Bitcoin vs. credit cards: Battle for micropayments.

bitcoin vs tarjetas

Introduction

In previous articles, we have already discussed, in broad terms, how the underlying technology of Bitcoin works. However, this technology was designed with very specific goals in mind. Bitcoin aspired to be the currency of the people, a fast, reliable, and efficient means of payment. Currently, its success is largely due to its appreciation as an investment product. However, it seems logical to think that the value of Bitcoin would grow as it becomes more widely adopted as a means of payment, which was its initial objective. In this sense, it aimed to become an alternative to traditional payment methods such as credit cards.

Let’s remember that, according to the document published by Satoshi Nakamoto, the cryptocurrency was created with the purpose of becoming a decentralized, anonymous, and secure payment system. It was designed for small remote payments, with irreversible and cheap transactions. We have analyzed these and other aspects in relation to how credit cards work. The idea is to see to what extent it makes sense to compare both payment methods for a similar use.

Comparison Elements

In order to carry out an effective comparison, it is necessary to define which aspects we will take into account. Credit cards are a privately originated payment method, but widely accepted worldwide. Cryptocurrencies, and Bitcoin in particular, have a more decentralized origin, and their acceptance is increasing although it is much more limited. The underlying technology of both systems is diametrically different, but their characteristics as payment methods are comparable. Therefore, we will analyze and explain the presence of a series of features based on the following table:

BITCOINCREDIT/DEBIT CARDS
Security
Speed
Scalability
Privacy, transparency and anonymity
Decentralization
Cost
Irreversibility of the transactions

Security

The vulnerability of exchanges and wallet storage is the main source of criticism regarding security in cryptocurrencies. In fact, these criticisms far outweigh those received by the security of the network itself, due to the significant hacker attacks that have occurred so far. Similarly, the fragility of passwords and scams targeting users are of much greater concern than the possibility of a double-spending attack, for example.

In traditional systems, although these risks also exist, the presence of central entities allows for the channeling of complaints and, in most cases, the recovery of all or a significant portion of the invested money, which is not possible with Bitcoin, at least currently. Additionally, the fact that these systems have private entities behind them (such as the card issuer or the bank itself) makes any type of claim much easier.

bitcoin vs tarjetas

Therefore, we could say that both systems have a sufficient level of security. Bitcoin relies on its technology and the size of its network. Credit cards, on the other hand, rely on financial institutions such as the Central Bank and the entire banking system.

Speed

If we analyze the speed of transactions, Bitcoin falls behind traditional systems due to block limitations. The blockchain technology allows for only a limited number of transactions to be added to the network. Blocks are mined every 10 minutes, which is equivalent to recording just 7 transactions per second. However, credit card systems like Visa claim to be capable of processing up to 24,000 transactions per second. This figure is therefore far beyond the reach of any cryptocurrency, including Bitcoin.

All of this is without considering that, for a transaction to be considered final, it is advisable to wait for a total of 6 blocks to be registered after ours, which increases the registration time to 60 minutes, something completely unacceptable in a global payment system.

The transaction processing method is also very different. While transactions with credit cards are virtually instantaneous, the registration in Bitcoin depends on block mining. Therefore, each transaction will not be considered registered until the block it is included in has been mined. As mentioned, this will not happen before 10 minutes at best. Can you imagine having to wait 10 minutes every time you want to use your credit card? Most likely, everyone would go back to using cash.

speed

It also happens that the Bitcoin system operates based on the fees offered by the user in each transaction. This means that during periods of network congestion, only those users willing to pay higher fees will have their transactions processed. This is also closely related to the scalability of the network.

Scalability

The number of transactions per second is not only related to the speed of each system but, above all, to its scalability. This element refers to the system’s ability to adapt when its usage demand increases. In the case of Bitcoin, demand peaks create genuine bottlenecks because the mining speed cannot be modified.

funnel effect

However, in a centralized system like the one used by credit cards, it is much easier to increase the system’s capacity. This allows for better responsiveness to demand increases, and therefore the efficiency of the system is not compromised.

The scalability issue has been addressed on multiple occasions by the cryptocurrency developer community, but a universal consensus has not yet been reached. Nevertheless, it is useful to be aware of the main alternatives developed so far.

Privacy, Transparency, and Anonymity

Any respectable payment system should offer its users a certain degree of anonymity in transactions. In fact, this is one of the great appeals of cash. No one wants the details of their transactions to be publicly known by others. Bitcoin publishes the details of all transactions on its network, and yet it is highly valued for it. How is this possible?

Bitcoin publishes all transactions to all participants as a way to maintain transparency. However, the identity of users is kept secret, as they are identified by a double key that other users are unaware of. Traditional systems, on the other hand, do not publish transactions except for auditing purposes. The users’ identities are known by the financial institution, and they are responsible for safeguarding user data.

safe wallet

In this way, in traditional systems, transactions are only known by the involved parties and the corresponding financial entities. With Bitcoin, the entire network knows that someone has made a certain transaction, but it is not easy to determine the ultimate author of the transaction. Therefore, both systems approach privacy in transactions very differently, but in both cases, the ultimate identity of the user should be well protected.

Decentralization

In terms of decentralization, Bitcoin is clearly ahead of any traditional system. Card payment systems rely on the banking entity, which acts as a trusted intermediary. In Bitcoin, however, it is the network of nodes that is responsible for the inclusion of new transactions, so there is no central authority figure.

However, it is important to note the high energy and resource costs that Bitcoin demands from mining nodes. This leads to a progressive clustering of nodes (tendency towards oligopoly), which reduces decentralization. Nevertheless, multiple payment systems are seeking solutions with a higher degree of decentralization to take advantage of its benefits.

Cost

Regarding the cost of these transactions, it is not currently high in either system. In the case of Bitcoin, transaction fees are closely tied to network congestion at any given time. The higher the demand, the higher the minimum fee required to have the transaction recorded in a reasonable time.

In a traditional system, the cost usually depends on the banking entity being used. However, the differences are minimal, although they tend to increase when paying from a country outside the origin entity.

Irreversibility of Transactions

Lastly, transactions in Bitcoin are considered irreversible to the extent that new blocks are added to the chain, making it difficult to invalidate them. The more transactions there are in the network after ours, the less likely it is for an “additional branch” of blocks to be created where my transaction hasn’t occurred, rendering it non-existent in the eyes of the network (known as “orphaned blocks”).

irreversibility

In a traditional system, however, it is reasonably straightforward to reverse any credit card transaction. Whether by contacting the financial institution or the affected merchant, it is possible to cancel almost any charge as long as the necessary documentation is provided.

It is not clear whether this characteristic of payment systems is positive or negative. In this regard, there is a great discussion about whether any transaction should be reversible at the user’s request. However, the data clearly support traditional systems in this aspect.

Conclusion

We can see that while the number of businesses accepting Bitcoin payments is increasing, as a payment system, it still has significant challenges to overcome compared to traditional systems. Bitcoin’s solution allows for decentralization and irreversibility of transactions while maintaining security and user privacy.

However, it cannot compete with the speed and scalability of traditional systems. Therefore, it seems difficult for Bitcoin to establish itself as a long-term payment method. Despite this, some countries like El Salvador have decided to adopt Bitcoin as an official means of payment. This is undoubtedly the best way to test its functionality, and in a few years, we will see the extent to which Bitcoin has succeeded in its ambitions. Until then, it will continue to be seen primarily as an investment product, a role in which it is already well-established.

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