Overstock.com And Bitcoin Shop Offer Virtual Currency First-Mover Advantages

| About: Overstock.com, Inc. (OSTK)


Bitcoin troubles haven't dented virtual currency demand.

Overstock.com Bitcoin sales have exceeded estimates.

Solution providers need to provide payment options for multiple virtual currencies.

With the bankruptcy filing of Bitcoin exchange Mt. Gox and potential loss of 850,000 bitcoins worth nearly $500 million, the Bitcoin market got a rude awakening to the risks involved in virtual currencies. On top of that, the supposed founder of the Bitcoin was identified and failed to back up those claims, leaving investors unsure of the origins of the concept. The shroud of secrecy and fraud isn't helpful for the development of the cryptocurrency.

While the negatives have gotten a lot of headlines, the resilience of the currency in the face of these issues suggests that some form of virtual currency will ultimately survive. The founder and outspoken leader of Overstock.com (NASDAQ:OSTK) provides a solid case for Bitcoin or any other currency that provides a cheaper payment processing method. In addition, Marc Andreessen of Netscape fame continues to invest heavily in the sector via his venture capital firm, suggesting the cryptocurrency isn't likely to disappear anytime soon.

Regardless of the interest in the cryptocurrency, the public markets have limited investment options. The relatively small Bitcoin Shop (OTCQB:BTCS) remains one of the limited vehicles for investing in the concept with the Winklevoss Bitcoin Trust ETF (BITCN) still pending approval. SecondMarket has launched the Bitcoin Investment Trust that derives its value solely from the price of Bitcoin. The private investment vehicle is only open to institutional and accredited individual investors. Unfortunately, the trust not only doesn't allow small investors into the investment opportunity, but the trust along with the Winklevoss option only invests in the currency and not in the concept.

Ultimately, other Bitcoin related firms will eventually go public, but investors need to grasp that the future holds the potential for numerous alternative currencies. The most profitable investments might be those that offer solutions to allow transactions in multiple currencies and not only the popular option now in the form of Bitcoin.

Mt. Gox Failure

The Mt. Gox failure topped off a string of high profile losses of bitcoins due to negligence or theft that cast some doubt about the cryptocurrency. In the case of Mt. Gox, the Tokyo based Bitcoin exchange claims that hackers attacked its software and stole 750,000 bitcoins belonging to its customers and 100,000 of its own.

In recent news, the exchange has reportedly found 200,000 of the missing bitcoins in old digital wallets not used anymore. The "found" coins amounted to roughly $120 million at the time and raised suspicions of fraud.

Other recent black eyes for Bitcoin include the Flexcoin, a Bitcoin bank, which shut down after thieves stole $600,000 worth of coins. Another smaller exchange called Poloniex lost more than 12% of its assets after a hack. Most recently, Blockchain suffered an hours-long outage.

Other Virtual Currencies

The recent failures of Bitcoin related businesses and resilience of market participants suggests that a virtual currency is probable to gain a material level of acceptance, but investors and users need to consider the possibility of another currency leaping past Bitcoin.

About.com lists alternatives to Bitcoin including Litecoin, Dogecoin, Peercoin, Megacoin, and Feathercoin amongst the top cryptocurrency alternatives. The article has links to more information about each alternative.

In a recent presentation from Bitcoin Shop, it lists the leaders in the virtual currency landscape back in early February, including the interesting realization that Ripples had a valuation of over $2 billion.

The data was obtained from Coinmarketcap.com, and a review of the site shows a vastly different landscape within roughly 45 days of the presentation. The top three positions remain noticeably identical, but the valuations dramatically lower. The interesting moves took place in the next positions with Auroracoin and Aphroditecoin pushing Peercoin, Nxt, and Dogecoin down the list. The below slide captures the top 10 cryptocurrency market capitalizations:

Slide - Coinmarketcap.com

The shocking part of the list is that it counts 127 different currencies, though only the top 30 have valuations above $1 million. What it does highlight is the reality that anybody investing in this sector or building infrastructure needs to prepare for a future of accepting multiple virtual currencies. Similar to say, MasterCard (NYSE:MA) and Visa (NYSE:V) credit cards, the winning retailers and technology firms will ultimately need to work with the top couple of options as the market matures.

