Overstock CEO’s Angry Response on Taking Bitcoin

bitcoins 457x320
an economist, business advisor and Founder of Market Platform Dynamics
5:00 AM EDT May 27th, 2014

It looks like I poked the hornets’ nest and awakened the slumbering bear at the same time with my article last Friday about Overstock not really taking bitcoin. The hysterical reaction is puzzling since the point of my article is simple and no one, including Patrick Byrne, Overstock’s CEO, seems to disagree with it (see his rather angry response here)

When you use your Coinbase wallet to pay for something on Overstock with bitcoins, Overstock.com gets paid in dollars. One of the great services that Coinbase provides Overstock (and other merchants) is the ability to avoid the exchange risk with bitcoin. So when a consumer buys something for $20 on Overstock, and uses bitcoin in their Coinbase wallet to do it, Overstock gets $20 (minus any service fees). Whether Overstock takes dollars because they need to pay their suppliers in dollars, as Mr. Byrne asserts, or whether they just don’t want to bear the risk coming from the extreme volatility of bitcoin doesn’t really matter. Overstock gets dollars, not bitcoins. (Click here for a fun illustration of how this works in practice.)

The Bitcoin community should actually care about this rather than claiming, as Mr. Byrne does, that I wrote a “hit” piece on bitcoin. In order for bitcoin to become a currency—which is what many in the Bitcoin community claim to be their aspiration—merchants need to actually accept bitcoin and not treat it as like they were playing with a hot potato.  Merchants that are getting the bitcoin payments instantly converted into dollars aren’t really accepting bitcoin as a currency. In order to ignite bitcoin as a currency, companies like Overstock would need to accept it as a currency and start using it as a currency.

What Mr. Byrne tells us is, well, that just isn’t possible right now because his suppliers and employees want to be paid in dollars. He could, in fact, pay his employees in bitcoin, contrary to his statement that the IRS hasn’t issued rules (they have), but his employees would need to pay capital gains tax on any appreciation and meet some paperwork burden. They probably wouldn’t like that very much.

It hardly does the Bitcoin enterprise any good to create the false impression that bitcoin is becoming widely accepted by merchants. It isn’t–any more than any other currency in the world is that, like the nairu, can be converted to currencies that people and suppliers actually do want.

The proposition that Overstock presents its customers demonstrates the sheer silliness of what’s going on with bitcoin these days. If you don’t have bitcoins (virtually no one does) you can go to Coinbase and get some. How do you get some? You give them dollars. Then you pay Overstock. What does Overstock get? They get dollars.

So let me turn to Mr. Byrne’s response to my article, which unfortunately, doesn’t move the discussion over bitcoin forward in any substantive way and is more than a bit disingenuous.

- He says that you don’t need a Coinbase wallet to pay with bitcoin. Well, that is true for people who currently have bitcoins. Hardly anyone does and the bitcoin payment option at Overstock is designed around the Coinbase wallet which makes it easy for people to get and pay with bitcoins. The Coinbase wallet is the first option the consumer is presented with. If the consumer doesn’t have bitcoins the purchaser is encouraged to go to Coinbase to get some; Overstock notes that the consumer can get up to $100 instantly. There is an option is for the few people who currently have bitcoins. Now, I understand many of the people in the bitcoin community who are upset over my article actually have bitcoins. But, folks, you are a tiny percent of consumers and aren’t relevant for turning bitcoin into a mainstream currency.

- Then we have the “hot potato defense.” Mr. Byrne argues that Overstock really does take possession of bitcoins but then Coinbase converts them to dollars. This of course is a distinction without a difference. Coinbase guarantees that merchants bear no exchange risk and get paid in local currency and Mr. Byrne acknowledges that Overstock gets paid in dollars.

- Mr. Byrne explains that he needs greenbacks to pay his suppliers and employees. As I noted above that’s exactly the point of my original piece. Bitcoin isn’t a currency that many merchants want to accept including one whose CEO is a big believer in it. I also don’t buy Mr. Byrne’s point that he can’t just keep all the bitcoins he’s getting. In addition to paying suppliers and employees he presumably accumulates profits for his shareholders. Why not keep that in bitcoin especially given some of the predictions on how much bitcoins will be worth? Perhaps because the shareholders of a public company shouldn’t be subjected to such risk and its CEO lacks confidence in the predictions about the long-run value of bitcoins. (Xapo’s founder Wences Casares recently said a bitcoin, which is currently worth slightly more than $500 could be worth between $500,000 and $1,000,000.

