Bitcoin vs. Credit Card Transactions: What's the Difference?

Bitcoin vs. Credit Card Transactions: An Overview

Most people have a credit card they can use to pay for items they'd rather wait to pay for in full. But some also have Bitcoin at their disposal. Which one should you use if you have both, and when should you use them to maximize your money?

Key Takeaways

  • Bitcoin transactions operate more like cash: exchanged person-to-person without a financial intermediary.
  • Credit card companies are widely accepted, but there are many parties between merchants and customers that charge fees for "necessary" services.
  • Credit card providers generally offer fraud protection, while Bitcoin does not.
  • Bitcoin is being accepted by merchants more and more.

Bitcoin Transactions

Bitcoin was designed for peer-to-peer transactions, which removes all parties except the two making the financial exchange. Bitcoins are stored in a digital wallet that you hold and control. You do not need to depend on a financial institution to hold your money for you.

Payments are similar to wire transfers or cash transactions, where payment is "pushed" directly from one party to another without going through another financial institution. Payment processing is executed through a private network of computers, and each transaction is recorded in a blockchain, which is public.

When making a Bitcoin transaction, it is not necessary to provide personal identification, such as your name and address. This means no one monitors your financial activity and establishes limits on what you can or cannot do.

Credit Card Transactions

By contrast, in a credit card transaction, you're authorizing a merchant to "pull" a payment from your account, passing through financial intermediaries in the process. For example, a typical Visa transaction generally involves five parties: the credit card network, the merchant, the acquirer (the financial institution that enables payments to the merchant), the issuer (the cardholder's bank), and the individual cardholder. Sometimes, there is a sixth party—the payment processor, although many are also the acquiring bank.

Credit cards in their modern form have existed since the 1950s, but credit has been extended to people for centuries.

Each party involved in the process charges other parties fees, which are then passed on to the cardholder—effectively raising prices. Credit cards must also be physically stored and kept secure. Technology is improving, but the card numbers are easy for hackers to steal, especially if you allow merchants to store them for easy future access. Even if you don't, hackers can access merchant's records and steal card information.

Key Differences

Bitcoin transactions are made using a public key—an anonymous alphanumeric address that changes with every transaction—and a private key. You can also pay on mobile devices using quick response (QR) codes linked to your wallet. Credit cards can also be used on mobile devices, but the payments have to go through several entities before they are processed and approved.

One of the key differences between the two is that often you hand your card to another person or swipe it in a point-of-sale terminal. These machines can be hacked, and simulated terminals can send your card information to hackers. An untrustworthy cashier can keep your credit card information, sell it online, or use it themselves. Bitcoin comes straight from your digital wallet and goes directly to the party you're paying, without a way to intercept the information.

Bitcoin transactions are irreversible and can only be refunded by the receiving party—a key difference from credit card transactions that can be canceled. This means there are no charge-backs for merchants when taking payment via Bitcoin. A charge-back is the demand by a credit-card provider for a retailer to cover the loss on a fraudulent or disputed transaction. 

Merchants that accept Bitcoin also save on credit card fees; fees can range anywhere from 0.5% to 5%, plus a $.20 to $.30 flat fee for each transaction. Bitcoin payments can be sent and received at either very low cost or none at all, as Bitcoin fees are based on the amount of data sent or the wallet you use.

While credit card transactions have many parties involved, they only take a few seconds to complete. On the other hand, Bitcoin transactions can take 10 minutes or more based on network activity and the network's current hashrate.

For merchants, the advantages of receiving Bitcoin are apparent. Payments made using the digital currency save substantially on processing fees and eliminate the risk of charge-backs.

For shoppers, the advantages of paying with Bitcoin include greater simplicity in placing the transaction; users are anonymous, there are no interruptions from intermediaries, and transaction fees are low. 

Credit cards offer other features, such as borrowing money and reward points. They are also accepted at many more merchants and vendors. However, using credit cards carries the risk of incurring late fees, interest charges, foreign transaction fees, or potentially affecting your credit score.

Which you choose depends on your preferences for fraud protection, ease of use, anonymity, and personal beliefs about cryptocurrency and existing financial infrastructures.

What Is a Crypto Rewards Credit Card?

A crypto rewards credit card is a credit card that gives cryptocurrency as a reward for using it to purchase goods and services.

Is Bitcoin Safer than Credit Cards?

Bitcoin is very difficult to hack, public and private keys can be lost or accidentally deleted. Credit cards and numbers can be stolen or lost, but fraudulent activity is generally protected by the issuer. Both have their safety concerns.

Can You Buy Bitcoin With a Credit Card?

If your card issuer allows you to use it for this purpose, then yes. However, you assume significant volatility risk—the risk of Bitcoin prices dropping and causing large losses—if you use a credit card to purchase cryptocurrency. Buying cryptocurrency on credit is the same thing as taking out a loan to go gambling—chances are you'll lose more than you win.

Investing in cryptocurrencies and other Initial Coin Offerings (“ICOs”) is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or other ICOs. Since each individual's situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein. As of the date this article was written, the author does not own Bitcoin.