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Bitcoin Could Unlock Profit for E-Tailers

By Johan Seijkens - Feb 14, 2014 at 4:27PM

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"[Bitcoin] is a techno tour de force." - Bill Gates

It is not always cheerful news when you are part of the Bitcoin community.

Mt. Gox, one of the largest bitcoin exchanges, appears to be in big trouble after it suspended bitcoin withdrawals to work on what it said were technical issues. Some experts even say that Mt. Gox has solvency problems. The latest news in the bitcoin ecosystem is that almost all bitcoin exchanges are under a "massive and concerted attack".

The exchange's limitations have had a negative impact on the bitcoin markets. The price of 1 BTC has plunged from about $850 at the start of this month to $660, according to the CoinDesk Bitcoin Price Index.

First major retailer to accept Bitcoin
Bitcoin is in still in the early adoption and innovation stage. Major online retailer Overstock.com (OSTK 5.85%) has just recently started to accept the cryptocurrency in exchange for its products. It is expected that more large e-retailers and brick-and-mortar stores will follow.

CEO Patrick Byrne said the company is staying abreast of the competition by finding market share in this new segment of buyers.

"I've been hearing from people all over the world -- cult followers of Bitcoin -- who say they are going to shift all of their shopping to Overstock.com," Byrne told CBS affiliate KUTV in Salt Lake City.

To protect itself against Bitcoin volatility, the company uses a Bitcoin broker that directly transfers bitcoins into dollars. Since announcing its acceptance of Bitcoin on Jan. 9, Overstock has received more than 3,000 orders in Bitcoin, with a total value of more than $600,000.

The profit margins for e-tailers like Overstock and Amazon (AMZN 3.58%) are usually below 5%, which means traditional payment fees of 2.5% consume half the margin. In the case of Amazon, fourth-quarter operating margin was about 2%. By accepting Bitcoin and cutting out middlemen like credit card payment processors, Amazon could grow earnings without having to do much. However, as fellow Fool Fani Kelesidou pointed out, Amazon is a much bigger and more successful company than Overstock, so it has less incentive to try dealing in a highly volatile currency that many regulators abroad are trying to quash.

Overstock, which derives most of its sales from the relatively Bitcoin-friendly U.S., is making the right choice to accept the currency. Which merchants will follow?

BitcoinShop
BitcoinShop, formerly known as Touchit Technologies, made its debut on the over-the-counter stock market last week. The e-commerce website, run by Bitcoin entrepreneurs Michal Handerhan and Tim Sidie, is an Amazon affiliate that offers more than 140,000 products for sale and accepts Bitcoin. BitcoinShop is one of the first U.S. publicly traded companies in the virtual-currency ecosystem.

The company developed a core technology that allows it to interface with vendors in order to display up-to-date inventory and present prices in Bitcoin according to the Bitcoin Best Bid exchange rate with U.S. dollars, which is updated every 15 minutes.

BitcoinShop still trades under the symbol "TUCND" but will get a new ticker, "BTCS," on March 5. 

Enough room to grow
According to eMarketer, e-commerce represented only 6% of total U.S. retail sales in 2012, leaving significant growth opportunities. Electronics and apparel/accessories are estimated to account for approximately 46% of U.S. e-commerce sales by 2016. A majority of the current Bitcoin users are still tech-oriented, so e-commerce websites such as Overstock and BitcoinShop really have to embrace this fact for now.

Despite that, I think cryptocurrencies like Bitcoin could eventually become part of everyone's life. Before that happens, many hurdles have to be cleared.

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Stocks Mentioned

Amazon.com, Inc. Stock Quote
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Overstock.com, Inc. Stock Quote
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OSTK
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