Right now, merchants seem to accept Bitcoin for three main reasons: They want press coverage, they’re libertarian fellow travelers, or they’re selling drugs. Assuming that last one doesn’t apply to Overstock.com (OSTK), its announcement that it will begin accepting Bitcoin by mid-2014 seems to be some mix of the first two reasons. The online retailer, whose 2012 revenue totaled $1.1 billion, is the largest yet to jump on the Bitcoin bandwagon.
Patrick Byrne, Overstock’s chief executive, says the decision to accept Bitcoin is based half on his personal beliefs and half on the conviction that it’s a sensible business decision. In essence, he’s trying to lead mainstream merchants toward Bitcoin by adopting it himself.
Byrne says he has wanted to accept Bitcoin payments for about two years and had been dreaming about creating his own gold-based currency for almost a decade before that. “I’m an Austrian economist by background, and we’re the guys who like gold, but not for the reasons our Keynesian critics accuse us of,” he says. “If you believe in limited government, you have to have something that no government mandarin can whisk into existence.”
That’s the standard idealistic line for Bitcoin; the practical argument is that merchants can avoid paying credit card fees. This already works when the volume is modest, but the relatively small size of the overall Bitcoin system is a barrier to merchants of Overstock’s scale.
Currently 12.1 million Bitcoin are in circulation, with a total value of about $8.8 billion. At this size, the value of Bitcoin can fluctuate violently based on actions by a few big investors or the Chinese government. This is a problem: If a retailer saves 3 percent on credit card transactions, but the value of Bitcoin loses 5 percent before the retailer can convert it back into dollars, the concept will quickly lose its luster.
Bitcoin-processing companies such as Bitpay and Coinbase take on this risk for merchants, offering to convert Bitcoin into U.S. dollars immediately. But they might not be able to handle that risk if any serious slice of Overstock’s transactions comes in Bitcoin, says Barry Silbert, the founder and chief executive of SecondMarket and an investor in both companies. “When you start talking to companies like Overstock or Amazon (AMZN), they’d only be able to guarantee those rates to a certain transaction amount,” he says.
Bitpay processed $100 million in transaction in 2013. “I think the system is going to expand as quickly as it needs to,” says Stephanie Wargo, the company’s vice president of marketing.
Of course, Overstock is unlikely to face a sudden deluge of orders in Bitcoin. Byrne expects orders to be a tiny amount of his overall business. But he is hoping his involvement will help solve Bitcoin’s chicken-and-egg problem: The only way to decrease volatility is to increase the overall size of the system, and the only way to lure new people in is to have a currency useful enough to be stable.
As for the risk that Overstock will take on, Byrne says the company could sell its Bitcoin every night, capping the amount at stake. But he would prefer to be able to buy derivatives that would allow him to hedge against Bitcoin crashes. Such derivatives don’t really exist yet, but he thinks that will change. Silbert agrees. “2014 is the year of Wall Street and Bitcoin,” he says, although he does add that Wall Street’s involvement in a market isn’t likely to have a calming effect.