Bitcoin: Bubble to Bedrock? – Part III
A case could be made that Bitcoin—its rise and fall and rise again—was the payments story of 2013. But in the early stages of 2014, the debate has shifted. While attention still is being paid to its volatility as an investment, increasingly, the focus is on merchant acceptance and navigating what could be a thorny regulatory environment (though recent events may introduce significant turmoil into the Bitcoin ecosystem that could claw back some of the hard-won gains in positive perception from the past few months). CardNotPresent.com presents a three-part series on Bitcoin and its spasmodic progress toward legitimacy. In Part III, we look at the merchants that have already made the decision to accept Bitcoin. Why are they taking part in this unproven experiment at this stage?
Part III – ‘The Question We Asked is Why Wouldn’t We?’
By Katie Flood
Like any currency, Bitcoin is valuable because people agree to value it. Unlike most currencies, however, Bitcoin has been around for only five years, is unregulated and unbacked by any government, and has no tangible, physical form. At this stage of the game, even the most optimistic Bitcoin enthusiasts acknowledge that it is a risk. So why would a business accept Bitcoin before it becomes . . . well . . . accepted?
One of the largest and most prominent Bitcoin adopters is online discount retailer Overstock.com, which began accepting the currency in January 2014. Director of Communications Judd Bagley says that for their company, adopting Bitcoin was partly a philosophical decision. CEO Patrick Byrne sees Bitcoin as having some of the virtues of gold, and he wanted to show support for a currency that is not government-controlled but rather peer-to-peer, with a mathematical limit to the amount in circulation. Accepting Bitcoin also makes business sense: As a discount merchant, Overstock.com has only about a 2 percent profit margin on items they sell, so credit-card processing fees are a significant cost. Bitcoin transactions allow the company to avoid these fees. At this point, Overstock.com is immediately converting its Bitcoin back into dollars through Coinbase, since its suppliers do not accept the currency. Though Bagley declined to give a number, he assured us that the exchange rate with Coinbase is “quite a bit less” than the fees credit card companies charge.
Connections Community Church, an evangelical Christian congregation of about 120 worshippers in Meridian, Id., accepts Bitcoin online and through a mobile-wallet app on an iPad at the church. The nonprofit began accepting Bitcoin last month, figuring it might as well be open to accepting donations in whatever form donors wish to contribute. Executive Pastor Jeremy Wight explains, “We’re realistic and we understand that the vast majority of people really don’t know what Bitcoin and cryptocurrencies are, and so most people are not going to give that way, but you’re opening yourself up for people to give that may or may not give in another form. So the question we asked is why wouldn’t we?”
This is the same question Derek Stevens, co-owner and CEO of the D Las Vegas Casino Hotel and Golden Gate Hotel and Casino in downtown Las Vegas, asked his staff when they were exploring the possibility of accepting Bitcoin. Stevens explains that Las Vegas’s downtown has seen a recent influx of businesses in the tech sector. Employees of these businesses would come into his hotels’ bars and restaurants and ask if they took Bitcoin.
According to Stevens, “All of a sudden the frequency [of these requests] started increasing, until it became an almost daily occurrence.” After researching the currency and what would be involved in accepting it, “we couldn’t come up with a reason why not to.” The hotels and several restaurants (but not the casinos) at the D and Golden Gate accept Bitcoin via mobile wallet on iPads, and then convert it back to dollars immediately through BitPay. This helps to ensure they will not run afoul of the IRS or U.S. Treasury, always a concern in the hotel/casino business. (The U.S. government has yet to give any guidance to businesses regarding taxation on Bitcoin.)
For The D and Golden Gate, avoiding credit-card fees was just one benefit of accepting Bitcoin. Moreover, he recognized the advantage of being an early adopter.
“Bitcoin users are very passionate and devoted, and they’ll drive out of their way to use their Bitcoin at properties that accept it, and so there is a significant advantage to early adopters.” Though he declined to discuss specific numbers, Stevens says he has been “very positively surprised by both the number of transactions and the dollar amount [of each Bitcoin transaction].” In addition, his hotels have seen a “rather significant increase” in international guests, for whom Bitcoin is more convenient and cheaper than converting their currency in dollars.
Overstock.com also attracted quite a few new customers by adopting Bitcoin before its competitors: Bagley notes that 70 percent of Bitcoin shoppers are new to the site, and on average, their orders have exceeded the typical Overstock.com order by $50. Eager Bitcoin holders spent over $180,000 in the first 24 hours after the company adopted the currency, and in just over a month, they passed the $1 million mark. (The most common purchase for Bitcoin holders? Bedsheets. Even Bitcoin miners need to sleep!)
For Connections Community Church, the gains from early adoption were a bit more modest: Wight says the church received $25-$30 in Bitcoin donations from people outside the congregation who read in a local newspaper that the church had begun accepting Bitcoin. Nevertheless, that’s money they would not have received otherwise. Wight says this show of support was unexpected, but it makes sense, since “the Bitcoin community at large wants to support businesses who are going to accept it because it increases the value of Bitcoin, [in that] it increases the usefulness of Bitcoin.”
The benefits of early adoption are clear, but what do these organizations make of the risk? Indeed, some might say that an obvious answer to “why not accept Bitcoin?” is the instability of its value due to security problems like the recent hack of the MtGox exchange. (As of the writing of this article, MtGox’s website has been taken down, and the future of what was once the largest Bitcoin exchange remains uncertain.) Stevens believes that such volatility is “something you’re going to see with any newer technology” or currency. He believes the risk for his business is still low compared to the benefits, particularly since they convert their Bitcoin back into U.S. dollars.
Overstock.com takes an even stronger position. According to Bagley, “the fact that [Bitcoin] continues to trade [even after the MtGox hack] tells us that it’s probably the real thing, because it can withstand these assaults and continues to work.” Bagley observes that the MtGox incident “has not affected Bitcoin purchases [on Overstock.com] at all.”
Despite the risks, Wight believes that Bitcoin is just getting started. He says the church has not converted its Bitcoin back to dollars, and though they have yet to discuss it as an organization, he would like to see them hold onto the currency as an investment. Going forward, he also sees its potential as a way of giving money to foreign missionaries. International wire transfers can take days and even weeks, and often the church’s donations are diminished by large bank fees and unfavorable currency exchange rates. Bitcoin would allow them to send money overseas within hours while avoiding these fees.
Overstock.com shares this optimistic outlook on the future of Bitcoin. In fact, Bagley predicts that “Amazon is going to have to start accepting Bitcoin; we know they’re aware of how well it’s going for us. That’s only going to improve the long-term prospects for Bitcoin. What that will do is increase the mainstream acceptance of Bitcoin, which will only help us. Our slice of the pie is going get a little smaller, but the pie is going get much bigger.” Bagley says Overstock.com is even exploring a way to give its employees the option of getting paid in Bitcoin.
Stevens takes a more circumspect approach. “I’m glad we’re in the position we’re in right now, I’m glad we took the first step, and then we’ve got to see how this evolves. Do I think Bitcoin’s the future? I think there’s a high probability that it may be, but you never know. You just never know.”
Whether the events surrounding the apparent end of MtGox turn into—as one columnist put it—an “existential crisis” remains uncertain. Read Part I and Part II of the series for CardNotPresent.com’s Bitcoin reservations and the efforts many companies have been exerting to reach the tenuous level of legitimacy Bitcoin had attained prior to the MtGox meltdown.