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Bitcoin vs Credit Cards

When it comes to making purchases, we like to make them as easily as possible. We also like the speed, and not having to carry around a lot of cash helps make that much easier (for example, it is easier to have a large balance that you can access any time you need it than it is to carry around that much cash; in my case, I only use credit cards as they are easy to use and keep their automatic ledger). Since Bitcoins and other crypto currencies are being used as a method to buy and sell things, it is important to understand how they fit in the financial atmosphere. The main competitor at this point would be the credit cards (although I think there are some implementations of Bitcoin credit cards that people are trying to get up and going with now as well). In any case, they have their differences and it is important to understand which one is best for which situation. It can save a lot of money and headache down the road by realizing their separation and what they are both good for.

Bitcoin Protects Sellers and Credit Cards Protect Buyers

This is a pretty clear thing we have been learning over the past months and years. Basically, Bitcoin helps protect the sellers because once they have received a payment, they know it is theirs. There is no fear of losing those funds, and there is no real recourse (aside from going to court) that the buyer can take to scam you, and if they are trying to scam you out of items or money they are not going to go through these venues because it is going to cost them even more money and they are more than likely not going to win their case.

Credit cards are the complete opposite, in that they support the buyers over the sellers. When a buyer feels as if they were wronged by a seller, they can do a charge back and get back all of their money. It could be because they just were not happy with a service, because they want to steal an item and claim it was never received, etc. There are also legitimate reasons for doing charge backs as well (and I have done a few on my own for different reasons). But the simple fact is that they are more supportive of the buyer than they are the seller. In a sense, they can be considered as the buyer's protection when it comes to our purchases. We can go to a store and buy something without having to worry about whether or not we are going to run in to problems down the road.

Looking at these two monetary systems, it is clear that they each cater to the other group of people. The bad part is that neither of them cater to both equally, so there really is no middle ground here. You either have to choose to support the seller or the buyer in your decision, with them having the most protection in the deal. In either case, one party can scam the other party, leading them through a case of litigation to deal with the situation.

The Costs of Transacting

One of the problems a lot of sellers have with credit cards are their immense costs. The credit card companies have rules against charging more for using a credit card than you do for cash, and this also often stretches out to not being able to give discounts for cash as well. The issue here? Credit cards take a percentage of each transaction (around 3% for much larger merchants), plus a flat rate on top of that. To make matters worse, if someone files a charge back there is another pretty large charge, up to $80 on top of that, for the researching the credit card company has to do. These things add up quick, and they lower the amount of profit merchants are getting. And as stated, this is also protecting the buyer, rather than the merchant.

Bitcoin has much cheaper transactions, with the merchant paying absolutely nothing. Instead of having the merchant pay the fees, the sender of the funds pays it. So when the merchant sells something for $500 and someone sends $500, they actually get $500, rather than $460 or so. This enables the merchant to lower their costs and charge less for the items they are selling; after all, if they are getting more money from each sale they make, their profit goes up and they can pass some of that on to their customers. Compare this to the credit card situation where almost 1/20 of their income goes straight to the credit card company and it is clear who is the winner here. The transaction fees here are also not a real problem for the buyer, being that they are so small they are negligible (and in some cases are absolutely free).

The Time of Transacting

Here is where we start to run in to problems. When we use a credit card to make a purchase, it goes through pretty much instantly. The computer just contacts the credit card processor to ensure you have a large enough credit line to make a purchase, then puts it through. Fast and easy, often done in a matter of seconds. Then you sign your paper and you are on your way. With crypto currencies, and Bitcoin in particular, this is different.

With Bitcoin, the time it takes to make a transaction can take a while. We rely on transactions being verified by the network to ensure that the funds that are being sent are real. To do this, the transaction has to be thrown in to a block and then verified. The blocking process in itself can take a long time (the average time is around ten minutes, although I have seen blocks that were nearly an hour apart). After this, you then have to decide how many confirmations to wait for before accepting the transaction as being verified and clear. Each verification you wait for can add another hour to the time (with the same average of around ten minutes). If you are making a large purchase like a car or a house it is understandable to wait this time, but if you are dealing with something like fast food or gas, do you really want to be sitting around for what could be hours? Some merchants have battled this problem by making it to where no verifications at all are needed, but this comes with its own risks since you could be doing a double spend. Even if not with Bitcoin, there are many other coins out there that are slowly making their way through the financial system as well, like Worldcoin.

Anonymity of Bitcoin vs Credit Cards

Anything and everything that you buy on a credit card is directly linked to you as a person. When you apply for the credit card, you have to give all of your personal information and it is added to your credit report. Each purchase that you choose to make will be linked to you, and is linked to your verified identity. There is nothing to hide with this level of transparency, and it brings about fear of privacy. While you may not be buying anything that is illegal to own, do you really want everything you buy to be tracked by someone to be used for whatever purposes they want to use them for?

