On December 6, Baidu (NASDAQ:BIDU) suspended accepting Bitcoins as payment. The suspension came just one day after the Chinese government issued a statement banning banks and financial institutions from handling transactions involving the digital currency. Since this news, the value of one Bitcoin on all the major exchanges has fallen more than 50 percent against the US dollar. How have these events affected Baidu stock, and what is the company's likely next move?
First, it is important to clarify what the ban and the suspension involve, and to put them in to some sort of perspective. Headlines like "Bitcoin in China: The Fall-out From Chinese Government Banning Real World Use," published by Forbes on December 12, are misleading. The Chinese government has not banned Bitcoin from real world use. Holders can still use Bitcoin to fund transaction in the real world, for real world goods and services, just not through financial institutions. A more apt description would be to say the Chinese government has legally defined Bitcoin. It has reclassified Bitcoin from a currency to a commodity. This is a key point. Regarding the Baidu suspension, the company issued a statement on its website saying, "Baidu's website-acceleration platform decided to suspend Bitcoin payment acceptance from Friday as recent large fluctuations in Bitcoin's value makes it unable to safeguard users' interests." The website acceleration platform in question is a security and web services enhancement system developed in tangent by Baidu and subsidiary Jashule. The clarification needed here is whether Baidu's suspension is as detrimental to the future of Bitcoin as media outlets suggest.
A look at Jashule's bitcoin wallet reveals that the answer is no. Since Baidu announced it had started accepting Bitcoin on October 15, the number of transactions in and out of the wallet totals a meager 38. Just short of 30 percent of these transactions took place during the week following the announcement, and a large number of them are simply donations to Baidu from bitcoin enthusiasts "welcoming" Baidu to the community. The total value of the incoming transactions? 1.3 Bitcoins, or $597 using today's exchange rate. For a subsidiary of a $60B company, this is practically nothing. In short, 99.999 percent of bitcoin transactions have nothing to do with Baidu.
An Important Note
While this last statement is true, it ignores the effect that Baidu's acceptance of Bitcoin had on speculators' perception of its potential. On the day of the October 15 announcement, Bitcoin closed at $158. It currently stands at $466, having reached highs in excess of $1,225 two weeks ago. Among other factors such as intense media coverage, it is reasonable to assume that the two Baidu announcements boosted and jilted the confidence of Bitcoin speculators respectively, and played a part in the October-November rally and current correction.
Did These Events Affect Baidu Stock?
Separating the effect that Bitcoin integration had on Baidu stock from other factors is difficult. Notable releases during the October-December period include positive Q32013 earnings showing a 42 percent increasing in revenues over Q31012, and the company issuing Q42013 revenue guidance above analyst expectations. All that can be said for certain is, at the Monday close following the announcement, Baidu stock was up more than 20 percent since the company made the initial announcement in October. Also notable is the price action around the time of the more recent government announcement and Baidu's subsequent Bitcoin suspension. After the government announced its reclassification, Baidu stock dropped nearly six percent. On Baidu's suspension announcement, the company's stock quickly recovered, and at its December 9, high stood approximately seven percent higher than at its December 6, lows.
One article suggested recently that Baidu stock could be the answer to investors who want to expose themselves to Bitcoin, yet do not want to expose themselves to its volatility. During the three days following the announcement, Baidu stock rose ten percent, likely through a combination of Bitcoin supporting investors who saw Baidu's acceptance as a smart 'first move,' and investors looking for large cap exposure to the digital currency as mentioned at the beginning of this paragraph. Baidu's pivot two weeks later might cause these marginal investors to exit on an invalidation of their entry thesis. A number of other alternative options are available to these investors, some examples being SecondMarket's Bitcoin Investment Trust and WPCS International, which recently announced its acquisition of Bitcoin trading platform, BTXtrader.
Will Baidu Reinstate Bitcoin Acceptance?
This is a difficult question to answer. The reason given for the suspension was that the volatility in the price of Bitcoin posed risk to Baidu's users. This infers that if Bitcoin volatility falls, Baidu might reinstate its acceptance, which poses the question, "Will volatility fall?" Again, particularly in the short to medium term, this is a difficult question to answer. Eventually, yes. The volatility surrounding Bitcoin stems from uncertainty, which in the long term will surely diminish as its future becomes clearer. Further, there are benefits to Baidu in reinstatement. Transaction costs are almost nonexistent, and accepting Bitcoin allows individuals outside of China to purchase its services.
Baidu took something of a gamble when it started accepting Bitcoin as payment for its software products, but the decision seemed to play a part in attracting investors looking for exposure to the digital currency commodity. These investors have now likely exited the stock, as alternative exposures have become available. This aside, Baidu stock has outpaced every major exchange this year, and does not look likely to suffer as a result of its Bitcoin pivot.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.