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Bitcoins and Irreversible Transactions: What You Need to Know

Introduction

Bitcoins are still a pretty new area for most of us, as it comes with its unique concept and we have still yet to see how it is going to end up playing out in the real world. While it has definitely been catching on and the community has been growing, its viability for long term transactions has still yet to be seen. Through this article I want to look at Bitcoin from the buyer and seller's perspective to help better understand how both merchants and customers benefit (and are harmed) by the exchange. Please keep in mind that this is the same for all alt coins and other crypto currencies that have been released so far (at least as far as I am aware), but since most merchants are focusing on Bitcoin that is what I will refer to throughout the article.

A Customer's Look

The Good

For customers, Bitcoins have the following great aspects:

  • They are pretty easy to use (as long as you are able to utilize computers there should be no real trouble here)
  • All transactions are public
  • They are secure (in terms of anonymity)
  • They are used like debit transactions (rather than having to keep up with a credit card)

The fact that all transactions are public is a great thing. This means that if you pay someone, you can easily show that you did. It is hard to argue with something that everyone else can see by simply putting the transaction ID in to a block explorer. Along with this, you are able to tag messages with “notes,” which allow you to input anything else you want. To make things even better, you can create signed messages, so someone can sign their information in to a message before you send coins, and that can be verified later if need be. This ensures that if you pay a merchant, you have a verified method of proving the transaction in case something goes wrong.

At the same time, the fact that Bitcoins come with almost no transaction fee means that merchants will be able to charge less for the same items. As a direct comparison for right now, Bitcoin transaction fees can be as little as $0.00 for amounts of at least 0.01 BTC ($1.00) to $0.05 for anything less. Compare this to the normal credit card charge of $0.30 + 2.9-3.6% per charge, and it is pretty obvious which one is the winner. Part of this also opens up the doors to being able to buy items that are less valuable, or even send people small tips that otherwise would not be feasible. With almost no transaction fee (or absolutely none if the amount is large enough) the possibilities here are endless.

The Bad

The bad part about Bitcoins for buyers is that once you send off the transaction, it can never be reversed. This means that you must go back through the merchant (or whoever you sent the coins to) in order to get a refund, and it will have to be done through a separate transaction. There is no “refund” feature. This is a bad part for buyers, but really just leads to one important suggestion: be sure that you trust the merchant you are paying before you do it. Think about it as if you are buying something from someone off the street with cash. If they asked for the money and promised to meet you the next day with the merchandise, would you do it? If not, do not do the same thing online (by sending Bitcoins to strangers) unless you want to risk losing it all.

There is also a bit of negativity around security. When you keep your Bitcoins, you need to do it locally. Do not trust another website somewhere to hold them for you, as you never know if the owner will run off with them, lose them or even be hacked. And again, once you have made the transfer the coins are gone unless the person you sent them to ends up sending them back (which will not happen if they were scamming or sometimes if they lost the coins in a legitimate accident). This really puts banks and such out of the loop, as Bitcoin businesses do not have the ability to give insurance on funds (hopefully the FDIC will start insuring Bitcoins soon, but there is no telling when or even if that will happen).

A Merchant's Look

The Good

Much like how the lower transaction fees benefit buyers, it also benefits the merchants. With a much lower transaction fee, prices for most items can go down slightly since they are usually boosted a bit to help compensate for the increased costs associated with accepting credit cards. This also cuts down on the processing costs, as well as any fees that would otherwise be charged just for having the ability to accept credit cards in the first place.

Another great thing is that since transactions can not be reversed, there are no fears of customers doing charge backs. Once the funds have arrived and been verified, they are the merchant's. All too often customers will make a purchase with the sole intention of later doing a charge back to get a refund and keep the item. Along with this, some customers will go through “buyer's remorse” and use a charge back as their way of getting a refund, even though they purchased the item and it was not the seller's fault that they changed their mind. What makes matters worse with charge backs is that:

  • The merchant loses the entire amount of the charge back
  • The merchant is hit with a fee that is as high as $50 on top of what they lost
  • If a merchant has too many charge backs they can have credit card privileges revoked, forcing them to only accept cash or debit cards

From the merchant's point of view, this removes any risk associated with making a sale. Once the funds have been transferred, the merchant knows for a fact that they have successfully made a deal and that nothing will take that back away from them (aside from possible lawsuits and such, but those would be based on fiat anyways so I do not consider them as relevant). Peace of mind is one of the most valuable things a merchant can have, and Bitcoin opens that door for them. Even the best merchants in the world, that are more than willing to help their customers, are going to have charge backs using normal methods. People love to scam the system to get free stuff, and merchants are hurt badly in the process.

