Credit Cards vs. Digital Currencies

Posted May 27, 2014 by CCC Staff in ,

Bitcoin Mining with USB

The emergence of Bitcoin has helped digital currency go mainstream. Major cities like Vancouver, Toronto and Montreal have recently hopped on board the Bitcoin bandwagon. You can now perform transactions with the cryptocurrency at Bitcoin ATMs. Although Bitcoin is in its infancy, it’s quickly growing – in 2013 there were on average about 30 bitcoin transactions per minute, compared 200,000 per minute for Visa transactions. (Source: Chicago Fed Letter PDF)

Even the Canadian government is taking part in the digital currency game. The Royal Canadian Mint recently introduced the MintChip, a digital currency backed by the Government of Canada. The meteoric rise of Bitcoin even has the Bank of Canada mulling over whether digital currencies could one day replace credit card payments online.

What is Digital Currency?

Digital currency is form of virtual currency that is electronically created and stored. Cryptocurrencies like Bitcoin are not controlled by one central authority. It’s made up of a network of computers that mine and process Bitcoin transactions. While conventional currencies are regulated by governments, cryptocurrencies have no oversight other than the network that creates them. Bitcoin stores details of every single transaction in a digital ledger called the block chain. While the network is transparent, the owners (and users) of Bitcoin remain anonymous. Bitcoin addresses – where the currency is stored – aren’t linked to names, addresses, or other personally identifying information. Similar to traditional currencies, digital currencies can often be exchanged for goods and services.

Now that you have a better understanding of digital currencies, let’s take a look at the advantages and disadvantages of using digital currency over credit cards for online transactions.

Advantages of Digital Currencies

Digital Currencies Were Designed for the Internet:

Credit cards were developed in the 1950’s; it wasn’t until later credit cards were adapted for e-commerce. One of the biggest problems faced by merchants is chargebacks. If you’ve been the victim of fraud your credit card issuer can initiate a chargeback to recover the funds. Although this is a good protection for cardholders, chargebacks are costly for retailers. Not only do businesses not get paid for the product, they also have to pay an administrative fee on top of that. With a Bitcoin the transactions are irreversible, so retailers don’t have to worry about chargebacks. Retailers in turn can pass the savings onto consumers through lower prices.

Lower Transaction Fees:

Although credit cards are a convenient way to make purchases, the transaction fees take money away from the bottom line of businesses. When you’re making online purchases, you’re not dealing with the retailer in person, so cash and debit are not an option.

With digital currencies like Bitcoin the transaction fee may be lower than credit card transactions for retailers. This allows online retailers to pass the savings onto you. Some retailers have even started offering discounts on Bitcoin transactions.

Disadvantages of Digital Currencies

Risk of Fraud:

A lack of government regulation can be both a blessing and a curse. There have been several high-profile Bitcoin exchange bankruptcies in the news over the past few months. The Mt. Gox Bitcoin exchange recently made headlines worldwide when it filed for bankruptcy, leaving Bitcoin users out millions of dollars.

While credit card transactions are governed by hundreds of pages of regulations, it’s buyer beware when it comes to digital currencies like Bitcoin. When you use your credit card, you’re protected from fraud in most cases. Digital currency doesn’t offer that same protection – if a hacker steals your Bitcoins, your digital dollars are as good as gone.

The lack of regulation of digital currency could soon change – the Canadian government has plans to regulate digital currencies like Bitcoin by bringing them under the provisions of the money-laundering and anti-terrorism financing regulations. Until then, it’s up to digital currency users to exercise extra caution when performing transactions online.

Lack of Consumer Protection:

When you use your credit card, you receive enhanced protection on purchases. Credit cards often offer extended warranties on purchases at no additional cost. Users of digital currencies don’t receive those same protections; if you want an extended warranty, you’ll have to pay for it out of pocket.

No Reward Points:

When you use your rewards credit card online to make purchases, you’ll receive rewards in the form of reward points, cash-back, or travel rewards. Those rewards can quickly add up – with digital currencies you don’t receive those same rewards. In fact, instead of receiving rewards, you may have to foot the transaction fee. Although some retailers offer discounts when using digital currencies like Bitcoin, you’ll receive reward points every time when you use your credit card.

Cash Flow:

When you make a purchase on your credit card, you’re borrowing money from a bank or financial institution, but when you make a purchase with digital currency, the funds are withdrawn directly from your digital wallet. If you’re looking to maximize your cash flow, you’re better off using your credit card, as long as you use it responsibly and pay off your balance in full.

The Bottom Line

Digital currencies may offer a convenient way to make purchases online, but they lack a lot of the protections credit cardholders receive. With most digital currencies, it’s buyer beware when it comes to fraud. If you’re making a major purchase online, it makes sense in most cases to stick with your trusty credit card and the many benefits and protections that come with it.