# Bitcoin and Chargebacks: How It Works

> How do Bitcoin and chargebacks work? Crypto payments act like final cash sales, cutting chargeback risk for merchants but adding volatility. See the tradeoffs.

TL;DR

Bitcoin is a peer-to-peer digital currency whose transactions work like final cash sales, virtually eliminating chargeback risk for merchants because there is no dispute process or third party to file complaints. This protects retailers from chargebacks and the traditional chargeback lag, but offers little protection to defrauded customers and exposes merchants to bitcoin's price volatility. With few major retailers accepting it, ClearSale's guaranteed chargeback protection remains a more reliable way to prevent chargebacks.

Merchants are always looking for a shopping experience that’s frictionless and enjoyable for consumers yet safe and profitable for retailers. One of the latest payment trends — bitcoins, a cryptocurrency [created in 2008](http://www.nytimes.com/interactive/technology/bitcoin-timeline.html#/#time284_8230) by an individual or group using the alias “Satoshi Nakamoto” — has a total current value of more than [$20 billion](https://bitcoin.org/en/faq#what-is-bitcoin). And that has merchants taking notice.

It’s not just the dollar signs that intrigue merchants — the promise of complete transactional security and the elimination of chargebacks has more e-commerce retailers accepting bitcoins. While bitcoins do appear to deliver on these promises, is that enough for merchants to adopt this new (still unproven) cryptocurrency as a payment method?

## What Is Bitcoin?

To put it simply, bitcoin is a [peer-to-peer digital currency](http://www.sfgate.com/technology/article/What-is-a-bitcoin-anyway-5529457.php#photo-6401923) that can be sent and received between user accounts without having to be routed through a financial institution. Each transaction is processed, verified and publicly recorded by a network of bitcoin enthusiasts (called “miners”) who trade their work for the chance to win new bitcoins. When a certain number of payments have been processed, the system generates new coins, until 21 million are in circulation. Bitcoins are a cross between a currency and a commodity, and its price is tied to its activity and to the value given to it by those who purchase it solely as an investment, leading to a reputation for volatility.

## How Bitcoin-Based Transactions Can Eliminate Chargebacks

In a traditional credit card transaction, merchants pull sensitive data from a customer’s card to complete a sale. During that transfer, consumers are at risk of having personal data hacked, stolen and used by fraudsters. But bitcoin transactions are more like cash sales: Customers decide precisely how much to transfer to a merchant. And because the blockchain structure behind bitcoins is virtually [immune to hacking risks](https://www.credit-suisse.com/corporate/en/articles/news-and-expertise/is-bitcoin-safe-201701.html), merchants never have to worry that payments are fraudulent.

This protection extends even after a bitcoin transaction. When a customer files a credit card chargeback, the card issuer immediately refunds the purchaser’s money while the chargeback is reviewed (rarely ending in a favorable ruling for the merchant). But making a purchase with bitcoins virtually eliminates chargeback risks for merchants. There are no dispute procedures and no third party with which a consumer can file complaints. Bitcoin sales are final (unless merchants choose to voluntarily refund the money), making bitcoins an attractive [alternate payment method](https://blog.clear.sale/alternative-payment-methods-are-they-right-for-e-commerce).

**Bitcoin Tip:** Not **every**transaction involving bitcoins is irreversible or immune to chargebacks. Some exchanges let customers purchase bitcoins using credit cards or PayPal; these are the only transactions involving bitcoins that are vulnerable to chargebacks. If a customer files a successful chargeback on the transaction, they keep the purchased bitcoins **and** the dollar amount of the transaction.

With the virtual elimination of chargebacks also comes the eradication of the chargeback lag — the [120 days](https://www.investopedia.com/terms/c/chargeback-period.asp) a customer has after the transaction date to file a chargeback. This [chargeback lag](https://blog.clear.sale/the-chargeback-lag-what-it-is-and-how-it-impacts-your-e-commerce-business) has traditionally wreaked havoc on an e-commerce retailer’s balance sheet, affecting a merchant’s bottom line, reputation and [ability to conduct business](https://blog.clear.sale/how-to-prevent-stripe-chargebacks-from-harming-your-online-business). The [blockchain technology](https://blog.clear.sale/abcs-of-blockchain-banking-the-building-blocks) behind bitcoin puts the money in the retailer’s hands — and on their balance sheet — permanently and immediately.

