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Could Bitcoin give credit cards a run for their money?

By , CardRatings contributor
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Widespread news of security breaches at retailers including Target and Neiman Marcus led to a holiday hangover for millions of shoppers. While these breaches are under investigation, some say future attacks could be thwarted if consumers turned to a new method of payment: Bitcoin.

Basics of Bitcoin

For those of us used to heading to the bank to pick up some dollars and cents, Bitcoin can be a little hard to grasp.

Essentially, it is an online currency created by an open-source software program. The currency is found by miners who perform complex math problems and are rewarded for their efforts with bitcoins. Those coins then go into virtual circulation where regular Joes and Janes like us can buy, sell and trade them for merchandise just like any other currency.

However, they are unregulated, meaning no country or official agency backs them. They aren't even associated with a bank or other financial institution. According to the Bitcoin Network, the number of coins in existence will be capped at 21 million, and supply and demand determines their value. As of this writing, one bitcoin is estimated to have a value of around $800.

Bitcoins could replace credit cards

Acceptance of bitcoins has been surging in the past year with both online and brick-and-mortar retailers accepting them for purchases large and small. Bitcoin ATMs are even popping up in locales across the globe to allow you to sell your bitcoins and access instant cash in your local currency.

And at least one commentator with The Washington Post is saying Bitcoin is positioned to eliminate some of the security threats and inconveniences seen in traditional payment systems. For example, the system's open platform could allow for the creation of systems in which users exchange their local currency for bitcoins that can be used in an immediate transaction.

In other words, rather than holding all their money in bitcoins, consumers could exchange only enough money to make a purchase and then process their payment with the virtual currency. Since Bitcoin is an anonymous form of payment and not linked to any financial institution, paying in bitcoins this way would eliminate the possibility of hackers gaining access to all your cash.

Or Bitcoin could crash and burn

Of course, the above scenario begs the question of what would happen to the value of bitcoins if everyone only uses the virtual money to process payments and then immediately exchanges their money to the local currency.

In addition, not everyone is convinced Bitcoin would be a more secure method of payment than credit cards. PC Magazine notes malware can steal coins, and Bitcoin mining may be susceptible to attacks too. In fact, the magazine predicts bitcoins will plummet in value in 2014.

Another wrinkle is that Charles Shrem, the co-founder and CEO of the popular Bitcoin website BitInstant, was just arrested by federal authorities, charged with money laundering.

For now, the jury seems to be out on the Bitcoin concept. While more retailers are accepting the payments, they appear to be a novelty at best for now. Rather than cut up your credit cards in exchange for a Bitcoin wallet, we suggest a wait-and-see attitude.

Remember, credit cards limit your liability to $50 in the event a hacker cracks your card number. With Bitcoin, if someone breaks into your wallet, you are left with nothing. That alone may mean credit cards are here to stay.

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