- Mr. Byrne tells us that Overstock is accumulating bitcoin reserves equal to 10 percent of Overstock purchases that are made by customers with bitcoins. That’s a nice demonstration of their support for bitcoin but hardly explains why they shun 90% of the bitcoins they could be getting. If such a believer, then why not flip the order – 90 percent in bitcoins and 10 percent in dollars?

If you read Mr. Byrne’s post carefully you will see that he acknowledges the fundamental point of my article. When a typical consumer goes to Overstock and wants to pay in bitcoin, that consumer uses dollars to get the bitcoins from Coinbase, Coinbase then reconverts those bitcoins to dollars, and gives the dollars to Overstock. Overstock, like virtually all merchants in the US, gets paid in dollars.

If you want to see for yourself how all this works click here.I needed to buy Annie, my border collie, a new Frisbee for the summer. I bought it from Overstock.com with bitcoins using my Coinbase wallet. Coinbase’s wallet works like a charm and is a very well designed digital wallet product. And kudos to Overstock for helping Annie get her new Frisbee. I’m pretty sure she’s the only dog in the neighborhood  (maybe even in Boston) with a Frisbee bought with bitcoin.

PS. My apologies to Mr. Byrne for the typos in his first and last name. I was in Beijing last week and had a remarkably hard time, even for China, connecting to the Internet. I wasn’t able to check the piece before it went live. I’ve made worse typos, believe me.

.

 

Comments
  • Milly Bitcoin

    Bitcoin is in its experimental stages so you should not compare it to established systems. It is like going back to 1993 and comparing the Internet to print media and claiming the Internet won’t be viable.

    • Chris Farlee

      The internet, conceptually, had consumer value beyond what existed at the time. What’s the consumer value of bitcoin? What does the average consumer gain by using bitcoin? Why would I take USD and convert it to bitcoin to buy legal items online? Why forgo the protections my credit card offers?

      The bitcoin protocol is ingenious, though I have yet to see where it is groundbreaking in it’s usefulness to consumers.

      • Milly Bitcoin

        I am actually preparing a video that will be released in a few weeks that addresses your points. I agree that Bitcoin has to be more ubiquitous to be a useful currency but it has to start somewhere.
        One use is small transactions, such as an app, can be developed and sold from anywhere in the world. right now selling a 50 cent app is not possible from a third world country. The fees are too high and many payment processors won’t service those countries. Other uses are small donations, tipping for comments, access to web content, etc. I have had to shut down some low cost services in the past due to chargebacks. The cost was so small most people didn’t care about credit card protection but I still got hit with huge fees that wold require me to get 20-30 more legitimate customers each time just to make up for the fraud. I don’t envision people switching completely to Bitcoin but it has uses beyond what is available now.

        • Chris Farlee

          I’ve been waiting for micropayment use cases to pop up. I’d love to be able to keep twenty bucks on my browser to pay for content.

          Not exactly use cases that are going to take over the world but it’s a legitimate value prop not easily facilitated by other methods of payment for sure.

          Would love to see your video when you are done.

        • http://www.filmannexnetworks.com/ Mike Sweeney

          Milly, Please upload your film to Film Annex and we pay you in Bitcoin for content: http://www.filmannexnetworks.com/#/filmmakers/

  • Rich. M.

    Milly Bitcoin = bitcoin pumper, cultist and all round fool.

    • A Anon

      oh stop with the Ad hominem attacks, bring something to the discussion instead.

  • A Anon

    its okay if overstock does not hold bitcoins, if anything i would rather them not hoard them. By using coinbase you are increasing transaction volume which tends to increase worth of BTC.

    As long as i can buy things with bitcoin that is good enough for me, rather or not the owner of the company keeps BTC or fiat.

  • Cory Tyler

    Can he pay his employees in bitcoin? can he pay for his research and development in bitcoin? Marketing? Are you so ignorant to realize he can’t pay for his business using bitcoins? That is like saying when a Chinese company buys something from a US company using Yen that the US company doesn’t really accept any payment or that it doesn’t count? just because then the US company converted it to dollars? No we wouldn’t say that because the US company pays for things in US dollars so any person with common sense realizes this. What a terrible article I can’t believe you even spent the time writing this junk up.

    • David Mooney

      But he’s not in China, is he. Bitcoin enthusiasts have touted its universality – because it’s not a fiat currency, it transcends national borders. Your rant, Cory, just proves the article’s point, which is that very, very few businesses or individuals anywhere actually accept Bitcoin as payment – in the end, they demand fiat currency – which renders it useless as a currency. The fundamental characteristic of a currency is that it is readilly and directly exchangable for goods and services. If I have Yen (which is the Japenese, not Chinese currency) I can use it to buy goods and services in Japan, or I can convert it to $US and buy US goods. The seller can use those $US to pay their suppliers, employees, landlord, etc., who can in turn use those $US to buy goods and services, or exchange them for Yen and buy Japenese goods and services. Maybe Bitcoin will develop into a currency, but it’s clearly not one now. And why do you guys get so pissed off and self-righteous about this?

