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It's difficult to overstate the buzz generated by Bitcoin recently. The U.S. Senate recently held hearings to discuss the legitimacy of the virtual currency. Former Federal Reserve Chairman Alan Greenspan declared it a bubble, while Ron Paul, the former congressman and presidential candidate, suggested it could bring the downfall of the dollar. And just this week, the head of a Bitcoin company and a Bitcoin exchanger were charged with conspiracy to commit money laundering, according to the U.S. attorney in the Southern District of New York.
Meanwhile, an increasing number of businesses now accept Bitcoin. In just the past few weeks alone, companies as diverse as Overstock.com and Tigerdirect.com, both online retailers; OKCupid, a dating site; and the Sacramento Kings basketball team said their customers could start using Bitcoin.
But what exactly is Bitcoin? What's it for, and why is it useful? Who is using Bitcoin? As a Bitcoin enthusiast (some would say evangelist), I use it on a regular basis. In addition to paying a couple of bills each month, Bitcoin buys my morning coffee and acts as an easy way to split the check with friends. It's as much a part of my wallet as my credit card.
What exactly is Bitcoin?
At its core, Bitcoin is a new way to send money. It allows people to (almost) instantly transfer value to anyone, anywhere on the Internet, for free.
In the age of hashtag purchases and interplanetary payments, that may not seem like much of a big deal. Shouldn't everyone be able to send anyone money quickly, cheaply, and easily over the Internet? Unfortunately, most payments today don't work that way.
What's wrong with payments today?
Virtually every payment you make -- whether with a credit or debit card, by check, or via online transfer -- relies on proprietary infrastructure controlled by large financial institutions (such as banks) and payment processors (such as Western Union or Visa). This creates two problems:
1. Different payment systems are incompatible. Because every processor uses its own technology, getting these systems to work together can be difficult and expensive. Just ask someone who has transferred money internationally or tried to make a same-day payment to someone at a different bank. These transactions are not impossible, of course, but the downsides to having multiple competing payment technologies are readily apparent.
2. Proprietary systems create extra cost. Because large, entrenched institutions are often the exclusive owners of the payments infrastructure, they can charge a lot to use it. For consumers, it means extra fees on wire transfers, money orders, and check processing. For merchants, it means paying a hefty fee on credit card transactions.
Bottom line: If I own the wires that send and receive money, I can charge you a lot of money to use them.
So why use Bitcoin?
I use Bitcoin because, for certain transactions, it's cheaper and better than the alternatives. Here are three examples of when using Bitcoin might make sense:
Sending money internationally. I used to live in Germany, and occasionally I will ask friends there to send me things I can't buy in the United States. In the past, I would use Western Union to wire them money for the purchases. But if I wanted to send $100, I was slapped with a minimum fee of $5 (going as high as $25, depending on the payment method and location), not to mention Western Union's often less-than-favorable exchange rate, which further added to the cost.
Today, I use Bitcoin to send them money. With 1% conversion fees on either side, that adds up to about $2 in fees for a $100 purchase. The best part is, instead of taking three to five days, my transaction is processed in only about 10 minutes.
Buying coffee. Credit card transactions are costly. Even though technologies like Square have made it easier to accept cards, it still costs merchants 2% to 3% per sale to let customers pay with plastic. As a result, these merchants often pass the cost on to their customers, or sometimes accept only cash.
Bitcoin helps tackle the problem not only by lowering the transaction fee, but also by splitting it between the customer and the merchant. For merchants, that means dropping their fee to 1% and improving their bottom line. For consumers, it means faster payments than cash and not having to hunt for your bank's nearest ATM (or paying $3.50 to use whatever's closest).
Splitting the check. I often go out to eat with friends, and there's always an awkward pause when the bill comes. If we're lucky, the restaurant lets us split the bill four ways. Otherwise, we have to ask the server to break a bunch of twenties or figure out among ourselves who's paying how much now and who will have to get it the next time.
With Bitcoin, one person picks up the whole check and the rest of us pay that person our portion of the meal right there from our phones. It's faster, cleaner, and a lot less cumbersome.
How can I get started with Bitcoin?
Because of its relative infancy, buying and using Bitcoin is not as easy as it could (and should) be. That said, great strides are being made every day to make Bitcoin more accessible and easy to use.
Bitcoin.org, a website backed and maintained by the Bitcoin core developers, offers a great Getting Started Guide on how to get up and running with Bitcoin. For most people located in the U.S., Coinbase.com is the easiest way to start using Bitcoin. Coinbase allows you to buy Bitcoin directly from your bank account, store your coins in an online wallet (similar to a bank account), and pay using Bitcoin for a large number of merchants (including Overstock.com).
A word of caution
Bitcoin is by no means a replacement for your checking account or credit card -- at least not yet. The biggest problem Bitcoin faces is its volatility. With fluctuations that can span hundreds of dollars in just hours, the value of an individual's bitcoins can quickly soar or be destroyed.
Moving from traditional currency such as the dollar into Bitcoin is risky, and you should be careful not to overexpose yourself.
The innovations that virtual currencies like Bitcoin bring are real and compelling, and they have changed the way I pay for things. I use Bitcoin because it's often cheaper and faster than other payment options.
While Bitcoin certainly isn't for everyone, it is a breath of fresh air for people who regularly send money internationally and for merchants looking for a lower-fee alternative to credit cards. It's also a quick and low-cost way to send money to individuals.
Bitcoin is still in its infancy, and as with any nascent technology, there are likely to be some growing pains on the way to mainstream adoption. There's no telling what the future of payments will hold, but I hope it includes Bitcoin. It saves me time and money every day, and it can do the same for you.