In a surprise move, Overstock.com just went live with its acceptance of Bitcoin. The company had announced in December that it planned to start taking bitcoins sometime in the first half of 2014, but hadn’t given any indication that it would do so this early in the new year. According to Wired, Overstock.com struck a deal with Coinbase for the processing of Bitcoin payments last Tuesday and has been working around the clock since to prepare to go live.
Overstock.com as Bellwether
While there is a seemingly daily story about some new business jumping on the Bitcoin bandwagon, this is different. Overstock.com is the largest U.S. online retailer to embrace Bitcoin. That alone is enough to make this a significant development for Bitcoin as it serves to provide both broaden exposure to Bitcoin and to further legitimize its use. But beyond that, Overstock.com is the proverbial canary in the coalmine. If all goes well for Overstock.com’s foray into Bitcoin, other major online and physical retailers who have been waiting in the wings are likely to follow suit.
The speculation has been that because existing payment mechanisms work well enough from the consumer’s perspective, broad consumer adoption of Bitcoin in the U.S. would be driven by major merchants turning to Bitcoin to sidestep the fees they pay on payment card transactions. (While retailers will pay a fee for the processing of Bitcoin transactions, it will be far lower than the 2.5-3% they are currently paying for payment card sales. Even if retailers offer incentives to consumers to encourage Bitcoin payments–say a 1% discount–they still will come out ahead.) If even a handful of major retailers embrace Bitcoin in order to bring down their transaction costs, it will almost certainly trigger a significant expansion in the Bitcoin user base.
Bitcoin Still Faces a Long, Slow Climb to Broad Adoption
That said, while the growth in the Bitcoin user base that will result from big retailers coming on board will be dramatic, that’s true because the existing base is so small. Bitcoin will still face a long, slow climb to broad U.S. consumer adoption. Aside from having to overcome its association in many people’s minds with Silk Road and other uses of questionable legality, there are practical questions about how consumers will get bitcoins to spend. While a small number of companies are paying employees in Bitcoin, and there are several start-ups exploring Bitcoin compensation as a component of payroll processing, in the near and intermediate term most people will continue to acquire Bitcoin via exchanges.
Therein lies the rub. To date there are only a small handful of U.S.-based exchanges, largely due to the money transmission licensing hurdle and the difficulty exchanges have faced in obtaining banking relationships. (While there are overseas exchanges available to U.S. users, broad consumer adoption would seem dependent on U.S. exchanges.) As a result there is a lack of liquidity, which will only get worse when demand increases. This will get better over time as more exchanges come online, and a robust inter-exchange market develops, but until it does, it will be a drag on adoption.
The current volatility of Bitcoin is another factor that could slow broad adoption in the near term. With huge swings in value, some consumers will be scared away from Bitcoin, while others will be unwilling to spend the bitcoins they have, hoping instead to benefit from appreciation. This too is not likely to be an issue in the longer term. Instead, the current volatility is the result of the Bitcoin market being tiny and in its infancy. As the number of users and transaction volumes climb, volatility will decrease.
Volatility also presents challenges to retailers accepting Bitcoin, especially for those who intend to keep some of the bitcoins they receive rather than convert them immediately to dollars. At least in the short term, devaluation is a real risk. Overstock.com has acknowledged this is an issue and has said that while it is exploring options for hedging against swings in value, for now it will immediately convert the bitcoins it receives into dollars. (Coinbase will establish an exchange rate at the time of each payment, accept the buyer’s payment in bitcoins, and then transfer the established value in dollars to Overstock.com.) Retailers will also have to grapple with questions about the accounting and tax treatment of Bitcoin. Hopefully there will be more guidance on at least the tax issues soon, as the IRS has said it will be releasing its long-awaited review of the taxation of virtual currency in the near future.