As mainstream acceptance of bitcoins as a valid payment method spreads, the process of buying and selling the digital currency has become simpler. A number of platforms now facilitate bitcoin exchange for a variety of fiat currencies and what last year might have been a tedious, complex and risky process is now not so. Two distinct industries stand to benefit from this increased acceptance. The first, the exchanges. The second, bitcoin retailers. As their description suggests, bitcoin retailers allow consumers to buy goods with bitcoins. Bitcoin Shop (TUCND)-or BTCS as of March 5, 2014-the only publicly traded company in this latter industry, will be the focus of this piece.
Why Use Bitcoins?
First, it is important to explain why a consumer might want to use bitcoins to pay for goods when they could just use a credit card. There are a number of well-documented reasons, but here is a quick breakdown. The main reason, and ironically the most controversial, is anonymity. The majority of online purchases are credit card purchases. To conduct a credit card transaction, a consumer needs to divulge information-credit card number, security code, billing address etc.-over the internet. A competent hacker can "steal" this information and use it to filter money from your account. In contrast, a bitcoin transaction requires just two pieces of information. A public key, which is generally the address of a bitcoin wallet and a private key, which only the holder of the bitcoins holds. The next advantage is cost. Retailers have to pay a merchant fee on credit card transactions. In many cases, the retailer will pass this fee onto the consumer. Bitcoin transactions involve none of the administrative costs of credit card transactions and so, in contrast to credit card transactions, bitcoin transaction fees are minimal or non-existent. Finally, bitcoin transactions are much faster than credit card transactions. Online credit card transactions involve three distinct stages: authorization, clearing and settlement. This process requires manual confirmation at each stage, and as a result, can take a number or days. Bitcoin transactions are often instantaneous (if the merchant takes responsibility for the transaction) or take ten minutes (if the merchant requires transaction confirmation).
What is Bitcoin Shop?
Bitcoin Shop is an ecommerce virtual currency ecosystem set up by two former NASA software engineers in June last year. Its platform currently offers 140,000 products across 450 product categories. The company holds no inventory and involves no logistics chain; instead, it leverages the resources of other vendors to retail products. Currently, Bitcoin Shop's only affiliated vendor is Amazon, but the company expects to increase its vendor base during 2014.
Bitcoin Shop has just gone public through a reverse merger with TouchIT Technologies Inc., a company that, prior to the reverse merger, designed, developed and manufactured touch-screen technologies for the education and corporate markets. Having completed the reverse merger, Bitcoin Shop became the first publics traded company to have the term "bitcoin" in its name and, more importantly, one of just a handful of companies that offer investors exposure to the bitcoin retail market; another being Overstock.com (OSTK).
Because the company has only just started trading publicly it is not yet possible to analyze its financial metrics. As an alternative, Bitcoin Shop has released a number of non-financial metrics to support its value proposition. The first relates to products sold. During Q3 2013, the sold 88 items through its platform. During Q4 2013, this grew to 1,266 items, a 1338% increase. This rise coincided with a rise in the Bitcoin Shop's product offering. During the same period, total products offered on the platform rose from 30,000 to 135,000 (now 140,000), a 350% increase.
Perhaps more importantly for a relatively new platform is user growth and traffic metrics. During Q3 2013, Bitcoin Shop.com logged 9,000 unique visits, 11,000 total visits and 46,000 page views. During Q4 2013, this rose to 68,000, 85,000 and 395,000 respectively. During the same period, the platform's total registered users rose from 160 to 750, a 601% increase.
Bitcoin Shop's primary growth target is to diversify its vendor and customer base. Currently the company's only affiliate is Amazon, but its business model makes it highly scalable. The company has stated that it is currently targeting Best Buy, Target Pet Smart, JC Penney and Walmart as potential affiliate sellers. As a secondary, but related, focus is to develop exclusive relationships with sellers.
Bitcoin Shop is also seeking to expand to new geographies, as virtual currency acceptance becomes prevalent. Bitcoin is quickly becoming an established payment method in a number of markets including the U.S, Europe and China, but many emerging markets are yet to adopt the virtual currency as mainstream. As this adoption takes place, Bitcoin Shop expects to duplicate its U.S. operations in those markets.
While the bitcoin industry is a potentially lucrative, growth industry, there is a substantial risk associated with early exposure.
The main risk lies in adoption. Bitcoin use is at an all-time high, both in terms of transaction rates and public awareness, but this does not guarantee future mainstream adoption. There exists a number of regulatory concerns regarding the cryptocurrency; validation of any one of these concerns could stall its adoption. No external body regulates the bitcoin network, meaning the security of an individual's bitcoin holding rests solely with him or herself. A holder that does not fully understand the necessary security measures may be susceptible to theft. High profile theft may discourage the wider retail community from holding and spending bitcoin. Bitcoin Shop's business model amplifies this risk, in that it relies solely on bitcoin transactions taking place.
A company specific risk lies in its financial structure. There are currently just 762,000 Bitcoin Shop shares outstanding and a float of 305,405 following a 1:300 reverse split. Such a low float could make the stock extremely volatile, meaning the holdings of early stage investors could be subject to large, short-term valuation swings.
When Overstock.com started accepting bitcoins as payment, the platform transacted $124,000 of bitcoin payments in 24 hours. This illustrates the willingness of the ecommerce community to adopt the digital currency as a payment method. Bitcoin Shop is one of the only companyies offering consumption related exposure to this willingness, and in turn, the growth potential of this fledgling industry. Investors should exercise caution, as the company's bitcoin-only business model exposes it to any setbacks in the digital currency's growth, but as ever, with this exposure comes large potential gains.
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.