Bitcoin battles this by keeping everything private, yet transparent. Wait a minute, this does not make sense though, surely? Well, it is private in that your “identity” is nothing more than a Bitcoin address that is not linked to you in any way, shape or form and can even be swapped out with other addresses at any point, should you choose to do so. On the other hand, everything is also transparent in that every transaction that is made on the Bitcoin (and other crypto currency) network is visible to everyone who wants to see it. Think of it as being like having the ability to see each credit card transaction that people make but with nothing showing but the two credit card numbers (the origination and ending ones), leaving no way to link people to their credit cards without them leaving their own traces behind.

Balance Transfer Mechanisms

With Bitcoin, the amount of money you can send to someone is limited only to what you have in your account, also known as your wallet. If you have $100, you can send a maximum of $100. If you run in to a situation where you need to send out more than that but you do not have it in your wallet, you are just out of luck and will have to find some other way to fund that transaction. On a great note of this, it also means that you can not accidentally attempt to over draft funds, which means that there are no fees you can incur as a result. But it also limits its usage in the same way that cash would.

Credit cards, on the other hand, have maximum balances on them and you can pay them off partially each month or in full, depending on how fast you want to get it paid off and how much money you have at the time (with the more you pay off at once being the best benefit). This means if you have less money than you need to send out to make a purchase, it is not a problem since you can just pay it off later (assuming you have a high enough credit card limit to cover the full amount). This does lead to its own issues, though, in that you can easily get yourself in to debt that is going to be tough to pay off and you can also hit over drafts if you are attempting to charge something that goes above your credit card limit. Being careful here is important; you have to ensure that you are not spending outside of your means or you can lose not only that card but also take down your credit as well.

Loss of Wallets and Cards

When you lose your credit card, you are protected. You are not held responsible for any charges that may pop up on the card after it is lost or stolen, and you can easily get a replacement for it. Basically, having a credit card is risk free in this department, giving it a huge benefit for those that travel a lot.

Bitcoin and other crypto currency wallets are the opposite, in that if you lose your wallet you lose your balance. It can never be returned, and it is in no way protected (unless you chose to keep your own backups and were not relying on just one copy – this could be equated to having multiple credit cards so that if one is lost you have another that you can use in the mean time). Should you keep your one wallet, though, and then lose it, you are out of luck and your funds are forever gone (and this is something we still see all the time, especially among people who like to store their wallets on their cell phones or other mobile devices). The other bad part is that if someone gets in to your wallet and sends off transfers to themselves or others, there is absolutely no protection and those coins are lost as well to the thief, of which the crypto currency anonymity generally keeps people from figuring out who it was that stole their coins. They can be tracked over time, but there is really no way to tell who has them at any given point since they often go from one address to another as they are traded around.

We Have No Internet!

When there is no Internet access due to the lack of power or other things, credit cards can still be used. They simply use the carbon copies of paper to handle it or will write down the numbers and do the transactions manually once the Internet or power is restored again. This means that transactions, while they are slowed down a bit (simply because an alternative method has to be used than to simply scan the card real quick), they are not really stopped or anything.

Bitcoin is dependent upon the Internet for the block chain, which is online. I have heard of hardware devices that can work without Internet access, but I think that dealing with transactions while offline would be high risk since there is no telling what has changed in the block chain since the last update. A person could go from one place to another making transactions and buying things, and the only way that anyone could tell it happened is after it is too late. This is a major wall towards allowing Bitcoin to be used everywhere and all of the time. Granted, it is not often that we do not have these access mechanisms, but it does happen from time to time and so there will always have to be alternative payment methods that can be used or problems are going to arise.

Volatility in Value

This is a huge difference between Bitcoins and credit cards. Our credit cards hold our balances in dollars, which do not fluctuate in value against dollars (in this case we are thinking in terms of USD to USD, which would obviously stay equal all the time). If you have $100 right now and you wait a few months, you will still have that same $100 unless you had spent it or added to it. The balance you have does not increase or decrease.

Bitcoins and other crypto currencies, however, fluctuate in value against the different currencies. You never know how much your coins will actually be worth. For an example of this, today started out with Bitcoins running a value of around $1200 each. Later on, it had dropped below $1000. This was a pretty massive drop, and imagine if you had gone out shopping while counting on having the value at $1200. When you decide to make a purchase you either have to lock in on the Bitcoin price ahead of time or just send the funds ahead of time; any wait could mean that you have more or less money than you had originally. Even between a few seconds you can see fluctuations, and usually will.

Conclusion

In conclusion, both Bitcoin (and other crypto currencies, since they all really work the same way in terms of transactions) and credit cards have differences. Both have their own pros and cons, and which one you choose to use really depends on what you are going for. It is also worth noting that Bitcoin can always be forked (or changed) to alter the way it works in the future, although it is a somewhat low chance unless there is some major problem that needs to get resolved. Until that happens, though, we can expect the network to continue working the same way it is now.

As everything stands right now, we can accurately guess that both Bitcoin and credit cards will still be in use (by people who are in the community), depending on the situation and what the buyer is going for. For large purchases, Bitcoin is probably going to be the way to go. For smaller ones, credit cards are the right path. And for things you want to get moving on fast, credit cards are pretty much a necessity at this point.

Finance


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