only one who can receive them. The network knows that the transfer has taken place and transactions have been validated; they cannot be challenged or taken back. This is big for online merchants who are often subject to credit card processors’ assessments of whether or not a transaction is fraudulent, or for companies who pay the high price for credit card chargebacks.
4. Data Is Safe — As we’ve seen with recent hacks on national retailer payment processing systems, the Internet isn’t always a safe place for private data. With Bitcoin, users do not give up any private information.
a. They have two keys: a public key that serves as the bitcoin address and a private key that contains personal information.
b. Transactions are digitally “signed” by combining the public and private keys; a math function is applied and a certificate is generated proving that the user initiated the transaction. Digital signatures are unique to each transaction and cannot be reused.
c. The merchant/recipient never sees your secret information (name, number, physical address), so it’s somewhat anonymous, but it’s traceable (to the bitcoin address on the public key).
5. Convenient Payment System — Merchants can fully use Bitcoin as a payment system; they do not need to hold any Bitcoin currency as Bitcoin can be converted to dollars. Consumers or traders can trade in and out of Bitcoin and other currencies at any time.
6. International Payments – Bitcoin is used all over the world; e-commerce merchants and service providers can easily accept international payments, opening up new potential marketplaces for them.
7. Easy to Track — The network permanently tracks and logs every transaction in the Bitcoin blockchain (the database). In the event of possible wrongdoing, it is easier for law enforcement to track down these transactions.
8. Micropayments are possible – Bitcoins can be divided up to one hundred millionth, so making small payments of a dollar or less becomes a free or near-free transaction. This can be a real boon for convenience stores, coffee shops, and subscription-based websites (videos, publications).
Still a little confused? Here are a few examples of transactions:
Bitcoin in the shopping environment
At checkout, the payer uses a smartphone app to scan a QR code containing all the transaction information needed to transfer the bitcoin to the merchant. Tapping the “Confirm” button completes the transaction. If the user does not own Bitcoin, the network will convert the dollars in their account into the digital currency.
The retailer can convert that Bitcoin into dollars if desired, there were no or very low processing costs (instead of 2 to 3 percent), no hackers can steal personal consumer information and there is no risk of fraud. Very smooth.
Bitcoins in Hospitality
Hotels can accept Bitcoin for on-site room and dining payments for guests who want to pay with Bitcoin using their mobile wallet, or PC-to-website to pay for a reservation online. A third-party BTC merchant processor can help handle the transactions it settles through the Bitcoin network. These processing clients are installed on tablets at the counter of the establishments or in the restaurants for users with BTC smartphone apps. (These payment processors are also available for desktops, in retail POS systems, and integrated into foodservice POS systems.) No need to change credit cards or money.
These cashless transactions are fast and the processor can convert bitcoins to currency and make a daily direct deposit to the establishment’s bank account. In January 2014, it was announced that two hotel casinos in Las Vegas will accept Bitcoin payments at the front desk, their restaurants, and the gift shop.
It sounds good – so what’s the catch?
Entrepreneurs have to think about participation, safety and costs.
• A relatively small number of ordinary consumers and merchants currently use or understand Bitcoin. However, global adoption is increasing and tools and technologies are being developed to make participation easier.
• It’s the Internet, so hackers are a threat to the exchanges. The Economist reported that in September 2013, a Bitcoin exchange was hacked and $250,000 worth of bitcoins were stolen from users’ online vaults. Bitcoins can be stolen just like any other currency, so vigilant network, server, and database security is paramount.
• Users must carefully protect their bitcoin wallets, which contain their private keys. Secure backups or prints are crucial.
• Bitcoin is not regulated or insured by the US government, so there is no insurance for your account if the exchange goes bankrupt or is robbed by hackers.
• Bitcoins are relatively expensive. Current exchange rates and selling prices are available on the online exchanges.
The virtual currency is not yet universal, but it is gaining market awareness and acceptance. A business may decide to try Bitcoin to save on credit card and banking fees, for customer convenience, or to see if it helps or hinders sales and profitability.
Are you considering accepting Bitcoin? Are you already using it? Share your opinion and experiences with us.