## Should Online Retailers Start Accepting Bitcoins?

While bitcoin payments show great promise for protecting merchants against [fraud and chargebacks](https://bitcoin.org/en/faq#what-are-the-advantages-of-bitcoin), they do little to protect and compensate defrauded customers. Because bitcoin transactions are truly final, the buyer is out of luck (and money) if they do business with a fraudster or with a merchant who’s unwilling to correct a transaction that went wrong. If no alternate form of payment is offered, the customer may be leery to pay a merchant in bitcoin, walking away from the sale instead.

As well, just because bitcoins protect merchants against friendly fraud and chargebacks doesn’t mean they aren’t risky. Bitcoins have no inherent value, so their perceived value can fluctuate wildly, depending on what people are willing to pay for them. [Prices in 2017](https://seekingalpha.com/article/4137094-bitcoin-big-short-already-get-far-worse) ranged between $800 and $20,000 per coin, making accepting bitcoins as payment a gamble for merchants if prices tumble.

## Alternatives to Bitcoin for Chargeback Elimination

Bitcoins offer the potential to put the power of a transaction back in a merchant’s hands as they no longer worry about the potentially devastating effects of chargebacks.

But bitcoins remain unpopular among retailers: Only [three of the top 500](http://www.businessinsider.com/merchants-arent-accepting-bitcoin-2017-7) internet sellers accepted bitcoin — down from five in 2016. Its lack of widespread usage suggests that retailers shouldn’t yet rely on bitcoin as a replacement to traditional payment cards or as the primary method of eliminating chargeback risk.

Luckily, there’s a more effective way to prevent chargebacks and their damaging financial and reputational effects: ClearSale’s [guaranteed chargeback protection](https://www.clear.sale/fraud-protection/guaranteed-chargeback-insurance). We help you stop fraud before it happens, identifying the source of fraud and implementing strategies to prevent future attacks. [Contact a ClearSale analyst today](https://www.clear.sale/contact)**to find out how our unique solution can protect your revenue and ensure you’ll never again pay for a chargeback.**

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## Frequently Asked Questions

### What is bitcoin?

Bitcoin is a peer-to-peer digital currency that can be sent and received between user accounts without routing through a financial institution. Each transaction is processed, verified, and publicly recorded by a network of users called miners, and it behaves as a cross between a currency and a commodity, which gives it a reputation for volatility.

### How do bitcoin transactions eliminate chargebacks?

Bitcoin transactions work more like cash sales, where customers decide exactly how much to transfer, and the blockchain structure is virtually immune to hacking. There are no dispute procedures and no third party for a consumer to file complaints with, so sales are final unless the merchant chooses to refund.

### Are all bitcoin transactions immune to chargebacks?

No. Some exchanges let customers buy bitcoins using credit cards or PayPal, and those purchases remain vulnerable to chargebacks. If a customer files a successful chargeback on such a transaction, they can keep both the bitcoins and the dollar amount.

### What is the chargeback lag, and how does bitcoin affect it?

The chargeback lag is the roughly 120 days a customer has after a transaction to file a chargeback, which can disrupt a retailer's balance sheet. Bitcoin's blockchain technology removes this lag by placing the money in the retailer's hands permanently and immediately.

### What are the downsides of accepting bitcoin?

Bitcoin does little to protect or compensate defrauded customers, since transactions are final, and it carries significant price volatility because it has no inherent value. Adoption is also low, with only a handful of top internet sellers accepting it, so retailers should not rely on it as a primary payment method.

### Is there a more reliable way to prevent chargebacks than bitcoin?

Yes. ClearSale offers guaranteed chargeback protection that helps stop fraud before it happens, identifies the source of fraud, and implements strategies to prevent future attacks. This avoids the volatility and limited adoption that make bitcoin an uncertain chargeback solution.

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Source: [https://www.clear.sale/blog/bitcoin-and-chargebacks](https://www.clear.sale/blog/bitcoin-and-chargebacks)