The Bitcoin Basics

Payments Leader

Posted on February 21, 2014

 


Bitcoin, or the recently developed and increasingly popular digital currency, has the world abuzz because of its sheer potential. Bitcoin has a number of useful applications, and when adopted on a larger scale may create ripples in the banking industry.

How Bitcoin Works
After a user installs a bitcoin wallet on his or her computer or mobile phone, it will generate an address to provide to other users for payment. Each address can be used once, and more can be generated as needed.

The wallet has a private key, which signs the transaction to prove where it comes from. When bitcoin is sent or received, it is logged in the block chain, which tracks all transactions in the network, allowing the transactions to be traceable, without providing personal information. Transactions all have a signature which prevents them from being altered once they have been initiated. The technology behind bitcoin is cryptography. It allows for secure transfer of bitcoin assets, while ensuring that no one can spend bitcoin currency that doesn’t belong to them.

Users can buy into bitcoin with real money in any currency, and cash out of the system at any time. Little to no payment fees are incurred when buying in or cashing out.

Bitcoin Uses
Bitcoin can be used in a number of ways, including:

  • Payment for goods and services, including micropayments, as the bitcoin is divisible by up to eight points after the decimal.
  • Transfer of digital signatures, contracts, etc.
  • Transfer of digital ownership of physical assets.

Revolutionary in the Payment Sector? Time will Tell
Because of the fact that anyone can buy into and cash out of the bitcoin system whenever they want, in whatever currency they want, all over the world, payments can be sent and received with ease. According to Marc Andreessen, areas where banking systems are not readily available, or citizens who conduct financial business without a traditional bank account will be able to easily handle their financial matters.

Unlike government backed currencies, the bitcoin is designed with a cap of 21 million. According to Business Insider, each bitcoin can be divided into 100 million pieces, allowing it to scale as a payments technology.

impact of bitcoins

Disruptor in the Payments Industry
As bitcoin reaches a higher level of adoption, Chris Dixon suggests it has the potential to become a disruptor in the payments industry, which relies on fees to process payments. Business Insider notes bitcoin’s average daily transaction volume stands at $89 million, compared to an average daily volume of $16.5 billion for Visa® and $9.8 billion for MasterCard®, so it’s far from the big players, but not insignificant.

The bitcoin system does not rely on banks, or a centralized system, in order to function, which is the appeal to some users. Instead, it relies on an extensive ecosystem of exchanges, wallets, and miners to provide secure transfer of currency online.

Though bitcoin is not currently regulated by any one entity, as it continues to grow regulation will surely follow. In fact, according to Christian Science Monitor, New York state legislators are already starting the regulation process on the cyber currency. When the Internet first took the world by storm, the rules and regulations around it were vague. Even two decades after the Internet became publicly available, we’re still unclear on a majority of the issues surrounding it. It’s clear that continued use of the bitcoin will promote its value as well as its scrutiny. As it increases in value, we may start to see a fundamental shift in the way payments are processed here in the United States, as well as on a global scale. Bitcoin may or may not prove to be a game changer, but it certainly can’t be ignored.

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Payments Leader from FIS Global provides insights on credit, loyalty, fraud and emerging payments strategies through blog posts from our industry experienced authors.