Whether it’s a rise or crash in trading price, or the growing number of businesses accepting the cryptocurrency, buzz about bitcoin keeps the blogosphere busy.
Of course, here at Get Elastic, want to keep an eye on its viability as a payment method online. With Overstock.com (#27 on the Internet Retailer 500 List) recently announcing its intent to accept bitcoin this year, we’re revisiting the question should you adopt bitcoin as a payment method?
What is bitcoin?
Bitcoin (BTC) is the original cryptocurrency – a form of digital money with no central issuing authority. Bitcoin can be bought on an exchange, or “mined” by solving complex mathematical equations using special software. Unlike fiat currency, cryptocurrency circulation is limited to a predetermined amount to safeguard against inflation (21 million in bitcoin’s case), drawing comparisons to gold and silver as a currency hedge (the $US price of 1 BTC surpassed the price of gold at one point last year).
Other cryptocurrencies like Litecoin and Coinye West (you can’t make this stuff up) are on the market, using their own algorithms and circulation caps.
How does bitcoin work?
Bitcoin is held in Wallets stored on holders’ computers, each with their own address keys. Transactions are made between Wallets anonymously between addresses, and posted publicly on the Blockchain, a record of ownership and transfer of each BTC in circulation.
Miners supply the power needed to keep the Blockchain going, and are rewarded with BTC and interchange fees. Approximately $150,000 worth of power is consumed daily in effort to mine bitcoin, and takes the average miner44 days to achieve 1BTC.
Why would Overstock want to accept Bitcoin?
Support the bitcoin movement
In an interview with Fortune, O.co CEO Patrick Byrne admits he doesn’t himself own bitcoin — he prefers gold – and owns enough that “if zombies walked the Earth I will have enough gold that me and mine are taken care of.” But he supports the notion of a monetary system where government can’t inflate the currency.
But bitcoin risks failure if there’s a lack of useful things to do with it, and will remain volatile unless it becomes more widely adopted.
“Adoption of bitcoin is low, but I think once we and some other major guys start accepting it that could change very quickly.”
Appeal to a niche customer
Byrne believes “legitimate number of consumers who want to be able to shop with bitcoin.
“http://finance.fortune.cnn.com/2013/12/24/overstock-ceo-bitcoin/?section=magazines_fortune including those who believe the government is managing the monetary system poorly. “This is a way of signaling to these people that we stand with them and we share their same doubts.”
Save on interchange
Byrne discloses O.co’s net margin is 2%, so saving 2% of sales in interchange fees is appealing (though he doesn’t expect a large portion of orders to be paid with bitcoin). However, losing more than the spread should bitcoin drop in value can cost dearly, especially if a large number of daily transactions occur. Overstock will perform conversion to $US daily through services Bitcoin processors like Bitpay, but even hour-to-hour volatility poses some risk.
Does bitcoin have a future as an online payment method?
Despite its promise for unregulated exchange, there is some risk that bitcoin will be killed off by regulatory pressure, at least in some countries. For example, China’s central bank has banned financial institutions from handling bitcoin. While this doesn’t bar peer-to-peer transactions, it does prevent bitcoin from achieving universal utility.
Though many economists believe bitcoin’s bubble is bound to burst, some are less pessimistic. David Woo, FX and Rates Strategist at Bank of America/Merill Lynch says its fair value analysis suggests bitcoin’s peak valuation would be justified when it accounts for at least 10% of all global B2C ecommerce transactions, becomes one of the top 3 players in the money transfer industry, and acquires a store of value reputation close to silver. A tall order, but possible if the stars align.
Treat it “like a startup”
Though O.co’s move could pave the way for more top retailers to accept bitcoin, and enhance its public appeal, there’s simply too much risk to bank on it as a solid payment method in 2014. Invest in bitcoin as an alternative payment method only if you support its philosophy and are willing to lose the time and resources put into it. Even if you have sufficient customer demand, its long-term viability is questionable.
As Gavin Andresen, lead developer for bitcoin himself said on his blog: “Bitcoin is an experiment. Treat it like you would a promising Internet start-up company: maybe it will change the world, but realize that investing your money or time in new ideas is always risky.”
Image credit: CC by Sean MacEntee