The Bad

As of right now the anonymity factored with the irreversible transactions scares a lot of potential buyers. There are far too many “businesses” that are set out solely to scam people, and that has been hurting the entire market as a whole. This either forces people to vet out companies much more thoroughly than they normally would (to reduce their chances of having the Bitcoins stolen with no real recourse) or to avoid them altogether. When it comes to making sales, this is a difficult hurdle that we are all still facing, and one that will not be easy to overcome.

There is also the idea of fluctuating prices. For people that buy their Bitcoins and use them for trading this is not such a big deal. For businesses, however, this can cause a problem. For example, if I am in the business of selling laptops, I need to ensure that every payment I receive is worth enough to cover the cost of buying a new laptop to replace the last. If I were to get Bitcoins for payments and then them tank in price, it could leave me with a problem: I could not recoup my costs and although the customer would have paid the full amount at the time of purchase, I would have lost money because now what they paid is worth much less. With this situation happening somewhat often, it makes speculation hard. When some items have a pretty small markup as it is, it is hard to justify risking a business loss to get a sale.

Thirdly, there is the fact that transactions take some time. If someone sends Bitcoins right now, it could take a while (ten minutes or so) for it to even show up. After this, the only real safe way to verify the transactions is to wait until they get some confirmations, which also lock in at around ten minutes each. Most businesses go for six confirmations, so you are looking at around an hour before you can be sure the transaction was successful. You can, of course, work with less (or even none) but then you are taking the risk of someone doing a double spend. Luckily, some of the alt coins have found a way to make this easier (by having faster block creation speeds), but this has no effect on Bitcoins themselves.

Why Irreversible Transactions Are Great

This one is pretty clear to anyone who has run their own store; there are just far too many people out there that scam. For any multitude of reasons, people will reverse their credit card charges. When this happens, the merchant loses the cost and even more money, and that is something that is not good. It ends up costing everyone more money because the merchants have to recoup their losses from somewhere. Credit cards are known for being a little too easy to manipulate because they almost always take the customer's side in a dispute. While this is great for the customers, there is no real way for a business to protect themselves against these attacks, and they happen far too often. I've had situations where people have bought something from me and left a public rating about how happy they were with the purchase and how accurate I was in my listing, then turn around and file a charge back that I lose, even with proof of their public review.

Some businesses have taken to a different route of only accepting bank transfers instead of credit cards, but that does not resolve the problem. People just make their ACH, and then report the transaction as having been fraudulent, or without their permission. While most banks will claim that they can not reverse the bank payments, they apparently can in situations like this, making them unsafe as well.

Bitcoin solves this by making sure no merchant has to go through that, so long as they are waiting until a transaction is actually verified. The only person who ever has access to the funds in anyone's account is the person with the private key (or people, if they have shared it – which they should never do!). Even the courts themselves can not get in to anyone's Bitcoin accounts to forcefully remove funds, though that does not mean that there can not be legal repercussions if someone is sued; they would probably just be handled via fiat means instead of by dealing with crypto currencies. So businesses, as long as they are not being run completely anonymously, are still responsible for their own decisions and can be held liable for issues that occur just like any other business.

Conclusion

The Bitcoin network helps bring a lot of security to merchants and also brings benefits to the customer. It gives merchants the peace of mind of knowing that the payments they receive will not be reversed by their customers later on, and it also lowers their fees so that they can charge less on items that are sold. All of this mixed together should lower prices a little because it is the customers that end up having to pay all of the credit card fees and fraud costs normally; the business has to turn a profit so when these things are popping up, they have no choice but to recoup it from the customers.

We do still have a long journey in front of us to get everything set up and organized in such a way that both businesses and individuals can completely understand all of the benefits they are getting from the different crypto currencies, but I think it is well worth the time and effort. The benefits are just far too great to not keep pushing for. As a merchant myself, I fully support Bitcoin and related currencies and I hope they thrive out in the real world. We are getting there one step at a time!

Bitcoin


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