17 January 2018

Bitcoin: The Online Currency

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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.

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. 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.

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.

Payment processors do some form of hedging though. 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. The only risk for the retailer is if the counterparty, or payment processor, doesn't fulfill its obligation. That risk is minimal.

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 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.

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.      

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.

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.

Click here to access the full article on Reuters.

 

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