When it was launched, Bitcoin (BTCUSD) was envisaged as a medium for daily transactions by its inventor, Satoshi Nakamoto. The idea behind a decentralized cryptocurrency was to eliminate centralized control of money from government agencies and ensure speedy processing of transactions.
More than a decade later, observers are questioning whether the cryptocurrency has failed to live up to that promise. Very few daily transactions are conducted using Bitcoin as a medium of exchange.
But the idea of an alternate currency, outside the purview of governments and federal agencies, is powerful. Recent developments in Bitcoin technology, such as Lightning Network, have the potential to return Bitcoin to its original promise. The number of places accepting Bitcoin has increased as the cryptocurrency’s technology and name recognition have evolved. You can buy a surprising number of things using Bitcoin.
Bitcoin is designed to offer users a unique set of advantages over other payment methods. We’ll take a closer look at those below, but before we do, it is useful to explore what Bitcoin, the cryptocurrency, actually is. By understanding Bitcoin’s design principles, it will be easier to see the advantages of using Bitcoin for payments.
- Bitcoin transactions offer several benefits, such as low transaction fees and speedier processing, compared to transactions conducted with fiat currencies.
- Bitcoin transactions are especially useful for international transfers.
- The potential for making payments with Bitcoin has improved following technological advancements such as the Lightning Network.
- Bitcoin transactions can be conducted by those who are unbanked as well.
What Is Bitcoin?
Bitcoin is a decentralized, peer-to-peer cryptocurrency system that processes transactions through digital units of exchange called bitcoin. It was invented in 2009, and the Bitcoin network has come to dominate and even define the cryptocurrency space, spawning a legion of altcoin followers and representing for some users an alternative to government flat currencies like the U.S. dollar or the euro, or pure commodity currencies like gold or silver coins.
Part of the reason for Bitcoin’s attraction to these followers is its decentralized status: It is not controlled or regulated by a central authority. This immediately distinguishes it from fiat currencies, which are issued by central banks and backed by the government. Fiat currencies are also disbursed into a given economy through institutions like banks that are beholden to government regulations for their operations.
On the other hand, Bitcoin creation and disbursal does not depend on government fiat. Payments involving Bitcoin are processed through a private network of computers linked through a shared ledger. Each transaction is simultaneously recorded in a “blockchain” on each computer that updates and informs all accounts. The blockchain serves as a distributed ledger and obviates the need for any central authority to maintain such records.
Bitcoins are not issued by a central bank or government system like fiat currencies are. Rather, bitcoins are either “mined” by a computer through a process of solving mathematical problems or algorithms are used to verify transaction blocks to be added to the blockchain. Bitcoin can also be purchased with standard national money currencies and placed into a bitcoin wallet that is accessed most commonly through a smartphone or computer.
El Salvador made bitcoin legal tender on June 9, 2021. It is the first country to do so. The cryptocurrency can be used for any transaction where the business can accept it. The U.S. dollar continues to be El Salvador’s primary currency.
Benefits of Bitcoin
Now that we have seen a brief overview of what bitcoin is, we can better understand how this leading cryptocurrency provides potential benefits to its users.
Bitcoin has user autonomy
Conventional fiat currencies are subject to multiple restrictions and risks. For example, banks are vulnerable to boom and bust cycles in the economy. Sometimes, these situations can end in bank runs and crashes, as has occurred numerous times in the past. This means that users are not really in control of their money. Theoretically, at least, bitcoin promises user autonomy because its price is not linked to specific government policies. This means that users and owners of the cryptocurrency are in control of their money.
Bitcoin transactions are pseudonymous
Most online transactions require an array of information to identify the person conducting the transaction. For example, transferring money from one person to another can be done only after the identifying information for parties at both ends is verified. Similarly, online purchases also require you to enter identifying information to make a purchase. The verification process may prevent crime, but it also places an intermediary firmly in charge of the transaction, allowing them to control the provisioning of services to select parties.
Bitcoin transactions are pseudonymous. While this means that they are not completely anonymous, the transactions can be identified only by using a blockchain address. An individual can have multiple addresses, just as they can have multiple usernames and passwords for a single account. Internet Protocol (IP) addresses or other identifying information are not required to conduct the transaction.
Bitcoin transactions are conducted on a peer-to-peer basis
The Bitcoin payment system is purely peer to peer, meaning that users are able to send and receive payments to or from anyone on the network around the world. Unless they are sending or receiving bitcoin from a regulated exchange or institution, the parties to a transaction do not require approval from an external source or authority.
Bitcoin transactions do not incur banking fees
While it is considered standard among fiat currency exchanges to charge so-called “maker” and “taker” fees, as well as occasional deposit and withdrawal fees, Bitcoin users are not subject to the litany of traditional banking fees associated with fiat currencies. This means no account maintenance or minimum balance fees, no overdraft charges, and no returned deposit fees, among many others.
Bitcoin payments have low transaction fees for international payments
Standard wire transfers and foreign purchases typically involve fees and exchange costs. Since Bitcoin transactions have no intermediary institutions or government involvement, the costs of transacting are generally lower compared to those for bank transfers. This can be a major advantage for travelers. Additionally, transfer in bitcoins is fast, eliminating the inconvenience of typical authorization requirements and wait periods.
Bitcoin payments are mobile
As with many online payment systems, Bitcoin users can pay for their coins anywhere that they have Internet access. This means that purchasers do not have to travel to a bank or a store to buy a product. However, unlike online payments made with U.S. bank accounts or credit cards, personal information is not necessary to complete any transaction.
Bitcoin transactions are irreversible
One of the characteristics of Bitcoin’s blockchain is that it is immutable. Therefore, transactions using the blockchain are irreversible and cannot be amended by a third party, such as a government entity or a financial services agency. Also, it is not possible to file a charge-back for bitcoin sent to someone else. The only way to reverse, in a manner of speaking, Bitcoin transactions is by having the recipient send back the original bitcoin.
Bitcoin transactions are secure
Bitcoin is not physical currency. Therefore, it is impossible for thieves to palm it off the holder. Hackers can steal a person’s cryptocurrency if they know the private keys for the wallet. However, with proper security, it is technically impossible to steal bitcoin. While there are reports of hacks at cryptocurrency exchanges, Bitcoin’s exchange has remained impervious to such breaches. Therefore, transactions conducted between two (or among multiple) addresses are secure.
Because users are able to send and receive bitcoins with only a smartphone or computer, Bitcoin is theoretically available to populations of users without access to traditional banking systems, credit cards, and other methods of payment.
Bitcoin Payment FAQs
Can I make payments using Bitcoin?
Several online retailers, such as Overstock (OSTK), allow users to pay with Bitcoin. In recent times, small businesses and individuals have also begun using the cryptocurrency’s blockchain for overseas remittances.
What are the advantages of using Bitcoin for transactions?
There are several advantages to using Bitcoin for transactions. However, the two main advantages of using the cryptocurrency are its peer-to-peer focus that removes intermediaries and its pseudonymous design that eliminates the need for identification information for both parties. Both characteristics expedite transactions and remove unnecessary steps for transactions.
Are transactions using Bitcoin completely free?
Because they are conducted without intermediaries, Bitcoin transactions do not involve fees or service charges using third-party intermediaries. However, users do have to pay Bitcoin’s blockchain network fees to conduct the transactions.
Do Bitcoin transactions require bank accounts?
Transactions using Bitcoin do not require users to have bank accounts. The only requirements for such transactions are that the user is connected to the Internet and has an associated address on the cryptocurrency’s blockchain to send or receive payment.