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.