Wild World of Bitcoin

When Overstock.com began accepting Bitcoin, the cashless (and cardless) alternative to online payment at the beginning of this year, it became the first major online shopping site to do so. Just three months later, the online retailer reported that it exceeded one million dollars in sales from the cryptocurrency alone. And of the more than 4,300 customers that made purchases using Bitcoin, as many as 60 percent were new to the site.

“We did not expect to hit this milestone so quickly,” says Overstock.com’s Chairman and CEO Patrick M. Byrne. He says the company first decided to start accepting the controversial currency for two reasons: there’s no central authority controlling it and it behaves similarly to gold in that the supply is constrained.

Overstock.com, with headquarters based in Salt Lake City, currently works with San Francisco’s Coinbase.com, a venture-backed trading platform and digital wallet for Bitcoin. The company processes payments and handles conversion from the online currency into U.S. dollars for the retailer. According to Coinbase’s blog, on average, purchases using Bitcoin are 34 percent higher ($226) compared to customers paying in U.S. currency ($168). Coinbase also reports that Bitcoin processing is actually cheaper (one percent of a sale compared to about 2.2 percent for typical credit card transactions).

With Bitcoin predicted to generate as much as $10 to $15 million in sales for Overstock.com alone, it’s not surprising that select retailers are taking the online currency a bit more seriously. Facebook’s offering its own form of cashless credits and Amazon has even developed its own coin system. Lord & Taylor, a department store chain operated by Hudson Trading Co., is also beginning to accept Bitcoin in hopes of driving more sales among younger, tech savvy consumers.

But despite the singling out of success stories, and the fact that Bitcoin is the fastest growing of all online currencies, cashless currency as a whole is controversial. Not only have media reports painted a grim picture of it as the wild west of the fi nancial market, it’s been lauded by anti-government types who are eager for the federally unregulated peer-to-peer payment system to take off. But these are not the people who will make Bitcoin’s case for widespread adoption.

There are also the controversies that have nibbled at Bitcoin’s heels for the past year, like the shutdown of Silk Road, an online black market, in which upwards of 144,000 Bitcoins (or an estimated $2.8 million)were seized by the FBI. There was also the collapse of Mt. Gox, once the largest Bitcoin exchange in the world, which sent some speculators into a tailspin over the volatility of the currency. But still, the U.S. is more accepting of Bitcoin than Asian and European markets, making it a hot prospect, particularly for the early-adopting consumer tech industry.

The New Internet Equivalent?

David Kinitsky, general manager of Bitcoin Investment Trust and senior director at SecondMarket Inc., an online marketplace for buying and selling illiquid assets, both in New York, first got interested in Bitcoin two years ago. As a self-described “reformed attorney” with a background in intellectual property law, the technology side of cashless currency appealed to him. “There are parallels between Bitcoin and the Internet,” says Kinitsky, citing a standardized set of protocols. “It made sense that this might be something valid.”

From an intellectual perspective, Kinitsky says that even though Bitcoin is very much an early-adopter currency, its value can already be seen in the way it inspires people to question concepts like “value,” “money” and how financial systems work. “We are in the  early stages of this thing,” he admits. “Really only early adopters are even considering using Bitcoin…right now it’s pretty limited.”

But in terms of what it could be, well, that’s what Kinitsky and other proponents of the currency are banking on, literally. His hope is that Bitcoin could create entirely new business models and industries that have not yet been possible using a new micropayment system.

Take the publishing industry, for example. Bitcoin could allow publishers to improve content while enforcing pay walls. “What if they could charge users in a seamless way for a la carte items?” Kinitsky asks. “It’s not feasible now with processing fees.” Or someone could send an email with a Bitcoin attached. The process would be extraordinarily low-cost for most users, but it could knock out spam.

“If you asked me 12 months ago [what might advance Bitcoin into the mainstream], I would have probably said regulation,” Kinitsky admits. “But over the last 12 months or so that has changed significantly.” He says as long as the community can self-regulate—and nothing drastic happens using Bitcoin (like, at worst, a terrorist attack)—the technologists who are seeking legitimate futures for the currency could be just the new blood that’s needed for innovation to take root.

“All big banks are looking at it,” he says. Like with any new innovation, some will embrace it and others will ignore it. How Bitcoin (and the banks) fair could depend entirely on the innovators themselves.

The Cost of Doing Business

Zlatko Bijelic is one of those innovators. As operations manager of BitcoinStore.com, an online electronics retailer powered by MemoryDealers.com in Santa Clara, Calif., he deals exclusively in Bitcoin. In doing so, the site has found a way to deliver high-tech devices—everything from laptops and printers to digital cameras and portable music players to consumers at cutthroat prices. The secret? By not paying credit card processing fees, BitcoinStore.com can keep prices up to 10 percent lower than its better-known competitors.

“There are many good things coming to the Bitcoin network,” says Bijelic. “It is changing how we transact with people all over the world.” He says because there are no transaction fees or charge backs, it’s becoming an easy way to send money anywhere.

“We are currently at a zero percent markup,” he says. “This is a genius strategy that was put in place to have competitive pricing and focusing on the mass adoption of Bitcoin.”

BitcoinStore.com is one of the first websites to structure a business around the currency by demonstrating to consumers that they have the option to purchase real products with it. 

And if guys like Bijalic seem fanatical, consider that at the TechCrunch Disrupt conference last year in San Francisco, Bitcoin’s cred was seriously upped when Hollywood star and tech entrepreneur Ash ton Kutcher (the actor launched A-Grade Investments, a venture firm with a keen eye on tech startups). “I think Bitcoins are obviously becoming more and more relevant,” he said, championing the concept of a decentralized technology. 

The Tip of the Iceberg

At Shopify, an ecommerce site headquartered in Ottawa, Canada, Director of Payments Louis Kearns is a champion of the currency. “It’s been an incredible year for Bitcoin,” says Kearns. “Since the dawn of the Web, I doubt that any other development have had more of an immediate impact on traditional financial and payments systems across the world.”

Bitcoin is already disrupting state-backed currencies, foreign exchanges, financial investing, P2P (person-to-person) transfers, online payments, point-of-sale (POS) transactions, government regulators and banks. “They are all scrambling to track or predict the impacts of the new currency, and to find ways to harness it through newly introduced legislation, policies or decree,” says Kearns, who believes that every Bitcoin transaction gets closer to dictating the next chapter for what he considers a potentially game-changing innovation.

But this isn’t to say that Bitcoin isn’t also still considered a fairly high-risk, very speculative investment option. And answers about its security and legal ramifications will continue to be debated as long as new questions arise. Still, the ongoing questions and legitimate concerns have not stopped Bitcoin’s momentum, or how it’s being used as a new alternative to credit cards and online bank transfers.

“Lucky for us,” says Kearns, “this is merely the tip of the Bitcoin-plated iceberg. Anyone with an Internet connection can mine Bitcoin or find an exchange to buy or sell them instantly with little-to-no red tape.”

Consumers who use Bitcoin even receive an optimized purchase experience at sites like Shopify, usually a quick scan with a smartphone camera against a QR code containing the seller’s wallet address. There are no forms to fill out and there are no foreign transaction fees to pay if the seller is located halfway round the world.

“Merchants benefit from heavily discounted transaction fees (compared to accepting credit cards), without worry of charge backs once the transaction has taken place,” explains Kearns. “Since Bitcoins are a global currency, merchants can accept purchases from anywhere, without cross-border fees or the need for a country-specific gateway configured on the ecommerce platform or marketplace they sell on.”

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