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Running an eCommerce Business

Bitcoin and the World of eCommerce: Allies or Foes?

Bitcoin and the World of eCommerce: Allies or Foes?

by John Larkin

John runs the blog here at eCommerceLift and is a verified Shopify Expert. Interested in an initial growth consultation? Click here

3 years ago


Bitcoin and the World of eCommerce: Allies or Foes?

For anyone involved in the world of eCommerce… it’s all about the money. It’s all very well aspiring to be the next Amazon or the next eBay, but you have to start off by getting money into the till at the end of the day. Until recently, the methods of payment didn’t vary much across the world of eCommerce – credit and debit cards prevail, with Paypal and similar technologies used also. But in the last year especially, there has been more and more attention paid to Bitcoins. 

Indeed, Shopify announced last November that they would start accepting Bitcoins, opening up a world of over 100,000 retailers to holders of the currency.

So the question is – should your eCommerce site adapt to accept Bitcoins – or is it all a dangerous bubble?

First off, we will ask, what are Bitcoins? Until quite recently, very few people had ever heard of Bitcoin, never mind used it. It was an unheralded virtual currency, and the only time it ever really gained any sort of press was when people were talking about it being used as the payment method on the shady underworld marketplace Silk Road – referred to as the Amazon of drugs. 

But then, all of a sudden, there came a point when everyone in the financial world wanted to find out more. The fact that the value of a Bitcoin had grown by over 500 percent, from around $47 to $470, in the space of a year might have had something to do with it. 

What is a Bitcoin?

Bitcoin, simply put, is a form of decentralised internet currency created in 2009 by anonymous computer scientists. Each Bitcoin is based on a unique system of blocks, which are prime number-based algorithms that are incredibly hard to discover. 

There is no central body issuing Bitcoins, instead, the system uses distributed computing power and complex mathematical formulas to ‘find’ or ‘mine’ a certain number of Bitcoins every day. Once you mine a Bitcoin, or buy a Bitcoin from someone else, it's held in a virtual ‘wallet’. When you want to use it to pay for something, you simply type in the recipient's address — a randomised string of between 27 and 34 letters and numbers — and off the payment goes. The entire process is anonymous and untraceable, which is part of the appeal. 

Buying a Bitcoin is pretty hard too, you can’t buy one with a credit or debit card because the point of the whole enterprise is that anonymity is key, and using a card would leave too much of a trail.  

Instead, you have to go to a Bitcoin agent, a fairly tortured process involving wire transfers, receipts and handing cash over to agents. But once you own one, it can be spent in a fairly limited amount of online stores (a couple in Texas sold their Porsche 911 for 300 Bitcoins in March 2013) or held onto as a store of value. Indeed, there is much debate over whether Bitcoins are a traditional currency at all or are they a commodity like gold or silver. Indeed, many argue that they are worthless and that the entire concept is a bubble… just like one that happened around eight years ago.

Cast your mind back to the early part of 2006. A virtual reality world called Second Life was all the rage. Users would log on, become an avatar (in reality, a fairly shoddy cartoon) of themselves and wander around an imaginary world talking to other people who were pretending to be cartoons too. Users could go for a virtual beer together and go to a virtual supermarket. 

Assuming the cold logic of hindsight, it seems absolutely nuts, but soon, the virtual currency on Second Life, Linden dollars, started being sold for real on sites like eBay and all of a sudden, real businesses started to think that they could go on Second Life too and cash in on a growing market. 

Brands like Dell, Calvin Klein and Reebok opened virtual stores, Business Week put Second Life on its cover and Reuters even hired a Second Life Bureau chief. There were stories about Anshe Chung, the first (and most likely, only) person to make a million dollars (in real currency) from Second Life.

Then, almost as quickly as it came along, the hype disappeared, as companies realised that there wasn’t much money to be made out of people whose main hobby was pretending they were a cartoon. The question eCommerce retailers have to ask themselves is – are Bitcoins the way forward or are they just the new version of Linden dollars?



Theory v Reality 

Michael Pento, an analyst with the American television station CNBC as well as CEO of Pento Portfolio Strategies, speaking exclusively to the PropelAd blog, thinks that while the concept of Bitcoin might be good in theory, in reality, there are too many grey areas for him or anyone involved in the world of eCommerce to get involved just yet. 

“Bitcoins are a great concept in that they are an attempt to provide a better currency and form of money than those provided by a central bank and government,” says Pento. 

“However, we already have the perfect store of wealth in gold. Gold can also act as a currency but with some difficulties. The problem with any alternative currency is that governments don’t like the competition and have demonstrated the habit of shutting them down.

“If governments make it illegal to use Bitcoins as a currency, they are just left as a store of wealth. And they are far inferior to gold in that regard. After all, there could always be new competition from other digital money in the future and that would dilute Bitcoins value. There is no such danger in there being a new element found that competes with or replaces gold.”

Pento’s analysis certainly chimes with the attitude of the market. A study carried out by the London Bullion Market Association in 2011 found that there was a total volume of $15,200 billion worth of gold traded that year. Even at current prices, which are eight times higher than the historic market value of Bitcoins, the entire market is worth $1.5 billion, or less than one tenth of a percent of the gold market as a whole. 