Bitcoin Shop Advantage

The interesting part about Bitcoin Shop is that it provides a seamless shopping and transaction experience for customers wishing to conduct virtual currency transactions. The company counts Amazon.com (NASDAQ:AMZN) as the only current seller, though, sizable enough to allow for the offering of 140,000 products. Initially, it appeared a major risk that business could suddenly halt if the massive online retailer decided to handle Bitcoin transactions directly. With the proliferation of other currencies, it appears logical that Bitcoin Shop could easily transition to offering acceptance of other virtual currencies, providing a flexible solution for retailers wanting to avoid the confusing and volatile landscape.

In corporate presentations, the company is not specific about actually offering sales in litecoins or another alternative, but it does focus the discussion on offering a virtual currency solution.

In an interview prior to the holidays, co-founder Michal Handerhan discussed working with the founder of Litecoin to explore the possibility of adding Litecoin payments. The flexibility to handle multiple virtual currencies as payment options could entice other retailers to view the online aggregator as more of a solutions provider to utilize. Remember, the company operates as a facilitator of virtual currency transactions for retail sellers by offering an order fulfillment and customer service using Bitcoin payments. The company doesn't own inventory or a logistics chain.

Business only began ramping during Q4 with all of the non-financial metrics jumping over the minuscule numbers from Q3. The investment decision isn't nearly clear-cut with the lack of financials, and especially ones covering the current quarter that would have meaningful volumes for analysis. The metrics for the current quarter and beyond are crucial to see if the site moves beyond the early adopters and Bitcoin enthusiasts. As an example, the company only sold 1,266 products and registered 644 net users during Q4. See the slide from the Bitcoin Shop presentation below highlighting the other non-financial metrics:

The company expects to add other sellers in the near future that will fuel growth and reduce the risk that individual retailers eventually offer sales via Bitcoin or any other virtual currency.

Overstock.com Margins

With the public notoriety of its CEO, Overstock.com is quickly becoming a measuring stick for the proliferation of Bitcoin and virtual currencies. The company made the announcement back in January that it would begin accepting bitcoins, and the payment option has been a huge success so far.

CEO Patrick Byrne can't seem to stop talking about the virtual currency, whether for business reasons by saving on interchange fees or his rather known hatred for government interference in fiat currencies. Either way, the pace of Bitcoin sales has even caught him off guard. By early March, the company had sold $1 million worth of goods via the Bitcoin payment method and the company now expects to reach sales of up to $15 million for the year. Analysts expect Overstock.com to generate around $1.45 billion in revenue this year, so the amount remains a drop in the bucket for the company.

In a recent interview with CNNMoney, Byrne proclaimed that the company saved about 2% in interchange fees from the Bitcoin payments. Considering the company only has net margins in the 2% range, any sizable revenue from a cryptocurrency that saved on fees could have a huge impact on the bottom line.

Overstock.com doesn't take on risk of the currency by immediately converting bitcoins for US dollars via partner Coinbase. At the most, the company takes on the intra-day volatility risk if it only converts on a daily basis. For its part, Coinbase claims to now have 27,000 businesses that accept Bitcoin for customer payment. As well, the provider of digital wallets claims to maintain more than 1 million Bitcoin wallets with growth of around 5,000 wallets per day. The growth is startling, considering Coinbase only had 13,000 consumer wallets at the start of 2013. The growth suggests that Overstock.com and Bitcoin Shop might have more customers than expected in the near future.

The stock trades at a reasonable multiple of around 18x current year earnings estimates. The real key to the investment story is whether the first-mover advantage of being the first major retailer to accept bitcoins pushes the company into profitable growth mode. It might ultimately depend on how long it takes other retailers to join the movement.


While the public markets are still waiting on the Winklevoss Bitcoin Trust ETF to invest directly in bitcoins without having to own or even understand the cryptocurrency, investors are mostly left to invest in stocks that accept Bitcoin as a payment in the form of Overstock.com and Bitcoin Shop. With the growth in popularity of Coinbase wallets, it is very plausible that sales at Overstock.com will continue surprising to the upside. Regardless, it will be years before the total sales are material enough to impact the financials of the retailer. It leaves investors with Bitcoin Shop for participating in the high growth of the virtual currency world. The company sits in the unique position of accepting Bitcoin payments for Amazon.com products and the apparent flexibility to provide other virtual currency payment solutions in the future.

The recent negative news about Bitcoin doesn't appear to have slowed down the demand for a virtual currency solution. Investors should prepare for a future onslaught of alternative currencies that may or may not include Bitcoin. The companies that offer payment solutions for multiple virtual currencies will avoid the fears of Bitcoin related problems and ultimately survive and thrive in the future.

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