      • Cory Tyler

        What are you talking about? I can’t use Yen in the United States can I? Bitcoin requires the same conversion as any other currency when using it in any other country besides the country that currency originates and so the one advantage at the moment is that, because governments force it, people still are required to use Dollars or Yen or w/e in that country. So your argument just makes no sense at all especially since Bitcoin can be used at certain companies with no conversion at all and no fees unlike dollars and Yen. There are plenty of companies that accept bitcoin and I suggest you do a little more research before supplying a piss poor argument, Bitcoin is a currency, that is fact and if you are going to argue the opposite you have to provide evidence which you have none, some employees for certain companies are paid in Bitcoin, look it up, do some research on the topic. The currency has been used for how long? 5-6 years? And already in terms of American Dollars there are: 7,983,793,771 USD in circulation worth of bitcoin. Tell me how it isn’t successful or working again? Its not a currency but people are just using it, can we come up with a new name that doesn’t hurt your feelings? Because by the very definition of being used as medium of exchange it seems to be fully functional and growing every day.

      • Michael Taggart

        That’s ok, as adoption continues to speed up, the network effect will take hold. It is only a matter of time, and the adoption rate IS increasing. This is due to not only merchants, but users adopting it.

        Once a user has the wallet and Bitcoin, they can send each other money, as well as buy from merchants. Believe me, when they begin to understand they are in essence, their own bank..they will realize they are saving money on fees, and it will explode in usage exponentially.

        Also, Bitcoin is also a payment network, not just a currency. There are many reasons why it is superior to other payment networks, which will further drive adolption.

  • stckpkr7000

    I have read that he actually holds some of the Bitcoins from purchases through overstock.

  • http://pointpayments.com Ed B

    Splitting hairs. They ‘accept credit cards’ yet, there too, get paid in dollars.

    • Dan Rizzatz

      Your counter argument is the best I’ve read so far.
      This author is failing to recognize that Bitcoin is a payment system and not a currency. While it may one day have the potential to act as a currency all on it’s own, let’s not get ahead of ourselves. Bitcoin is going to establish itself as a payment system first, then become a currency.

      Isn’t that something else? A currency piggy backing it’s way into relevance by opening as a payment system. Kinda reminds you of notes for gold, then notes for goods, then no more gold. The difference is that the gold standard in Bitcoin’s situation, can never be abolished, because the “currency” and “payment system” are one in the same.

  • Nikato Muirhead

    Attacking Overstock by saying they don’t really acceptb bitcoin because they don’t hold on to them…. That is lowdown fud. Most places that accept bitcoin follow this same process, so what is the issue ? I think that fact that people are here reading this article is the true purpose.

  • http://www.bottomviolation.com/ Paco Ahlgren

    This piece shows the author’s ignorance of carrying costs and currency conversions. Even after digital currencies become standard (and they will), near-instant conversions will continue to occur. This is the sort of myopia and ignorance one would expect from ego-entrenched journalism… but that doesn’t make it any more excusable, palatable, or valid.

  • http://stevenroose.be Steven Roose

    Coinbase should offer companies to option to keep a certain fraction of their income in Bitcoin. I think many of them would try this out by keeping 5% or so. When they see the profit they can make on this when the price increases (and on the long term it will always increase because of Bitcoins deflationary nature), they will be tempted to keep more.

    Then they will come to know the real value of Bitcoin: a reliable store of value.

    • Dan Rizzatz

      I’m a Bitcoin supporter, and I’d hate to burst your bubble, but you are not describing a “reliable store of value.”

      “When they see the profit they can make on this when the price increases”

      What you are describing is a system of greed that resembles fractional banking debt and loan pay-off, or stock market appreciation.

      • Ted Ryder

        He isn’t describing fractional banking AT ALL. What he is describing is similar to stock market appreciation. There is ABSOLUTELY nothing wrong with that. It’s smart…very, very smart.

        • Dan Rizzatz

          People who store their money in a bank or payment system don’t expect the value of that money to drop relative to their other money. Money stored in Bitcoin can become worth less, relative to other fiat. It’s not a store of fiat value.

    • Michael Taggart

      Bitpay does

  • kpandey

    Hey everyone needs to “poke the hornets’ nest ” once in a while! I will be reading his articles with healthy dose of skepticism from now on since he did such a poor job with this article (kinda like the Paul Krugmen moment for me).

