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Might bitcoins replace credit cards?

by Peter Andrew

Earlier this month, Time.com published a piece by reporter Jessica Roy in which she described her experiences when purchasing every item on her Christmas gift list using bitcoins. She wrote, "...bitcoins are a far more secure method of payment than your credit card, so if you use them, there's little reason to fear identity thieves as other shoppers might."

Wow. That sounds pretty good. Should you seriously consider trading in your plastic for a pile of virtual bitcoins? It's almost impossible to overstate the extent to which the answer to that should be a resounding "No!"

What is Bitcoin?

Bitcoin is effectively a virtual currency, although some quibble with that term. It's not regulated by any government, nor is it guaranteed by one -- not that any currency really is -- and it keeps its value because of the faith its users have in the integrity and security of the extraordinarily sophisticated IT applications that enable it. Every transaction is verified and confirmed through a consensual process within the network, and a very small fee is charged for that.

Besides fairly few techie enthusiasts, Bitcoin tends to appeal to two groups:

  1. Those who believe that quantitative easing may yet undermine the dollar and other world currencies, and who want a safe haven for their money. Although the number of bitcoins in circulation rises very slowly, nobody can create new ones beyond a pre-set cap, which should be reached in 2040. Somebody called them "gold for nerds."
  2. Criminals, especially drug kingpins and tax dodgers. That's because each transaction a person or organization makes can be carried out using a different pseudonym, making the entire process totally anonymous. When, in October, the founder of the Silk Road website (which became a major trading medium for illegal drugs) was arrested, the value of bitcoins plummeted.

Spending your bitcoins

You can buy bitcoins online, and then store them in a digital wallet on your computer or smart device. Once you've found a merchant that accepts them, it's fairly straightforward to purchase goods and services online. Buying something face-to-face is less easy. When Jessica Roy tried to settle her tab in a New York bar, it took 20 minutes, thanks to the cumbersome transaction-approval process.

Another issue with spending is knowing how much a bitcoin is worth. It fluctuates against the dollar, like all other currencies, but it often does so much more wildly. When, in early December, the Chinese government banned its banks from trading in bitcoins, the value of the virtual currency plummeted again, from $1,240 to $870 in a single day. At one point on Dec. 18, it dropped to a low of $455, according to The Wall Street Journal's MarketWatch, although it subsequently rallied a little. That prompted NPR to ask that day whether the virtual currency would bite the dust.

Credit cards vs. bitcoins

There are benefits to bitcoins. Someone who bought some early in 2011 at $2 each would be very happy to see them hit that $1,240 peak. And there's no doubt that the chances of your being a victim of identity theft when using them seem close to zero, at least so far. But as a method of payment there's no comparison between credit cards and Bitcoin:

  1. Lose your credit card and you get a replacement. In November, a man in Wales accidentally threw out a hard drive on which he kept the digital wallet containing his Bitcoin stash. It's now buried deep in a garbage dump, and he's $9 million down.
  2. If your credit card's stolen, you're highly unlikely to lose financially. If your Bitcoin "private key" falls into the wrong hands, your loss could be total.
  3. Get scammed using your credit card, and your issuer is normally obliged to reimburse you. If you pay with bitcoins, and are the victim of a crime, there's nobody to turn to for help. And Bitcoin anonymity cuts both ways: You may even not know who conned you.
  4. If a merchant is having financial or organizational problems, and can't deliver a purchase as promised, your card issuer almost always steps in, and refunds the full price. There's no call center to contact and no such obligation with Bitcoin.
  5. You can use credit cards almost anywhere. So far, bitcoins are accepted by only a few merchants.
  6. A credit card transaction takes just a few seconds to be approved. As Jessica Roy discovered, it can take much longer with bitcoins.
  7. Unlike many credit cards, Bitcoin doesn't offer extended warranties or price and purchase protections.
  8. Bitcoin also can't provide common card perks, such as rental car insurance cover, and 24/7 help desks.
  9. Rewards credit cards give you cash back, miles or points. Bitcoin doesn't.
  10. With most credit cards, you get to borrow money interest-free from the time of a transaction until the due date of your next statement. Bitcoins have to be bought upfront.

It may be that Bitcoin will evolve. Perhaps, one day, credit card companies might even offer plastic denominated in bitcoins. But we're still a very long way from that. Right now, you might, if you have nerves of steel, wish to own bitcoins as a hedge within a diversified investment portfolio. But you should probably think twice before you cut up your cards.

Published 12/23/13

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