So, what is Bitcoin?
It is not an actual coin, but a “cryptocurrency”, a form of digital payment produced (“mined”) by many people around the world. It enables instant peer-to-peer transactions worldwide for free or at very low cost.
Bitcoin was invented after decades of cryptographic research by software developer Satoshi Nakamoto (believed to be a pseudonym), who designed the algorithm and introduced it in 2009. His true identity remains a mystery.
This currency is not backed by a tangible commodity (such as gold or silver); bitcoins are traded online, making them a commodity in themselves.
Bitcoin is an open source product, available to anyone who is a user. All you need to get started is an email address, Internet access, and money.
Where does it come from?
Bitcoin is mined on a distributed computer network of users running special software; the network solves certain mathematical proofs and looks for a specific sequence of data (a “block”) that creates a specific pattern when the BTC algorithm is applied to it. A match produces a bitcoin. It is complicated and takes time and energy.
Only 21 million bitcoins will be mined (about 11 million are currently in circulation). Mathematical problems solved by networked computers make it increasingly difficult to control mining operations and supplies.
This network also authenticates all transactions through cryptography.
How does Bitcoin work?
Internet users transfer digital assets (bits) to each other on the network. No online banking; rather, Bitcoin is described as a distributed ledger on the Internet. 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 their Bitcoins from this virtual ledger by trading them to someone else who wants them. Anyone can do it anywhere in the world.
There are smartphone apps for conducting mobile Bitcoin transactions and Bitcoin exchanges are flooding the internet.
How is Bitcoin valued?
Bitcoin is not held or controlled by a financial institution; completely decentralized. Unlike real world money, it cannot be devalued by governments or banks.
Instead, Bitcoin’s value lies simply in its acceptance as a form of payment among users and its limited supply. Its global currency values fluctuate according to supply and demand and market speculation; as more people create 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 sites are predicting that Bitcoin will be worth several thousand dollars in 2014.
What are its benefits?
There are advantages for consumers and merchants who want to use this payment option.
1. Fast transactions – Bitcoin is transferred instantly over the internet.
2. No fees/low fees — Unlike credit cards, Bitcoin can be used for free or with very low fees. Without a centralized entity like a middle man, no permissions (and fees) are required. This improves the profit margin sales.
3. Eliminates the risk of fraud – Only the owner of the Bitcoin can send the payment to the intended recipient, who is the only person who can receive it. The network knows that the transfer has taken place and that transactions have been confirmed; they cannot be challenged or withdrawn. This is huge for online merchants or businesses who pay the high cost of credit card chargebacks, who are often subject to credit card processors’ assessments of whether a transaction is fraudulent.
4. Data is secure — As we’ve seen in recent attacks on national retailers’ payment processing systems, the Internet isn’t always a safe place for personal information. With Bitcoin, users don’t give up their personal information.
a. They have two keys – a public key that serves as a bitcoin address and a private key that contains private information.
b. Transactions are digitally “signed” by combining public and private keys; a mathematical function is applied and a certificate is generated proving that the user initiated the transaction. Digital signatures are unique for each transaction and cannot be reused.
c. The merchant/buyer never sees your private information (name, number, physical address), so it is somewhat anonymous, but traceable (down to the bitcoin address in the public key).
5. Convenient payment system — Merchants can use Bitcoin entirely as a payment system; Since Bitcoin can be converted into dollars, they do not have to hold any Bitcoin currency. Consumers or merchants can trade Bitcoin and other currencies at any time.
6. International payments – Bitcoin is used worldwide; E-commerce merchants and service providers can easily accept international payments, which opens up new potential markets for them.
7. Easy to Track — The network tracks and permanently records every transaction on the Bitcoin block chain (database). In the event of possible illegality, it is easier for law enforcement officers to track these transactions.
8. Micropayments are possible – Bitcoins can be divided into hundred millionths, making small payments of a dollar or less a free or nearly free transaction. This can be a real boon for convenience stores, coffee shops, and subscription-based websites (videos, publications).
Still a little confused? Below are some examples of operations:
Bitcoin in a retail environment
During checkout, the payer uses a smartphone app to scan a QR code that contains all the transaction information needed to transfer bitcoin to the retailer. Tapping the “Confirm” button completes the transaction. If a user doesn’t have any Bitcoins, the network converts the dollars in their account into digital currency.
The retailer could convert that Bitcoin into dollars if they wanted, there were no or very low processing fees (instead of 2-3 percent), no hackers could steal consumers’ personal information, and there was no risk of fraud. Very smooth.
Bitcoins in Hospitality
Hotels can accept Bitcoin for room and board payments for guests who want to pay with Bitcoin using their mobile wallets, or go from a computer to a website to pay for an online reservation. A third-party BTC merchant processor can help manage the transactions it clears over the Bitcoin network. These processing clients are installed on tablets at the front desk of businesses or restaurants for users with BTC smartphone apps. (These payment processors are also available for desktop computers, retail POS systems, and integrated into foodservice POS systems.) No credit cards or money need change hands.
These cashless transactions are fast and a processor can convert bitcoins into currency and make a daily direct deposit into the business’s bank account. In January 2014, it was announced that two Las Vegas hotel-casinos would accept Bitcoin payments at their front desk, restaurants and gift shop.
Sounds good – but what’s the catch?
Business owners must consider accessibility, security and cost.
• Relatively few ordinary consumers and merchants currently use or understand Bitcoin. However, adoption is increasing globally and tools and technologies are being developed to facilitate participation.
• This is the Internet, so hackers are a threat to exchanges. The Economist reports that in September 2013, the Bitcoin exchange was hacked and $250,000 worth of bitcoins were stolen from users’ online wallets. Bitcoins can be stolen just like any other currency, so vigilant network, server and database security is paramount.
• Users should carefully protect their bitcoin wallets with their private keys. Safe backups or prints are very important.
• Bitcoin is not regulated or insured by the US government, so there is no insurance for your account if the exchange goes out of business or is robbed by hackers.
• Bitcoins are relatively expensive. Current prices and sales prices are available on online exchanges.
Virtual currency is not yet universal, but it is gaining market awareness and acceptance. A business may decide to try Bitcoin for customer convenience, to save on credit card and bank fees, or to see if it helps with sales and profitability.
Thinking of accepting Bitcoin? Are you already using it? Share your thoughts and experiences with us.