Nevertheless, there are many people out there who see Bitcoin, not as a way to necessarily invest their money, but as a way to spend it, and in the process, circumvent the traditional banks and financial intermediaries that have dominated the market for so long. One of those people is David Fleming, who recently set up Eircoin, a brokerage site for Bitcoin in Ireland.

“I certainly believe in the product and have been following it closely since I discovered it. The protocol is solid and the team behind it is doing a great job to keep the project moving forward. I set up the site, as there is currently no easy way to easy way to purchase Bitcoins in Ireland. But even using Bitcoin made the whole process much easier. Much of the code [used to set up the site] I contracted out and paid coders in Bitcoin. The ease of this process goes beyond anything currently available in the banking system. Even though transfers in the Eurozone are now free, it takes three days. 

“From a customer’s point of view, it seems the banks slow them down intentionally and charge you to speed these up to within 24 hours. This highlights just one of the problems Bitcoin overcomes and I already see and take advantage of it. If you extrapolate on this problem, you can see how the banking models currency exchange service is redundant if Bitcoin as a standard currency becomes a reality.”

Techno-babble or techno-bubble?

Fleming’s belief in the system is not a view that Pento shares and after the cyber attacks on MtGox, the Bitcoin exchange, and the shutting down of Instawallet – a cyber wallet for storing Bitcoins, there is a severe doubt over the sustainability of the technology. 

“All the techies claim that Bitcoins can’t be hacked or counterfeited, so let’s assume that is true, even though I’m not sure that it is,” says Pento. “In order for holders of Bitcoins to know what they are worth there must be an exchange where the market can readily determine accurate pricing. Bitcoin exchanges are indeed vulnerable to cyber attacks and there is a distinct possibility [that any eCommerce business that holds Bitcoins] could be left holding a highly illiquid asset. 

“Bitcoins have zero intrinsic value. They aren’t rare because competition can pop up at anytime. They are not indestructible because they disappear when the power goes out. They can only be used as a currency; and that can be wiped out in a second by government decree. Therefore, they will only amount to a fad because Bitcoins can never replace gold as a store of wealth.”

Fleming, though, is not hiding his affection for Bitcoin, though he does agree with Pento’s assessment that the currency might not be as secure as it could be. But where Pento sees obstacles, Fleming sees opportunities.

“I think it is very hard to pin down what’s going on with Bitcoin right now. It would be a stretch to say that it is a safe and reliable currency. Not in its core features, which go beyond the safety of any traditional currencies but for the average user, the responsibility for security and storage of Bitcoins is still a lot to take on. If you store them locally on your PC and you have a malicious programme installed, you may lose them, if your hard drive packs in, you may lose them. Also if you store them online, you are trusting someone else with this problem and the accumulation of coins in various sites makes them the target of hackers. 

“These concerns are ongoing but as interest grows in Bitcoin, solutions become the concern of the people drawn to the currency so in effect it’s a feedback loop. And I believe this was the intention of the inventor(s), as to create a currency with the goals of Bitcoin, you need people to create the system upon which it operates and there has to be an incentive to do so. You are currently seeing the realisation of that incentive and more services that are tuned to Bitcoin will appear because of it.

“Analysts are like weathermen… everyone of them has a different opinion. I have no idea where Bitcoin is going but rather than speculating on prices, I like to focus on the reality of the technology. I believe the biggest threat to its future comes directly from the institutions it seeks to replace. I believe there will be a sustained attack against the technology from agent provocateurs as it has the ability to disrupt the current order.”

Whether or not Bitcoin is a bubble or not, there is no question that a media bubble has built up over the whole topic of Bitcoin. Acres of newsprint were devoted to analysing the pros and cons of this new phenomenon, two New York-based magazines sent reporters out to buy Bitcoins and analysts scrambled to find anybody who had the most tangential of connections to these mysterious Bitcoins. 

But, when you look at it logically, Bitcoins, since their inception, have been the bastion of the anti-bankers, people who don’t trust banks and want to avoid dealing with them in any way. To the outsider there seems to be parallels with groups like Anonymous and Occupy with people wanting to avoid dealing with the system in any way. 

Right now, there is no compelling financial reason for most eCommerce retailers to start accepting Bitcoins. There might be value in accepting it as a way to differentiate your site from other more established businesses. Online clothing retailer Cory Vines brands itself as an alternative to traditional clothing retailers. They have recently announced that they are accepting Bitcoin.

We positioned ourselves as a technology-enabled brand, and we want to stay ahead of the curve," says Daniel Lieberman, founder of Cory Vines, speaking to PaymentsSource. "We had some customers ask us about Bitcoin, so it's an opportunity to be active in giving people a new way to pay. Most of our customers are younger people, Gen Y consumers or young parents that are looking for an alternative to some of the higher-end products that are on the market so Bitcoin fits in with our image completely.

Either way, it is a tantalising story for the media to deal with, but one that was probably over-wrought… the total value of every Bitcoin in existence is hovering at somewhere around $1.5 billion (though this valuation fluctuates wildly), which is the same as the GDP of countries like Belize, Kiribati and Liberia and most eCommerce retailers are not too worried about attracting those markets. The only reason, right now, for any eCommerce site to accept Bitcoins, has more to do with marketing than with market forces.

What do you think, too risky or a great opportunity? Let us know in the comments below.

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