Cash, Credit, or Bitcoin? A Digital Currency Primer | CreditShout

Cash, Credit, or Bitcoin? A Digital Currency Primer

By Kim Goodwin / April 7, 2016
Cash, Credit, or Bitcoin? A primer on digital currency

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Are digital currencies the future of money? I don't know. But I do know that being able to decide between cash, credit, or Bitcoin is much more common. So let's take a look at the revolutionary Bitcoin and how it works.

Bitcoin is a digital asset and payment system released as an open source software by Satoshi Nakamoto in 2009. It is a cryptocurrency that is used around the world and exists outside the control of any government monetary authority. The decentralized nature of Bitcoin means that the currency is only under the control of the networks of users.

This is appealing to people around the world for many reasons.

There are the obvious nefarious ways that Bitcoin can make it easy to hide money transfers and criminal activity from the eyes and control of government.

On the positive side, the decentralized currency is a very libertarian idea, and control by a worldwide network of users means that the currency cannot be manipulated by the actions of a single government. Farming out the verification process to users also makes transaction costs incredibly small. Bitcoin reduces the costs associated with transferring money between users, especially in countries where banking systems are not as advanced and widespread as they are in the United States.

Recognizing the growth and development of Bitcoin as a currency, last year the New York Stock Exchange created an index to track the exchange rate of a Bitcoin per US dollar each day.

Yet, for all the hype around this digital currency, its acceptance among a broad population has been limited. The reasons for this can be broken down into three main questions or concerns that potential users still have.

Is Bitcoin Money or a Payment System?

Education is one of the biggest hurdles that Bitcoin will have to address over the next few years. The general public may have heard the term used by the media, but few of those people actually know what it is. Of the small percentage who know what Bitcoin is, the perception is that it is something for criminals or inherently unsafe.

So, in some ways the decentralization of Bitcoin may actually keep people from adopting the currency. Since the end of the gold standard, currency really only holds as much value as citizens believe it has. The value is a function of the faith citizens have in the strength of a government and its central bank.

With Bitcoin, you have to put your trust in a network of users around the world who are unknown and hidden behind a computer screen. The average person is simply not comfortable enough with this type of a currency system. So, for now, it is limited to being a payment system.

Where do you get Bitcoin?

You don’t walk around with Bitcoin in your pocket, and chances are that your employer does not pay you in Bitcoin. So, where do you get some?

There are three ways that you can get Bitcoin.

  • First, you can get a Bitcoin wallet and pay to exchange your US Dollars for Bitcoin at the current exchange rate.
  • Second, you can receive a payment in Bitcoin from another user.
  • Third, you can be a part of the Bitcoin user verification network and earn Bitcoin as a payment for your service.

For people sending payments to friends and family in other countries, Bitcoin might be a easier and more cost effective way to transfer money. However, most people currently do not have a need to receive Bitcoin payments.

Where Can You Use Bitcoin?

Technically, Bitcoin is a payment system that can allow consumers to make payments for goods just like they would with a credit card, debit card, or Apple Pay. The difference is that processing a Bitcoin transaction uses a network of users for verification and allows the merchant to avoid high processing fees.

Not many places, however, allow you to use the currency for purchases. You probably can’t pay your bills using Bitcoin. But the list of stores accepting Bitcoin for purchases grows all the time (including Amazon, Overstock.com, and Zappos). 

Part of that growth for Bitcoin will also need to involve expanding the network of users who are verifying transactions. While traditional payment processing systems can verify a transaction in seconds, the backlog in Bitcoin processing can take anywhere from 10-60 minutes depending on the number of users running nodes and the transaction backlog.

And smaller retailers are unlikely to invest in Bitcoin payment processing until a larger number of users in their market begin using the cryptocurrency for transactions.

Another current drawback is that Bitcoin use is restricted or not legal in many countries. Some of those are countries where the use of such a currency might be appealing. Other countries may choose to follow suit in limiting or regulating the use of Bitcoin in the future.

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