What are the advantages of paying in BTC?

What are payment rails?

Think about all of the ways you can pay a merchant for an item or service. The timeless way is with cash—though some would argue that even more timeless is bartering or using precious metals or gemstones. Modern technologies have not made cash obsolete, but in many forums, they have replaced physical money with more convenient methods using plastic cards or electronic devices.

Traditional financial institutions are now connected by a complex, web-like infrastructure that facilitates money’s digital path around the world. The parts of this infrastructure on which the globe’s currencies ride like trains—moving across states, provinces, and countries—are called payment rails. Much like railroad tracks, these rails are owned and operated by different entities, have different requirements and capabilities, and charge a cost to maintain their functions.

In day-to-day life, most people interact with a common payment rail: credit card networks. These actually constitute multiple payment rails, but they have similar structures. Card rails include household names like Mastercard, Visa, and Discover. Automated Clearing House (ACH) is another payment rail that is responsible for moving funds among financial institutions like banks. It generally costs less to conduct a transaction using ACH than credit cards, and ACH is often used for recurring payments like employee paychecks.

Other examples of payment rails include:

• SWIFT — Short for “Society for Worldwide Interbank Financial Telecommunication”, SWIFT is often used for international transfers.

• RTP — Real-Time Payments (RTP) is a nearly instantaneous system for settling transfers of funds, but it is usually quoted as having higher fees than other services. It was launched in 2017 and is run by The Clearing House Payments Company.

• FedNow — Introduced in July 2023 by the US Federal Reserve (“the Fed”), FedNow is a 24/7 service that provides support for immediate financial transactions among institutions. Within the crypto community, many see FedNow as a step towards a central bank digital currency (CBDC), but it is not a CBDC itself.

• FinTech solutions — Apps and companies like PayPal, Square, and Cash App use traditional payment rails networks like ACH and card rails for transactions involving other institutions. However, for on-app payments (e.g., between PayPal wallets), they may use their own internal ledgers.* *

How do BTC payments work?

itcoin is a decentralized payment network that uses a cryptocurrency as a medium of exchange. There has been a lot of emphasis on Bitcoin’s novel technology and its ethos. But when it comes down to it, Satoshi Nakamoto saw Bitcoin as one thing: a payment rail.

So then, what is different about Bitcoin?

Unlike traditional payment rails like ACH, SWIFT, and credit cards, BTC transactions do not depend on a trusted third party who operates the network. Instead, Bitcoin is run by a decentralized group of users.

When sending BTC from one wallet to another, the sender signs a message indicating their intent and sends it to the network. Nodes on the network pass it along and confirm important details that ensure the transaction is valid, and ultimately that message is written into a block that joins the chain. When this process is complete, the recipient collects the payment. The blockchain—a ledger of transactions detailing every asset and its history—is then used for future transactions.

Because the confirmation process can take time, the Lightning Network was developed as a payment rail using Bitcoin’s network. This layer 2 scaling solution is essentially a rail-inside-a-rail, and it facilitates faster transactions. It is one of the ways that El Salvador under Nayib Bukele could adopt Bitcoin as legal tender and worldwide merchants can accept BTC as payments.

What advantages does paying in BTC have over traditional payment methods?

As with everything in the world of cryptocurrency, using a decentralized blockchain network like Bitcoin obviates the need for trust in “middle-man” parties with their own motivations. This can be an ideological sticking point for those using cryptocurrency to reduce their reliance on financial (and other) institutions.

Practically, however, the decentralized model may also remove barriers put in place by private companies and governments like high fees and slow settlement of funds. Bank transfers may take days to finalize, and traditional wire transfers are costly. Avoiding middle-man companies may also reduce risks of business failures. In 2024, one of these intermediary enterprises, called Synapse, filed for bankruptcy after mishandling depositor funds, and as a result its customers could not access approximately $265 million.

Bitcoin’s Lightning Network is especially notable for its low cost and high speeds, which may make paying in BTC attractive compared with traditional rails. Its use for remittance payments across borders has highlighted how BTC transfers could revolutionize parts of the existing financial system.

In all, BTC payments have distinct advantages, but they do not solve every problem of the financial industry. There are still risks inherent to all financial transactions. While Satoshi created a new asset class to reduce these risks, even today BTC payments must be considered in the context of the broader financial landscape.

What are the disadvantages of paying in BTC?

While Bitcoin offers unique advantages as a payment rail, it is important to consider its limitations and potential drawbacks when used for payments:

• Volatility: The value of Bitcoin is highly volatile compared to fiat currencies, which can lead to uncertainty for buyers and merchants.
• Limited adoption: Users may struggle to find merchants willing to accept BTC, especially for day-to-day purchases.
• Transaction fees: Bitcoin transactions on the blockchain can incur high fees during periods of network congestion. Solutions like the Lightning Network were created to solve this issue.
• Speed and scalability: Bitcoin transactions can take several minutes or even hours to confirm during periods of high activity on the network. Similarly, the Lightning Network is built to solve this.
• Irreversibility: Bitcoin transactions are irreversible once confirmed on the blockchain. While this feature increases security, it also means users have no recourse in cases of accidental payments, fraud, or disputes with merchants.
• Technical barriers: Users may need technical knowledge, including setting up and managing wallets, securing private keys, and understanding transaction mechanics to pay in BTC.

Paying in BTC essentials

• Payment rails are the underlying infrastructure that facilitates financial transactions. The most often used ones include credit card networks, SWIFT, and FedNow in the United States.
• Bitcoin is a payment rail built on a decentralized network that uses BTC as a medium of exchange. Its Lightning Network is especially notable for promising low-cost, high-speed transactions.
• BTC payments enjoy advantages such as not needing a trusted third party to facilitate transactions, 24/7 reliability, security bestowed by the blockchain, and relative speed.
• Paying in BTC has some drawbacks, including price volatility, speed and scalability issues and technical barriers that users must be aware of before using the Bitcoin network for payments.