KEY POINTS

  • Bitcoin's greatest potential is as a global payments network, to power transactions that are extremely low-cost, virtually frictionless, and easily flow across national borders. Bitcoin's elegant design does place a strict limit to how many units can be created — 21 million. But each coin can be divided into 100 million pieces, which will allow it to scale as a payments technology.
  • In order to understand Bitcoin's strengths and vulnerabilities as a payments network it's important to understand how it works, and the mechanics of how bitcoin transactions are processed and cleared securely. We give a high-level, no-nonsense explanation. Bitcoin exchanges, wallets, miners, and merchant service vendors all play a role. We also explain concepts like bitcoin blocks and blockchains.
  • In a nutshell, Bitcoin allows for the simple and secure transfer of value online, without intermediaries (although intermediaries are often good to have, see below). Bitcoin's strengths explain why it potentially pushes out legacy payments players — like credit card networks and card-processing companies — that rely on skimming transaction fees for their revenue.
  • Bitcoin faces some hurdles before it can be widely adopted as a payments platform. One is its delay in clearing transactions, another is price volatility. Bitcoin payment processors already are stepping in to address these flaws. Bitcoin's transaction confirmation process can take 10 minutes or even longer. Bitcoin payments processors serve as intermediaries and clear transactions in seconds, and also allow merchants to instantly exchange their bitcoins to dollars or other government-backed currency, and avoid exchange risk.
  • Bitcoin faces other risks, including tampering and fraud. We explain one potential type of manipulation, a double-spend attack, which could occur if one entity in the Bitcoin network accumulates too much computing power. There are also regulatory threats from governments that don't like the idea of a technology that competes with their national currencies or gives crime syndicates a new way to transfer money. Even in the U.S., which has been relatively open to Bitcoin, powerful lobbies attached to legacy banking and payment players might seek to squelch its development.
  • Despite these barriers, we believe its efficiency and low cost in comparison to legacy payments tools like credit cards, money transfer services, or letters of credit will ultimately prove too tempting for merchants, individuals, and business-to-business billing. [...]