Analysis - Bitcoin shows staying power as online merchants chase digital sparkle

NEW YORK Thu Aug 28, 2014 6:11am BST

A Bitcoin (virtual currency) coin is seen in an illustration picture taken at La Maison du Bitcoin in Paris July 11, 2014.  REUTERS/Benoit Tessier

A Bitcoin (virtual currency) coin is seen in an illustration picture taken at La Maison du Bitcoin in Paris July 11, 2014.

Credit: Reuters/Benoit Tessier

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NEW YORK (Reuters) - Bitcoin is catching on at U.S. online merchants including Overstock.com and Expedia, as customers use a digital currency that just a few years ago was virtually unknown but is now showing some staying power.

Though sales paid for in bitcoin so far at vendors interviewed for this article have been a fraction of one percent, they expect that as acceptance grows, the online currency will one day be as ubiquitous as the internet.

"Bitcoin isn't going anywhere; it's here to stay," said Michael Gulmann, vice president of global products at Expedia Inc. (EXPE.O) in Seattle, the largest online travel agent. "We want to be there from the beginning." Expedia started accepting bitcoin payments for hotel bookings on July 11.

Until recently a niche alternative currency touted by a fervent group of followers, bitcoin has evolved into a software-based payment online system. Bitcoins are stored in a wallet with a unique identification number and companies like Coinbase and Blockchain can hold the currency for the user.

When buying an item from a merchant's website, a customer simply clicks on the bitcoin option and a pop-in window appears where he can type in his wallet ID number.

Still, broad-based adoption of bitcoin is at least five years away because most consumers still prefer to use credit cards, analysts said.

"Bitcoin is a new way of making payments, but it's not solving a problem that's broken," said George Peabody, payments consultant at Glenbrook Partners in Menlo Park, California. "Retail payments aren't broken."

There are also worries about bitcoin's volatility: its price in U.S. dollars changes every day. On Wednesday, bitcoin was up 0.4 percent at $514.09 BTC=BTSP.

That risk is borne by the consumer and the bitcoin payment processor, such as Coinbase or Bitpay, not the retailer. The vendor doesn't hold the bitcoin and is paid in U.S. dollars. As soon as a customer pays in bitcoin, the digital currency goes to the payment processor and the processor immediately pays the merchant, for a fee of less than 1 percent.

"We don't have to deal with the actual holding of the bitcoin: it's the payment processor that takes the currency risk for us," said Bernie Han, chief operating officer at Dish Network Corp (DISH.O), in Englewood, Colorado. "That's what makes it appealing for us and I guess for other merchants as well."

Dish, with about $14 billion in annual revenue, started accepting bitcoins in mid-August.

Payment processors do some form of hedging though, said Gil Luria, a financial technology analyst at Wedbush Securities in Los Angeles. These entities would, for instance, sell bitcoins in the market to offset the ones they have processed and in their books, so they're not left with much exposure, Luria said.

The only risk for the retailer is if the counterparty, or payment processor, doesn't fulfill its obligation. That risk is minimal, Luria said,

"Coinbase and Bitpay are now well-funded start-ups and they have put a lot of resources behind security," Luria said. "You can consider them as secure counterparties, as opposed to a year ago, when they were very small."

ADDING TO EARNINGS

For some, it has become a beneficial situation for retailers, as they take advantage of lower transaction fees and sales from new customers. In at least one instance, bitcoin sales are expected to pad a company's bottom line, adding 4 cents a share to 2014 earnings at Salt Lake City-based online merchant Overstock.com (OSTK.O), said chief executive officer Patrick Byrne.

Overstock was the first U.S. company with annual sales of at least $1 billion to accept bitcoins. Soon after, other companies including computer maker Dell Inc, Dish, and Newegg Inc (EGGZ.N), an online retailer of computer hardware and software, began to accept payments in bitcoin.

To date, there are about 63,000 merchants globally accepting bitcoin, estimates from data provider CoinDesk show. It forecasts that figure to rise to 100,000 by year-end.

Overstock's Byrne estimated bitcoin sales of between $6 million and $8 million by the end of 2014, a fraction of the company's total revenue.

More importantly for Byrne, the bulk of bitcoin sales comes from new customers, who would otherwise not shop at Overstock if the website didn't offer bitcoin payments. Bitcoin owners tend to be high net-worth individuals and tech-savvy consumers.

In a way, bitcoin has been used by retailers as a marketing strategy to bring some much-needed buzz to brands that may be struggling.

"Every retailer knows that if they make some sort of announcement on bitcoin these days, they know it's going be picked up more broadly by the media, than if they decided to accept Discover cards," said Glenbrook's Peabody.

One disadvantage from a consumer's point of view is that, in general, Bitcoin sales are final and irreversible. Still, there are some vendors that do return bitcoin payments for faulty products, said Adam White, director of business development and strategy at Coinbase, an online wallet company in San Francisco.

       

SAVING ON TRANSACTION COSTS

For retailers, the biggest benefit in accepting bitcoins is lower transaction costs. Coinbase and Bitpay, for instance, charge less than 1 percent per transaction. A credit card payment, in contrast, typically carries a 3 percent fee.

Dell, which started accepting bitcoins in July, Dish, and Expedia all say their bitcoin revenue so far have exceeded their expectations. The three companies declined to give specific figures, but said bitcoin sales are modest relative to their overall revenues.

"From the first day...we saw traffic at the site, it has been growing since," said Paul Walsh, chief information officer at Dell Commerce Services in Texas. He cited a recent single purchase in bitcoins of a server worth more than $50,000.

At online travel agent Cheapair.com in Calabasas, California, bitcoin sales totaled $1.5 million so far since it started accepting them in November 2013, said CEO Jeff Klee. In July alone, bitcoin sales at the company jumped 20 percent.

Data from BlockChain.info, a bitcoin wallet which stores the digital currency for customers, showed that over the last three months, there were between 50,000 and 75,000 bitcoin transactions a day on average, worth between $45 million and $85 million. That compares with U.S. retail sales of about $15 billion a day during July, according to U.S. Census Bureau estimates.

As of the end of June, bitcoin wallets, representing the number of users who have bitcoin accounts, have grown to 5.32 million, from 765,039 users a year ago, CoinDesk data show. It predicted that wallets would increase to 8 million by year-end.

"I don't see too much risk for us right now on bitcoin," said Dish's Han. "We are not expecting bitcoin to revolutionize the way our customers handle their accounts, but based on what we have seen so far, there is no reason for us to change."

(Reporting by Gertrude Chavez-Dreyfuss and Michael Connor. Editing by David Gaffen and John Pickering)

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