In 2008, an anonymous researcher (or team of researchers) named Satoshi Nakamoto published a nine-page research paper titled “Bitcoin: A Peer-to-Peer Electronic Cash System.” The document, known as the bitcoin white paperintroduced a new type of digital currency that could be sent directly between users without relying on financial intermediaries.
After the release of Bitcoin In 2009, people around the world discovered that its functionality allowed transactions, specifically cross-border transactions, to be sent faster than most international bank transfers. A bitcoin transaction could be settled in just a few minutes compared to 2-3 business days for traditional services. By removing banks from the process, Bitcoin mitigated the high costs often associated with cross-border payments.
How bitcoin payments work
Bitcoin network and blockchain
Bitcoin (BTC)the protocol’s native digital currency, circumvents the banking system by relying on a series of interconnected “nodes.”
These nodes are operated by volunteer users who make up the Bitcoin network and help maintain it by using their computers to perform various tasks in something called bitcoin block chain — a special type of general ledger system used to verify and record transaction data.
You can think of these two concepts, the Bitcoin network and the blockchain, as a globally distributed group of people working together on an open Google document. Every time new information is added to the document, everyone else must first make sure that there are no errors in it. The document is also fully accessible to anyone who wants to see it, not just those who work on it.
In exchange for fulfilling energy-intensive roles like data validation, nodes can earn rewards paid in newly minted bitcoins.
How a transaction works
When a person wants to send a bitcoin transaction to someone, they must first transmit it to the rest of the network. The nodes then independently verify the validity of the transaction (whether the sender has enough funds to transfer and is not trying to double spend their funds) and compete to win the right to add that and a batch of other transactions into a new block on the blockchain
If you want to learn more about the process of validating transactions and adding them to the blockchain, you can refer to our Learning Center guide. What is bitcoin mining?
Once a transaction is added to the blockchain, it is finalized. And because there are no banks involved and payments are sent over the internet, it doesn’t matter if the recipient is in the same country or on the other side of the world: transactions take the same amount of time to process. You can think of it like sending an email instead of a handwritten letter.
These properties are the reason why cryptocurrencies like bitcoin are ideal for frictionless remittances and cross-border transfers.
Barriers to the adoption of bitcoin payments
While there are a number of advantages to using bitcoin over traditional currencies, a survey 2021 found that only 13% of US customers preferred to use bitcoin and other cryptocurrencies when sending payments abroad. This low level of preference occurs despite the fact that the figures show that 42% of those surveyed paid an average commission of 6.2% when sending traditional remittance payments.
So what is it that stops people? People may be put off by a number of misconceptions surrounding bitcoin payments.
Bitcoin transactions are usually not anonymous. When you use an exchange to transfer cryptocurrency, you need to send something called Know Your Customer (KYC) data. This data often includes your personal information and a copy of your passport. KYC is important because it ensures that transactions are legal and regulated.
For many years, criminals have abused the pseudonymous nature of bitcoin payments to finance nefarious activities. And while it’s impossible to know exactly what percentage of payments are involved in illegal businesses, advances in detection, tracking, and enforcement have made it far less attractive.
a recent report Per Chainalysis reported that around $10 billion USD, or 0.34% of all bitcoin transactions, were flagged as being used to finance criminal enterprises.
Looking at traditional currency in comparison, the United Nations figures found that up to 5% of global GDP is involved in money laundering and other criminal practices per year. This equates to around two trillion US dollars.
high power consumption
It is no mystery that the computational power committed to securing the bitcoin network is extremely high, around ~100 TW/h. However, it is important to note that this figure represents the energy consumption of an entire financial system, including the issuance and settlement of transactions. Additionally, the vast majority of the power consumed by the network is used to create new units of bitcoin (via mining), which is systematically reduced over time by halving.
No one has tried to measure how much energy a major coin consumes per hour. Think about the US dollar and how many banks, money printers, ATMs, card payment devices, and security vehicles it takes to support a single currency. Now think about how much power those elements combined, potentially much more than the Bitcoin network!
Bitcoin is known to be a particularly volatile asset class. This means that its price can fluctuate drastically in a short period of time.
For remittance payments, volatility can lead to the recipient receiving less than the intended amount in fiat currency once the transaction is complete. However, this volatility works both ways, and sometimes during bullish market moves, recipients may receive a larger amount.
The effects of bitcoin’s volatility and transaction speeds can also be mitigated if the sender simply takes a few precautions. That is, these imply operating during weekends when network congestion is low and avoiding sending remittance payments during particularly bearish episodes.
In general, while some people may be discouraged from using bitcoin for cross-border payments, it has a number of key advantages over traditional currency that make it an ideal solution; namely, the speed, cost and purpose of the transaction. Keep in mind that after Bitcoin has been sent across borders, it can be quickly and easily converted back to a government currency using a crypto exchange like Kraken.
Need help understanding how to use Kraken to manage your assets? stop by our Support Center where our support team is available 24/7.
These materials are for general information purposes only and are not investment advice or a recommendation or solicitation to buy, sell or hold any digital asset or to engage in any specific trading strategy. Some cryptographic markets and products are not regulated and you may not be protected by government compensation schemes and/or regulatory protection. The unpredictable nature of crypto asset markets can lead to loss of funds. Taxes may be payable on any returns and/or on any increase in the value of your crypto assets and you should seek independent advice on your tax position.
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