How Do Bitcoin Payments Work?
You can pay bitcoin by transferring coins from your wallet to the address of the recipient. This is done by signing the transaction using your private key. The Bitcoin blockchain is used to record payments. This ledger is public, and entries can’t be changed or deleted.
Bitcoin is a payment system that “pushes” the transaction to the merchant, rather than your credit card. Bitcoin does not involve third parties in processing the transaction. This is why the whitepaper describes Bitcoin as a “peer to peer electronic cash system.”
To pay Bob with bitcoin you will need a wallet that contains bitcoin and Bob’s public blockchain address. You would then transfer a certain amount of bitcoin to Bob’s account and authorize the transaction using a digital signature that you generated with your private key.
Bob will instantly receive the money in his wallet after the payment has been confirmed by miners. He won’t need to undergo the authorization, settlement and exchange processes required for credit cards. Bitcoin payments work in the same way as wire transfers: the money moves directly from the customer to his buyer.
Why is Bitcoin a Better Alternative to Credit Cards?
The disadvantage of credit card payments is that they depend on multiple parties. This increases the risk of malicious attacks. By entering your credit card information online, you are granting the site permission for them to withdraw money from your account. This information can be accessed by hackers, but what happens if the company isn’t trusted?
Targeted attacks on large companies, such as Equifax and Neiman Marcus, have resulted in the theft of credit card information. These breaches could expose users to identity theft as hackers might use stolen card information for illicit transactions.
Credit card information is not only vulnerable to theft online, but it also poses a security threat. Card skimmers are often attracted to point-of-sale equipment such as self-service gas pumps and checkouts at retail outlets. They can deplete your bank accounts within minutes by using this information.
It’s not possible to just walk into a bank and ask for a credit card. Then expect it to appear. Nope. Before issuing a card, every bank will require you to complete a lengthy registration process. Merchants who want to establish point-of-sale systems for credit cards will need to go through the same process, if any, as they do with their bank.
To start sending and receiving Bitcoin payments, you only need to set up a Bitcoin wallet. You can download free Bitcoin wallets as web, mobile, or desktop applications. The sign-up process for Bitcoin wallets is simple enough to be used by even non-technical users.
Although the simplicity of Bitcoin may seem obvious to those who live in Western countries with well-organized banking systems, it is not difficult to see the benefits. Bitcoin’s peer to-peer cash system makes it possible for people in developing countries to open a bank account and get a credit card.
Reduce Transaction Fees
Credit card companies might charge 3% of the purchase price to process payments. These costs are often passed on to customers by retailers due to their small profit margins.
Bitcoin transaction costs can rise; however, Layer 2 options like Lightning Network can help to alleviate this problem. Lightning Network charges one satoshi (0.00000001 BTC) or $0.0004. Lightning Network payments are a great option for companies because they charge very little fees.
Critics often point out the differences in processing speeds between Bitcoin and credit cards when comparing it to credit cards. As an example, Visa processes 24,000 transactions per minute (TPS) whereas Bitcoin takes five to seven TPS.
These comparisons miss many important details. The money is not automatically deposited in the merchant’s bank account when you swipe your credit card. Credit card companies can take several days for authorization and clearance of payments.
Privacy & Anonymity
Bitcoin transactions are pseudonymous by design. The blockchain records only the public addresses of the parties and the amount traded. A transaction on the blockchain cannot be viewed by anyone and no one can see who you are or what payment you made.
Many people associate Bitcoin’s anonymity with terrorists, right-wing extremists and other criminals who have to bypass traditional banks. Even regular buyers of legal goods might not want their identities tied to purchases made for other reasons.
A person buying an adult toy online might prefer a discreet way of purchasing it than using a credit card. Even though marijuana is legal, payment providers can block the purchase of certain products.
While Bitcoin is often criticized, it has a lot to offer as a reliable payment system. Accepting bitcoin payments for businesses means that they can reduce transaction wait times, chargeback fraud is reduced, and pay lower processing fees. Buyers can pay with Bitcoin in a private, secure, quick, and easy way.
New innovations such as the Lightning Network will increase bitcoin payment adoption. Bitcoin could eventually eliminate the credit card monopoly, for retailers and consumers alike.