Bitcoin is the most interesting technology of my lifetime as it has the power to have far-reaching effects besides just the currency. Currency is the first app which utilizes the blockchain technology. The other uses include eliminating the three-day settlement of stock trades and eliminating the problem with pre-borrowing shares in order to short them. These are the issues Overstock.com's (NASDAQ:OSTK) Bitcoin arm called Medici is working on.
Since my excitement about Bitcoin is so high, I thought it would be a great idea to learn more about what Overstock.com is doing in the space. There seems to be a cloud of distrust over Bitcoin as investors seem to believe the $3.2 million OSTK spent on Medici last quarter was a waste of money. Hopefully, this interview helps investors learn about the amazing achievements of Medici and the bright future it has.
The CEO of Overtsock.com, Patrick Byrne, direct messaged me Judd Bagley's email address. Judd Bagley is the Director of Communications at Overstock.com. I emailed him my questions, and he responded with the answers below. My questions are in italics.
Alex Pitti (AP): If Amazon (NASDAQ:AMZN) begun accepting Bitcoin, would you view it as a positive for Overstock because it means Bitcoin is gaining traction or a negative because it is a competitive threat?
Judd Bagley (JB): Purchases with Bitcoin account for a small enough portion of our revenue to make Amazon's decisions in the space not very consequential for us. That said, every additional business that accepts Bitcoin is good for the cause of crypto-currency, so it would be a good thing.
AP: I understand you are currently selling the tØ product as a license to enterprise trading firms in the medium term, but wouldn't the blockchain technology eliminate the need for these firms or at least lower their profits significantly?
JB: The tØ securities trading platform is not currently in use by any firms, though that should change in the not-too-distant future. While blockchain technology will dramatically disrupt a portion of the finance ecosystem, there will always be a need for banks and full-service firms. So we don't think they're going away. We believe they will welcome our service, because it will greatly reduce the cost and time associated with trade settlement, both of which are too high. These benefits will be passed along to their customers, whom we expect to be very appreciative.
AP: Is tØ principally working with SpeedRoute or is it agnostic to whether it works with a Medici trading firm or not? Has SpeedRoute grown its market share since Medici purchased it since it offers traders a better product?
JB: SpeedRoute is our pipeline to the rest of Wall Street. All trades on the tØ platform will move through SpeedRoute. Because securities trading is not currently happening on tØ, SpeedRoute has not seen a change in its market share.
AP: If your product lowers the cost to traders, why would an enterprising trading firm be motivated to adopt your product? How has adoption been going since August?
JB: We believe firms will use tØ because their customers, both institutional and retail, will demand the lower settlement times and transaction costs.
AP: The finance industry will be disrupted by Bitcoin, but Bitcoin will not destroy it. Which businesses will be the most affected, and how is Overstock planning to take advantage of these changes?
JB: The list of sectors likely to be disrupted by blockchain technologies is too long to list. Some obvious areas include: land titling, voting, identity and copyright. Overstock.com's Medici group is tasked with investigating other uses of blockchain technology and developing disruptive solutions for some of them. We are believers in this space.
AP: What are the hurdles to spinning off Overstock's Bitcoin arm? Will this spin-off be the first company listed on the blockchain-based public exchange which was approved by the SEC in December?
JB: No comment here.
AP: It seems as though Ethereum has had a major hiccup because it didn't hedge its Ether currency. While Patrick Byrne is optimistic about Bitcoin's future, how does Robert Hughes moderate this risk by hedging the exposure to Bitcoin? When Patrick says tØ is blockchain agnostic, does this mean it is working with Ethereum?
JB: We only retain 10% of revenues from Bitcoin as Bitcoin. The rest is converted to dollars. Consequently, our exposure isn't very significant and thus we've not seen a need to hedge.
No comment on working with Ethereum. It's too early to say.
AP: When Medici offers a crypto-bond, is it a profitable venture? Are the profits lower than a typical bond issuance?
JB: Thus far, the two corporate bond transactions made on tØ have been intended to prove the safety and security of blockchain trading. They were not intended to be profitable. Of course, we expect that when made available to the market, securities trading on tØ will happen profitably.
AP: If prime brokers make so much money from pre-borrowing, how is tØ going to innovate around this entrenched support for the status quo?
JB: We believe that the beneficial owners of shares available for stock loan will insist that the inventory by allocated via tØ's Short Token product, because this will do more to ensure that they receive a fair market price for their shares. Because stock loan is such a lucrative industry on Wall Street, we believe this will compel the prime brokers to use the platform as well.
AP: Would you view the negative characterization of high frequency trading as a mistruth because they are operating in a flawed environment? Are high frequency traders your biggest customers because of the pre-borrowing tokens you offer?
JB: I'm not going to comment on the nature of the customers most likely to buy Short Tokens. We do know that the buyers will love the security of knowing they are in compliance with regulations governing short selling, and that the blockchain provides them with turnkey, auditable proof of their compliance.
As for high frequency trading, I can tell you that tØ does not accommodate the kind of front-running associated with that practice.
I am not recommending Overstock.com stock because it has two parts - the online retailer and the Bitcoin company. I don't want to invest in an online retailer that Patrick Byrne seems to have little interest in. OSTK is planning to spin off Medici. When it does, I will consider buying it, as it is innovating at an amazing clip and is providing products that have technology way ahead of the competition.
Image Source: Overstock.com
Disclosure: I/we 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 (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.