Is Bitcoin the Next Generation of Online Payments?

What is Bitcoin?  

Bitcoin, the virtual crypto-currency that is somewhat mysterious and extremely volatile, is a decentralized virtual currency that relies on cryptographic mathematics to determine its creation and trade. If you’re not totally confused yet, hang on, it get’s better.

Is Bitcoin the Next Generation of Online Payments? image bitcoin 300x1681Is Bitcoin the Next Generation of Online Payments?Bitcoin (BTC) is a digital currency first described in a 2008 paper by pseudonymous developer or group named Satoshi Nakamoto, who called it a peer-to-peer, electronic cash system. Bitcoin creation and transfer is based on an open source cryptographic protocol and is not managed by any central authority. Each bitcoin is subdivided down to eight decimal places, forming 100 million smaller units called satoshis.  Bitcoins can be transferred through a computer or smartphone without an intermediate financial institution, which claims to be anonymous and untraceable to any individual.

A bitcoin is simply an SHA-256 hash in hexadecimal format. A person’s bitcoins are stored in a special file called a wallet, which also holds each address the user sends and receives bitcoins from as well as a password/private key known only to the user, which is required before the bitcoins can be spent.

What is the Value of a Bitcoin?

Bitcoin is both a currency and a commodity. Speculators have sent bitcoin value soaring and crashing. As the market valuation of the total stock of bitcoins approached $1 billion USD, some commentators called bitcoin prices a bubble. In early April 2013, the price per bitcoin dropped from $266 to around $50 and then rose to stabilize around $100. As of the date of this article, May 24, 2013, the value of a bitcoin is roughly $131.

Q: Where do you get Bitcoins?

A: You Mine Them

Any computer can run a free application called a Bitcoin miner that performs the necessary calculations to create the coin, storing bitcoins in a free, open source digital wallet of your choice.

Below is a rough overview of the process to mine bitcoins:

  1. New transactions are broadcast to all nodes.
  2. Each miner node collects new transactions into a block.
  3. Each miner node works on finding a difficult proof-of-work for its block.
  4. When a node finds a proof-of-work, it broadcasts the block to all nodes.
  5. New bitcoins are successfully collected or “mined” by the receiving node which found the proof-of-work.
  6. Nodes accept the block only if all transactions in it are valid and not already spent.
  7. Nodes express their acceptance of the block by working on creating the next block in the chain, using the hash of the accepted block as the previous hash.
  8. Repeat.

By convention, the first transaction in a block is a special transaction that produces new bitcoins owned by the creator of the block. This adds an incentive for nodes to support the network and provides a way to initially distribute coins into circulation, since there is no central authority to issue them nor are they backed by any government or entity.

Why Use or Accept Bitcoin as a Payment Option?

Bitcoin charges no transaction fees for consumers. For merchants, bitcoin offers lower transaction fees, roughly 1%, and protection against any type of chargeback makes it attractive. Bitcoin also opens up business to customers in countries unsupported by PayPal and other credit issuers, as well as minors. Unlike bank transfers through PayPal, payment clears instantly, a benefit for both business and customer. So, would it make sense for Email Answers to accept bitcoin as a payment method? Maybe not (yet).

Where do we go from here?

There is no doubt that bitcoin is risky. The digital currency is vulnerable to loss of public interest, hacking or the bitcoin bubble bursting. There are too many unknown variables which makes bitcoin a proof of concept model at best. There is no doubt that bitcoin is an intriguing concept which has actually gathered some interest. For bitcoin to become truly disruptive requires a critical mass of trusting users. Stay tuned.

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