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What Is Bitcoin?

Invented in 2009 by an anonymous creator using the alias Satoshi Nakamoto, Bitcoins are one of the earliest known examples of “cryptocurrency.”  In layman’s terms, this is a type of digital currency that is generated and managed electronically — without any form of centralized control.

All transactions happen on a peer-to-peer (P2P) basis between other Bitcoin users.  There is no intermediary tracking the creation or flow of Bitcoins. Rather, each transaction is verified using an open-source node network that is extremely redundant and publicly available. 

This makes Bitcoins highly resistant to fraud.

Like most types of currency, you can buy Bitcoins on open exchanges. You can also digitally convert dollars, euros or yen into whatever denomination of Bitcoins you desire.

Isn’t this just like any other type of electronic currency? What makes the Bitcoin concept unique?

Although Bitcoins share many similarities with other online payment technologies, there exist a number of important differences, including:

  1. Bitcoin Transactions Carry Lower Fees

    Bitcoin-based transactions carry minimal fees. This is because all business happens directly between individual users. Most other payment types require a processor, bank, or other intermediary — each of which charges its own fees.

    In fact, you don't even need to open a merchant account to begin accepting Bitcoins.

  2. Bitcoins Are Not Subject to Government Regulation

    For most businesses, this isn't very important, but the government can’t freeze or investigate your Bitcoin account (at least not right now). This is why the payment technology is so popular with criminal syndicates, terrorists and even groups like WikiLeaks.

  3. Bitcoin Is an Independent, Standalone Currency

    Bitcoins are not tied to any central bank or mint. New Bitcoins are safely generated at a fixed rate by the entire network working together.  What’s more, the currency works across all borders.

    Because no single organization controls the supply of new coins, there will never be a "stimulus" package or “monetary easing” that instantly devalues your stash.

    If anything, the value of each Bitcoin will actually increase over time. By design, only 21 million Bitcoins will ever be created. Users will have to continuously subdivide their Bitcoins into smaller denominations in order to conduct business.

  4. Bitcoin Prices Fluctuate Wildly in the Short Term

    Most types of money are fiat currencies whose value comes from government backing. The dollar is valuable because the U.S. federal government says it is — and we believe it.

    Bitcoins also work on faith. However, the underlying value comes exclusively from supply, demand and the community’s collective belief in the future buying power of the currency.

    As a result, Bitcoin valuation can be quite erratic:

    • In 2013, the currency was essentially worthless. 
    • In 2014, it went above $1,000. 
    • In 2015, the value is roughly $240.
  5. All Sales Are Final

    It's possible for either side of a transaction to dispute credit card charges, check-based purchases, or even cash-based buys. 

    With Bitcoins, however, all sales are final.

    This is great for merchants, obviously, because they don’t have to worry about chargebacks or refunds.

    This is why some Bitcoin shoppers use an escrow account until they feel confident about their purchases. However, this additional step involves an intermediary, which defeats the whole point of using Bitcoins in the first place.

Just Another Payment Option?

For some merchants, Bitcoins represent just another payment option. It’s nice to have, but it doesn’t offer much value.

Other businesses are able to tap into new markets, boost their sales, and reduce expenses by incorporating Bitcoin options into their payment infrastructure. Do your research before deciding if Bitcoin is an option that you want to pursure.

Topics: Payment Technology, PCI Compliance and Fraud Prevention

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