OK, so what is Bitcoin?
It is not an actual coin, it is a “cryptocurrency”, a digital form of payment that is produced (“mined”) by many people around the world. It allows you to transact with partners instantly, 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 tangible goods (such as gold or silver); Bitcoins are traded online, which makes them a commodity.
Bitcoin is an open source product that is available to every user. All you need to get started is an email address, internet access and money.
where does it come from?
Bitcoin is mined on a distributed computer network of users running specialized software. the network solves certain mathematical proofs and searches for a certain sequence of data (“block”) that creates a certain pattern when the BTC algorithm is applied to it. Lutsky produces Bitcoin. It’s 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 grid computers solve are increasingly difficult to keep mining operations and supply under control.
This network also validates all transactions through encryption.
How does Bitcoin work?
Internet users transfer digital assets (bits) to each other over the network. No online banking; rather, Bitcoin has been described as a distributed ledger for the entire 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, exchanging their Bitcoin with anyone else who wants in. Anyone can do it anywhere in the world.
There are smartphone apps for 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 real money, it cannot be devalued by governments or banks.
Instead, Bitcoin’s value simply lies in its acceptance among users 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 bitcoins, and more businesses accept it, the value of bitcoin will rise. Banks are now trying to capitalize on Bitcoin, and some investment websites are predicting that the price of Bitcoin will reach several thousand dollars in 2014.
What are its advantages?
There are advantages 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 very low fees. Without a centralized institution as an intermediary, no proxies (and fees) are required. This improves the profit margin sales.
3. Eliminates the risk of fraud – Only the owner of the Bitcoin 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 are validated; they cannot be challenged or withdrawn. This is great for online merchants, who are often subject to credit card processors’ assessments of whether or not a transaction is fraudulent, or for businesses that pay the high price of credit card chargebacks.
4. Data is safe. As we saw with the recent hacks of national retailers’ payment processing systems, the Internet isn’t always a safe place for private data. With Bitcoin, users don’t give up personal information.
a. They have two keys: a public key that serves as the bitcoin address and a private key with personal data.
b. Transactions are digitally “signed” by combining public and private keys; a mathematical function is applied and a certificate is generated that proves the user initiated the transaction. Digital signatures are unique for each transaction and cannot be reused.
c. The merchant/recipient never sees your private information (name, number, physical address), so they are somewhat anonymous, but they are traceable (to a public key bitcoin address).
5. Convenient payment system. Merchants can fully use Bitcoin as a payment system; they don’t have to hold any Bitcoin currency because Bitcoin can be converted to dollars. Consumers or traders can trade Bitcoin and other currencies at any time.
6. International Payments – Bitcoin is used worldwide; E-commerce merchants and 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 block chain (database). In case of possible illegalities, it is easier for law enforcement agencies to investigate these transactions.
8. Are micropayments possible? Bitcoins are divisible down to one hundred millionths, so making payments of one dollar or less becomes a free or nearly free transaction. This can be a real boon for convenience stores, coffee shops, and subscription-based websites (videos, publications).
Still a bit confused. Here are some examples of transactions.
Bitcoin in the retail environment
At checkout, the payer uses a smartphone app to scan a QR code that contains all the transaction information needed to transfer the bitcoin to the retailer. By clicking the “Confirm” button, the transaction is completed. If the user does not have any bitcoins, the network converts the dollars from his account into the 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 hacker could steal the consumer’s personal information, and there was no risk of fraud. Very subtle.
Bitcoins in hospitality
Hotels can accept bitcoin payments for room and board for guests who want to pay with bitcoin using their mobile wallets, or from a computer to a website to pay for an online reservation. A third-party BTC merchant processor can help manage the transactions it clears through the Bitcoin network. These processing clients are placed on tablets at the front desk of establishments or restaurants for users with BTC smartphone apps. (These payment processors are also available for desktops, retail POS systems, and integrated food service POS systems.) No need to exchange credit cards or money.
These cashless transactions are fast and the processor can convert the bitcoins into currency and make a daily direct deposit into the institution’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 their gift shop.
Sounds good, so what’s the catch?
Business owners must consider participation, security and cost issues.
• A relatively small proportion of ordinary consumers and merchants currently use or understand Bitcoin. However, adoption is growing 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 in September 2013, a bitcoin exchange was hacked and $250,000 worth of bitcoins were stolen from users’ online vaults. Bitcoins can be stolen just like other currencies, so vigilant network, server and database security is paramount.
• Users should carefully protect their Bitcoin wallets, which contain their private keys. Secure backups or prints are very important.
• Bitcoin is not regulated or insured by the US government, so there is no insurance for your account if the exchange goes out of business or is hacked.
• Bitcoins are relatively expensive. Current prices and sale prices are available on online exchanges.
Virtual currency is not yet universal, but it is gaining market awareness and acceptance. A business 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.