The use of bitcoins
Bitcoin is a form of currency that was created in 2009, and which is not issued by any central bank. The transactions that are made using this currency do not have middle men which imply that there is no use of banks. Bitcoin transactions do not have transaction fees, and a user does not need to provide real names. There is no physical bitcoin, but rather computers are used to create them. All those computers that create them form a network that serves to confirm the transactions that are made with bitcoins, without the help of MasterCard, Visa, or any local bank. In order to keep inflation in check, the system is set up in way that makes it difficult to produce new bitcoins over time (Tindell).
Bitcoin has a network of peer-to-peer that operates on a protocol that is cryptographic. The users of bitcoin network send bitcoins unit of currency by broadcasting messages that are digitally signed to the network using bitcoin wallet software. The bitcoin network has a distributed public database, the block chain, which records transactions, with the consensus achieved by a proof-of-work mining system. The distribution of block chain is done internationally with the use of peer-to-peer technology of file sharing that is similar to BitTorrent (Nakamoto, 115-119).
Satoshi Nakamoto, the person who created Bitcoin, designed the protocol in 2008 and released it in 2009 as open source software. Bitcoin network includes transactions in blocks that form an ongoing chain referred to as block chain. Such blocks cannot be altered without redoing the network timestamps that was required in creating the blocks since the modified block. The network itself requires a petit structure to enable it share transactions (Nakamoto).
Why/how bitcoin is being used
Bitcoins is a coded currency that operates on a decentralized platform globally. It is supported by a community of users, as compared to a centralized government. The bitcoins could be preferred because they can be used to buy merchandise without much recognition of people involved in transactions. Besides, it allows merchants to avoid paying that fee that is associated with credit card transactions. Making international payments with bitcoins is easy and cheap given that bitcoins are not tied to any country or subject to any regulation. Small businesses could prefer bitcoins because they will not incur credit card fees. Some people prefer buying bitcoins as an investment with the hope that its value will go up one day. Of course, this factor of rising value remains to be unseen yet. If its use is widely accepted, Bitcoins could make merchants to offer lower prices to people who pay with the currency given that it costs less to accept than plastic money (Biggs).
A bitcoin can be elaborated by a sequence of transactions that are designed digitally, and this sequence began with its creation as a block reward. The owner of bitcoin transfers it to the next owner by signing it digitally handing it over to the next owner in a bitcoin transaction, much the same as endorsing a traditional bank check. In order to verify the chain of ownership, a payee is able to verify each previous transaction. Although a bitcoin is an entity of currency object which is traded, there is nothing that prevents exchanging in fractions of, or multiple bitcoins (Barber et al., 77-100).
Transactions are, therefore, allowed to contain manifold inputs and outputs, and in such a way can be split and again combined. Common transactions will have either multiple inputs combining small amounts, or single input from a larger previous transaction. At most, there should be two outputs, one for making the payment and the other for returning the change, if there is any, back to the sender. A difference between the total input and total output amounts is given to the miners as the transaction fee (Biggs, 120).
Connection of bitcoin to accounting systems
When a customer makes a payment, a merchant might simply issue a credit to the customer’s account in an ideal way that suggests that the merchant received a payment. The merchant could consider entering the payment as a discount, but he/she will like to consider whether this entry inappropriately disguises the nature of the said transaction. If the other hand, a merchant is giving discounts for bitcoins, but then they are selling bitcoins for currency and then counting it as income, then chances are high the calculation of income is making up for it.
If the business sells gift certificates or gift cards, the merchant may find that the easiest way of accepting bitcoin is to accept it for the purchase of gift cards only, and then as a requirement, gift cards should be used for actual purchasing of goods and services. This way, the accounting practices that already exist for processing gift cards can be put into use. The bitcoins accounting would then be minimized into tracking sales of a single SKU. The above method is also ideal for convenience stores and retail food establishments, where making payment of bitcoin through a mobile phone for small food purchases on a daily basis might be disruptive or cumbersome, especially before a line of other customers. In this case, bitcoins would be best used to reload prepaid cards that can then be used by swiping at a point-of-sale.
If a merchant does not accept gift cards, but he or she already accept credit card through a swipe terminal, there should be a consideration of the possibility to add a system of retail gift card through a swipe terminal that already exists. Most terminals of point-of-sale are designed with the ability of supporting multiple applications on the same terminal. A merchant could consider adding a private label gift card service provider to help them handle their funds, by simply providing a solution that keeps track of the balance on the cards on their behalf, including those features that enable users to check their balances using a phone or the web. Such a solution provided by a label gift card service provider is also what makes the gift card swipe-able through the card reader.
Future replacement of bitcoin
Bitcoins continue to receive mixed reactions from governments as well merchants. Some governments view it as a competitor to their currencies while other thinks that they are losing on taxation and cannot effectively control the currency. Merchants also are not sure about the process of transactions using bitcoins. While the acceptance of bitcoin is a matter of debate, the greatest question people ask is what does the future hold for bitcoins, will it be replaced by another currency?” while there is no one who knows what will become of bitcoin, another platform is yet to come.
Barber, Simon; Boyen, Xavier; Shi, Elaine and Uzun, Ersin. "Bitter to Better — how to make Bitcoin a better currency". Financial Cryptography and Data Security. Springer Publishing, 2013.
Biggs, J. How to mine bitcoins. Techcrunch, 2013
Cleveland Business News - Northeast Ohio and Cleveland – Crain: https://www.crainscleveland.com/article/20140323/SUB1/303239986/1006
Nakamoto, S. Bitcoin: A Peer-to-Peer Electronic Cash System, 2009.
Tindell, K. Geeks love the bitcoin phenomenon like they loved the internet in 1995. Springer, 2013.