To elaborate further on why, we’ll provide some important information to explain how bitcoin works, and how it compares to other payment methods.
When bitcoin was created, it was introduced as a public, distributed peer-to-peer electronic cash system. And in order for bitcoin (the currency) to succeed without a third party like a bank to mediate, verify, and manage transactions, the concept of a block chain ledger was developed alongside the currency as a way to verify and track transactions and prevent fraud. Settlement with a high degree of certainty is a requirement for a payment system to function. Otherwise people could make transactions, receive goods, request funds back, then make more transactions.
Bitcoin is portable, fungible, divisible, and irreversible. Payment methods like credit cards also include some of these properties, but their transactions are not irreversible. A credit card transaction can be reversed in the form of a chargeback, which can happen days or weeks after a transaction has initially processed. Unfortunately, this comes with friction and costs because the network has to be maintained by an intermediary.
From a merchant’s perspective, bitcoin presents an increasingly convenient alternative to credit cards that ensures they can avoid the inconvenience of chargebacks, and cut transaction costs. For the consumer, bitcoin also presents similar benefits, but it’s extremely important to double check the recipient’s address and amount are correct before sending your funds.
Bitcoin shares some but not all qualities of credit cards, and the same goes for cash, particularly where reversibility is concerned. You can pay for something with bitcoin or cash and neither transaction can be reversed unless the recipient returns the funds back to you.
Let’s take a look at two scenarios to explain this further. One with bitcoin, and the second with cash.
Scenario 1: You accidentally sent bitcoin to the wrong address. Without knowing the identity of who controls the address you sent your funds to, you have no way to contact the accidental recipient and ask them to send the funds back.
Scenario 2: You accidentally dropped a $20 bill while walking on the sidewalk and failed to take notice. Shortly after, someone you don’t know picks up your cash and keeps it. Unless you were present to see the person pick up your cash, you have no reasonable way to track them down and retrieve it.
In both scenarios, it’s highly unlikely you’ll ever see either forms of currency again. While bitcoin does paint a clear path of where your funds went (by looking on the
blockchain), bitcoin addresses don’t have conventional forms of ID associated with them like a first or last name, or government ID.
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