Love it or hate it, there’s no denying that pretty much everyone you meet is going to have one opinion or another on the topic of Bitcoin. The digital, decentralized, encrypticized currency that only exists on the Internet and bows to no nation, Bitcoin has been predicted to either become the linchpin that completely revolutionizes how the world economy works, or could just lose the Winklevoss Twins a whole lot of their precious Facebook money when it eventually tanks.
No matter what you think about it, these days more retailers, restaurants, and online shopping portals have begun opening their doors to the previously-fringe payment method, but how do these transactions work compared to a regular credit card, and is it just as safe?
Sending/Receiving Bitcoin Online
Without getting too deep into the nitty gritty of how a Bitcoin transaction works (you can read all about that in our guide here), here’s a brief overview of the order of events when two people or retailers pay each other with the currency online:
If Steve sends some bitcoins to Sarah, that transaction will have three pieces of information:
- An input: This is a record of which bitcoin address was used to send the bitcoins to Sarah in the first place (who herself got them from her friend, Tim).
- An amount. This is the amount of bitcoins that Sarah is sending to Steve.
- An output: This is Steve’s bitcoin address.
In normal Bitcoin transactions, the “miners” are responsible for the process of going through and double checking that the receipt is being backed up by a valid “blockchain” (again, our guide is great for getting anyone up to speed on all the need-to-know lingo).
This whole process usually takes about ten minutes back to front, and while this may not matter all that much when shopping on a website for something that will take a week to ship, it’s far too long to be a viable solution for checkout counters mobbed with hundreds of voracious shoppers during the holiday rush. This is where a third-party would need to come in and foot the bill while both sides of the equation settle up the final amounts on the backend in order to reduce the transaction delay from 10 minutes to under 10 seconds.
How It Might Work in Retail Tomorrow
The problem with the whole “decentralized” part of Bitcoin is that you aren’t going to find any of the PayPals or Visas that are willing to step forward and take care of the bill for hundreds of thousands of transactions at once, lest it all suddenly go missing one day. If the attack on Target last year was any indication of the lengths that hackers will go to to get their hands on our bank account information, it’s understandable that the industry is still going to be weary of trying to roll a Bitcoin-based POS out worldwide.
The closest entity Bitcoin has that’s similar today is Coinbase, an online platform and app that lets you buy, sell, or transfer coins all from the comfort of your phone.
Coinbase works slightly different from most Bitcoin buying/selling online wallets in that it actually backs the real funds in your preferred currency immediately, while the bitcoin transaction itself is only registered several days later. They assume the risk of the transaction with the knowledge they gathered from each individual when they signed up, and so far haven’t run into any issues with people attempting to defraud the blockchain or steal the contents of other user’s wallets.
The easiest way to think about it is in the terms of a more popular solution that most of us have probably already used (or seen our friends use) at least once: Venmo.
With Venmo, two users who have added each other through an email address can choose to either send or request money through the app on their smartphone. As long as both users had their bank accounts verified at the time they registered for the service, they’ll be able to “pay” any amount instantly to a friend, family member, roommate, or even their local hairdresser.
If the person who sent the money defaults on the amount due to a lack of funds in their account, Venmo then accepts that debt while letting the payee cash it out to their bank account the next day. If the debt isn’t repayed, the money is written off as a loss. Unfortunately, the only way for a company to make enough money to cover those kinds of losses would be to become the centralized entity that the Bitcoin community is doing everything it can to avoid.
Bitcoin in POS
Last, there’s Bitcoin POS (point-of-sale) systems. Eager to jump on the train while it’s at the ground floor station, dozens of companies have already begun developing their own Bitcoin POS systems that mirror the model of Coinbase. These work off the same concept that credit card vendors have relied on for years: fronting the cost of an item in good faith that you’ll pay back the sum within a reasonable amount of time), and then incurring the temporary debt until the transaction is fully verified 10 minutes to an hour later.
Thanks to options like QR code scanning and mobile NFC secure wallets like what we’ve seen with Apple Pay, it might not be as long as we think before these types of terminals start popping up in stores. They’ll need to feature universal payment options (not just Bitcoin) if they’re going to be accepted as a mainstream product, but as long as the vendors can assure all sides of the purchase (customer and store) that Bitcoin is a viable alternative to the current implementation of credit and debit cards, shopping with the cryptocurrency could be a whole lot easier in just a few short years.
Bitcoin, like the modern US dollar, is a fiat currency – it only exists as much as we believe it does, and not for a second longer. We can’t eat a digital coin just as much as we can’t light a pile of one dollar bills on fire to drive our car down the road, and because it’s an ethereal, yet widely-agreed upon method of payment between two parties, there’s no reason why a third-party company wouldn’t be able to stand in as a trustworthy signatory in between transactions.
For now, that workaround appears to be in the form of sites like Coinbase, which unfortunately are still nowhere near prepared to take Bitcoin where it needs to go for your local Starbucks to be accepting it at the cashier. Until a more creative solution is agreed upon by the community itself, the challenges of how to reduce the transaction time to the same as what you’d get swiping a debit card will mount as Bitcoin’s userbase continues to grow.