Ok, so what is Bitcoin?
It is not a real coin, it is a “cryptocurrency”, a digital form of payment that is 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 their own right.
Bitcoin is an open source product available to anyone who is a user. All you need is an email address, internet access and money to get started.
Where does it come from?
Bitcoin is mined on a distributed computer network by users running specialized software; the network solves certain mathematical proofs and looks for a specific sequence of data (“block”) that produces a specific pattern when the BTC algorithm is applied to it. Coincidence produces Bitcoin. It is complicated and takes time and energy.
Only 21 million bitcoins will ever be mined (about 11 million are currently in circulation). The mathematical problems that networked computers solve are becoming increasingly difficult to keep mining operations and supplies under control.
This network also validates all transactions through cryptography.
How does bitcoin work?
Internet users transfer digital assets (bits) to each other over a network. No online bank; 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 from this virtual ledger by trading their bitcoins to anyone else who wants them. Anyone can do this, anywhere in the world.
There are smartphone apps for making mobile bitcoin transactions and bitcoin exchanges populate the internet.
How is bitcoin valued?
Bitcoin is not held or controlled by a financial institution; it is completely decentralized. Unlike money in the real world, it cannot be devalued by governments or banks.
Instead, Bitcoin’s value lies simply in its consumer acceptance as a form of payment and because its supply is limited. Its global currency values fluctuate according to supply and demand and market speculation; as more people create wallets and hold and spend bitcoin, and more businesses accept it, the value of bitcoin will increase. Banks are now trying to value bitcoin, and some investment websites predict that the price of one bitcoin will be several thousand dollars in 2014.
What are its advantages?
There are benefits for consumers and merchants who want to use this payment option.
1. Fast Transactions – Bitcoin is instantly transferred over the internet.
2. No Fees/Low Fees — Unlike credit cards, Bitcoin can be used for free or with very low fees. Without the centralized institution as an intermediary, no permits (and fees) are required. This improves profit margins on sales.
3. Eliminates the risk of fraud – Only the Bitcoin owner can send a payment to the intended recipient, who is the only one who can receive it. The network knows that the transfer has taken place and the transactions have been validated; they cannot be challenged or taken back. That’s big for online merchants, who are often subject to credit card processors’ evaluations of whether a transaction is fraudulent or not, or for businesses that pay the high cost of credit card chargebacks.
4. Data is secure — As we’ve seen with recent hacks into the payment processing systems of national retailers, the Internet isn’t always a safe place for personal data. With Bitcoin, users don’t give up personal information.
a. They have two keys – a public key that serves as a Bitcoin address and a private key with personal data.
b. Transactions are digitally “signed” by combining the 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 to each transaction and cannot be reused.
° C. The merchant/recipient never sees your secret information (name, number, physical address), so it is somewhat anonymous, but traceable (to the Bitcoin public key address).
5. Convenient payment system — Merchants can use Bitcoin entirely as a payment system; they don’t need to hold bitcoin currency as bitcoin can be converted to dollars. Users or traders can trade in and out of Bitcoin and other currencies at any time.
6. International payments – Bitcoin is used worldwide; merchants and e-commerce 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 in the Bitcoin blockchain (database). In the event of a potential breach, it is easier for law enforcement officials to trace these transactions.
8. Micropayments are possible – Bitcoins can be divided up to one hundred millionths, 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, posts).
Still a little confused? Here are some examples of transactions:
Bitcoin in Retail
At checkout, the payer uses a smartphone app to scan a QR code with all the transaction information needed to transfer bitcoin to the retailer. Tapping the Confirm button completes the transaction. If the user does not own Bitcoin, the network converts the dollars in his 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 to 3 percent), no hackers could steal personal user information, and there was no risk of fraud. Very smooth.
Bitcoins in Hospitality
Hotels can accept Bitcoin for on-site room and board payments for guests who wish to pay with Bitcoin using their mobile wallets or PC-to-website to pay for a reservation online. A third-party BTC trade processor can help process the transactions it clears through the Bitcoin network. These processing clients are installed on tablets at the front desk of establishments or in restaurants for users with BTC smartphone apps. (These payment processors are also available for desktop computers, in retail POS systems, and integrated into food service POS systems.) You don’t need to change hands on credit cards or cash.
These cashless transactions are fast and the processor can convert bitcoins into currency and make a daily direct deposit into the establishment’s bank account. In January 2014, it was announced that two Las Vegas hotel-casinos would accept Bitcoin payments at the front desk, in their restaurants and in the gift shop.
Sounds good – so what’s the catch?
Business owners must consider participation, security and cost issues.
• A relatively small number of ordinary users and merchants currently use or understand Bitcoin. However, adoption is increasing globally and tools and technologies are being developed to facilitate participation.
• It’s the Internet, so hackers are a threat to exchanges. The Economist reported that a bitcoin exchange was hacked in September 2013 and $250,000 in bitcoins were stolen from users’ online vaults. Bitcoins can be stolen like any other currency, so vigilant network, server and database security is paramount.
• Users should carefully guard their Bitcoin wallets, which contain their private keys. Secure backups or printouts are critical.
• Bitcoin is not regulated or insured by the US government, so there is no insurance for your account if the exchange goes down or gets robbed by hackers.
• Bitcoins are relatively expensive. Current exchange rates and selling prices are available on online exchanges.
Virtual currency is not yet universal, but it is gaining market awareness and acceptance. Businesses may decide to try Bitcoin to save on credit card and bank fees, as a customer convenience, or to see if it helps or hinders sales and profitability.
Thinking of accepting Bitcoin? Are you already using it? Share your thoughts and experiences with us.