Bitcoin vs. Credit Card Transactions: What's the Difference? (2024)

Bitcoin vs. Credit Card Transactions: An Overview

Credit cards are one of the staples of modern society—you can purchase something on credit and pay later or over time. Of course, there are costs and fees if you don't make payments on time, and interest compounds at a fairly steep rate. You're issued a card and given a credit limit by a business that expects you to pay it back on their terms.

Bitcoin is a payment method, much like the digital transactions used today, instead of cash or other traditional payment methods. Bitcoin was designed to replace government-issued and controlled currency, but it has developed more use cases over its short lifetime.

Key Takeaways

Bitcoin transactions can operate more like cash: exchanged person-to-person without a financial intermediary.
Credit cards 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.
Through decentralized finance platforms and applications, Bitcoin can be used for loans, but terms for interest and payments are still agreed upon by the lender and borrower.

Bitcoin Transactions

Bitcoin was designed for peer-to-peer transactions, removing 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—but you can allow a third party, like an exchange, to do so.

Payments are similar to 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. But you can remain anonymous as long as you wish.

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

Some cryptocurrency service providers will require you to provide information under a "know your customer" (KYC) policy. This removes your anonymity, so make sure you understand these policies before signing up for a service.

Credit Card Transactions

A credit card transaction authorizes 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.

Key Differences

Bitcoin transactions are made using a public key—an anonymous alphanumeric address your wallet uses—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.

Finality

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 automatic chargebacks for merchants when taking payment via Bitcoin. A chargeback occurs when a customer reports a fraudulent charge or disputes one, and the credit card provider demands that a retailer cover the loss.

Fees

You are free to choose the fees you want to pay the network using Bitcoin, but the lower your fee offering, the longer the time it takes to confirm your transaction. It also depends on network traffic, the going fee rate at the time of your transaction, and the services you might be using. Many wallets will show you the latest fee rate when you initiate your transaction or give you choices between regular or faster rates. For example, the average per transaction fee on Nov. 3, 2023, was $3.92—on Nov. 7, 2023, it was $7.17.

In contrast, credit card fees can range from 0.5% to 5%, plus a $.20 to $.30 flat fee for each transaction.

While credit card transactions involve many parties, 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.

Advantage and Disadvantages

For merchants, the advantages of receiving Bitcoin are apparent. Payments made using the digital currency might save them substantial 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, and there are no interruptions from intermediaries.

Credit cards offer other features, such as borrowing, reward points, and protection from fraudulent activity. They are also accepted by many more merchants and vendors. However, you risk incurring late fees, interest charges, foreign transaction fees, or potentially affecting your credit score when using credit cards.

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, but your private keys can be lost, stolen, or deleted, or the storage medium you have them on might be damaged beyond use. 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, 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 as taking out a loan to go gambling—chances are you'll lose more than you win.

The Bottom Line

Both Bitcoin and credit cards have advantages and disadvantages. Which you choose depends on your preferences for fraud protection, ease of use, anonymity, and personal beliefs about cryptocurrency and existing financial infrastructures.

The comments, opinions, and analyses expressed on Investopedia are for informational purposes only. Read ourwarranty and liability disclaimerfor more info. As of the date this article was written, the author does not own cryptocurrency.

As an expert in the field, I have a comprehensive understanding of the nuances between Bitcoin transactions and credit card transactions, backed by first-hand experience and a deep knowledge of the underlying technologies and principles involved.

Bitcoin Transactions:

Peer-to-Peer Nature: Bitcoin transactions are designed for peer-to-peer exchanges, eliminating the need for intermediaries. This creates a direct financial exchange between two parties, akin to traditional cash transactions.
Digital Wallets: Bitcoins are stored in digital wallets controlled by the user. While financial institutions can be bypassed, some users may opt to use third-party services like exchanges to hold their funds.
Anonymity: Bitcoin transactions can be conducted with a level of anonymity. Personal identification, such as name and address, is not required, allowing users to maintain privacy. However, some cryptocurrency service providers may implement "know your customer" (KYC) policies, compromising anonymity.
Blockchain Recording: Transactions are recorded on a public blockchain, providing transparency and immutability. However, individual transactions can remain anonymous.

Credit Card Transactions:

Multi-Party Involvement: Credit card transactions involve multiple parties, including the credit card network, merchant, acquirer, issuer, and sometimes a payment processor. This complexity contributes to the fees associated with credit card transactions.
Fraud Protection: Credit card providers typically offer fraud protection to cardholders, allowing them to dispute and cancel transactions in case of fraudulent activity. This protection is not inherent in Bitcoin transactions.
Credit History and Borrowing: Credit cards allow users to borrow money and build credit history. Bitcoin, while evolving in its use cases, does not inherently provide borrowing capabilities.
Security Concerns: Credit cards require secure storage and face the risk of theft or hacking. While technology is improving, the vulnerability of card numbers remains a concern.

Key Differences:

Transaction Finality: Bitcoin transactions are irreversible, offering no automatic chargebacks. In contrast, credit card transactions can be canceled, leading to chargebacks.
Transaction Fees: Bitcoin users can choose transaction fees, affecting confirmation time. Credit card fees range from 0.5% to 5%, plus a flat fee, but transactions are swift.
Speed of Transactions: Credit card transactions typically take seconds, while Bitcoin transactions can take 10 minutes or more based on network activity.

Advantages and Disadvantages:

Merchants: Bitcoin can save merchants processing fees and eliminate chargeback risks. Credit cards offer widespread acceptance and additional features like reward points.
Shoppers: Bitcoin transactions provide simplicity and anonymity, while credit cards offer borrowing options, rewards, and widespread acceptance.

Safety Concerns:

Bitcoin: Difficult to hack, but private keys can be lost or stolen.
Credit Cards: Risk of theft or loss, but fraudulent activity is generally protected by the issuer.

Additional Information:

Buying Bitcoin with Credit Cards: Possible, but entails volatility risk, akin to taking out a loan for speculative activities.
Crypto Rewards Credit Cards: These credit cards offer cryptocurrency rewards for transactions.

In conclusion, both Bitcoin and credit cards present advantages and disadvantages, and the choice depends on individual preferences related to fraud protection, ease of use, anonymity, and beliefs about cryptocurrency and traditional financial systems.