  • matthewdolman

    Golly, your lack of understanding is immense, the article is a little embarrassing to read.

    Bitcoin is both a store of value AND a means of exchange. Due to the FUD and lack of understanding the market is affecting it’s reliability as a store of value. At this point it would not be wise to invest anything you can’t afford to lose into it no matter how much you believe in the concept behind it. Believing in the concept of Bitcoin is not the same as believing that it will succeed.

    At the moment it is an incredible means of exchange and overstock are making the most of it. They are using Bitcoin but only the half that is reliably useful at the moment.

    How have you missed this up until now? It’s pretty obvious….

  • David Evans

    Bitcoiners need to decide whether bitcoin is supposed to be a currency or not. If bitcoin wants to be a currency then consumers and merchants need to use it as a medium of exchange. You can’t use bitcoin as a currency at Overstock or many of the other merchants that supposedly accept bitcoin. It is an important distinction because bitcoin actually could become a currency if it could set up a virtuous circle between senders and receivers of funds and merchants are very important receivers. (By the way, for bitcoin to be a currency in a country people need to accept it in that country, just like stores in Switzerland accept the euro in addition to the Swiss Franc.)

    Bitcoin certainly could become a payment system and that seems like a more plausible future than becoming a currency. The Overstock-Coinbase example shows, though, that it is a quite peculiar payment system today. The Coinbase wallet is an online prepaid card. Consumers can put value on it and use it to pay. The consumer proposition is take dollars from your bank account, buy bitcoins, then when you want to pay give Coinbase those bitcoins, and Coinbase will then buy dollars for Overstock. (Note by the way that there is no virtuous circle going on here.) Unlike putting dollars on a prepaid card the consumer incurs significant exchange risk and in theory has to worry about IRS paperwork. Coinbase would provide a better proposition to consumers if it was a really cheap prepaid card on which people put dollars that they could use to pay online. Now, I understand that the wallet is very appealing to people who have want to support bitcoin for nonpecuniary reasons.

    Anyway, the proof is in the pudding, right? We’ll see from the data whether bitcoin
    transactions accelerate. They have been pretty flat for many months. My
    conjecture, which I understand many of you disagree with, is that the fact that
    merchants really don’t accept bitcoin as a currency is a big deal and that bitcoin transactions won’t get into a phase of explosive growth.

    • http://www.filmannexnetworks.com/ Mike Sweeney

      David,

      Bitcoin is a payment system for us as we now pay our Content Providers in Bitcoin and they can:

      1. Spend their Bitcoin in our very early shopping: http://www.filmannex.com/shop/

      2. Transfer their Bitcoin earned at Film Annex and either spend them on other sites or transfer then into USD, Euros or others on Coinbase, Bitstamp, Atlas ATS….

      Please understand that I agree that my wife saving a few percentage points of fees on Bitcoin versus a credit card is not going to change the world. However, I personally sent Bitcoin to 7 different countries last week: http://www.filmannex.com/blogs/country-count-film-annex-bitcoin-payments-sent-late-you-can-thank-me-later/209053/

      For women in developing countries and many other that are not “bankable”, Bitcoin is a real value proposition. Please see the work of our Foundation:

      http://www.womensannexfoundation.org/#/digital-currency-for-digital-literacy/

    • matthewdolman

      “Bitcoiners need to decide whether bitcoin is supposed to be a currency or not.”

      Who are bitcoiners?

      How can they make a decision about what bitcoin is? The system already exists, if bitcoiners(whoever they are) even wanted to make a decision on what bitcoin is they would be powerless to do so.

      If bitcoiners (whoever they are), could make a decision about what bitcoin is (which they cant), why do they need to?

    • http://pointpayments.com Ed B

      Must Japanese decide whether the Yen is a currency when they shop along 5th Ave in NYC? No, there VISA cards work just fine…the merchant takes VISA and gets settled in USD $ and the user is debited Yen.

  • mike

    Umm ur explanation is a bit long winded, like a senator during a philabuster… Dude u have wasted my time, and I have returned the favor.

  • Coach P

    Conceptually not a bad idea; however, as you can currently see new insurance products coming out relative to bitcoin type currency liability risks there is another added risk component that is not generally discussed. Whether you start or end with dollars, including an intermediary adds risk. How well do merchants understand or effect the underlying operation of such trade currencies? I develop insurance policy wording and underwriting rules. All good for me but pricing is another question.

  • Wooxer Pt

    When I buy internationally I use my Euros, people on the other end receive in Dollars or Yuan, am I not really using Euros? Dumbass.

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