While it is unlikely your local grocery store is currently accepting payment in bitcoin, you may have heard of this new emerging form of currency and may be wondering what is it; how does it work; and should you have some bitcoin stashed in your wallet?
Bitcoin is a new form of currency created in 2009 that only exists in digital format. At its core, bitcoin functions like other payment forms—you can purchase goods online or offline using your bitcoins as long as the seller accepts that form of payment. At present, not that many entities take payment in the form of bitcoin (coinmap.org is attempting to track physical locations that accept the currency), and people are likely buying bitcoins more as an investment with hopes they’ll go up in value over time.
According to Martine Niejadlik, Chief Compliance Officer at Coinbase, that may change in the future as bitcoin provides several benefits for consumers and merchants over other traditional payment options. Coinbase is a company providing consumers services for sending, receiving, selling, buying and storing bitcoin.
“When you pay with a credit card or check, there are a lot of entities and expenses involved to make that process work and each company gets a fee for their part of the process,” Ms. Niejadlik explained. “There are interchange fees and other potential expenses such as chargeback management and currency exchange fees. So when you purchase $100 worth of goods with a credit card, the merchant is only getting a portion of that, around $97 as the other $3 is covering the various fees involved.”
“With bitcoin, the processing fees are a small fraction of what is charged today. Accepting bitcoin provides the merchant opportunities to reduce expense and pass some of those savings on to their customers in the form of lower prices or offering discounts or coupons when paying with bitcoin – which is already happening today.”
Other potential benefits bitcoin proponents point out:
- Micro payments opportunities. In the U.S., the penny is the smallest currency component. In the online space, however, the vendor may want to charge at an even smaller currency value. For example, an online news journal may want to charge 10% of a penny for each page view. Bitcoin easily facilitates a “micro-level” pricing structure that existing payment options don’t.
- Ability to make a payment without sharing all your personally identifiable information to the merchant – kind of like using cash.
- International based online transaction may be more efficient and less expensive as bitcoins are not tied to any specific country’s currency (or regulations).
So, where do bitcoins come from?
This is a pretty easy to comprehend with other forms of currency. With cash, the U.S. government prints it. With credit cards, the card issuers set the available credit limit on our credit cards. The process with bitcoin is a bit harder to comprehend.
They are created through a process called mining, and as I understand it, people compete to “mine” bitcoins by solving complex mathematical computations to validate that bitcoin transactions are legitimate when a bitcoin transaction is posted. The winner is rewarded with a fee and “x” newly created bitcoins they can save or “sell” into the market.
How do you get access to bitcoins?
Since it is a virtual currency, you’ll need to set up a virtual wallet to convert your local currency (U.S. dollars) into and out of bitcoin currency as well as to store it. Companies like Coinbase have created processes and services to help consumers conduct these transactions easily, but bitcoin exchange services are another option.
Be careful as with any new technology, there is both potential risk and reward. Bitcoin is currently less regulated versus other payment options (checks, credit cards, cash) and bitcoin wallets are not insured by the FDIC (like standard bank accounts). Additionally, there has been news coverage that governments (U.S. and other countries) are concerned about taxation and their perceived lack of control over the currency.
“It is really important that anyone interested in bitcoin do their homework before making any investment decision given the currency is in its very early stage,” Ms. Niejadlik added.
When you think about it, the rate of evolution with payment options in the last one hundred years is quite remarkable. Many of us can remember when there were no credit cards or ATM machines–technology that is now used daily without a thought by most people. Will bitcoin be a similar phenomenon 10 … 25 … 50 years from now?
We’d like to hear what you think. If you’re interested or invested in Bitcoin, tell us why.
Tom Quinn is the Vice President of Business Development for myFICO® , and has over 20 years of experience working with consumers, regulators and lenders and regarding credit related questions and initiatives.