Tomorrow sees bitcoin’s fifth anniversary. When Satoshi Nakamoto flipped the switch on the first bitcoin client on 3rd January 2009, there wasn’t a single merchant for the product. Now there are thousands. But why did they begin accepting the virtual currency, how are they faring, and what have they learned during the last, turbulent year?
“Merchants give several reasons for accepting bitcoin,” says Stephanie Wargo, VP of marketing at payment processing firm BitPay. These include lower transaction fees, no chargebacks, easy setup and the ability to reach more customers worldwide, she says.
“We have seen tremendous growth. We are averaging over 400 new merchant requests a day.”
Nevertheless, there are some challenges for merchants wanting to accept the virtual currency. The biggest one last year was price fluctuation, says Matt Mullenweg, founder of Automattic, the company behind the WordPress-hosted blogging service which introduced bitcoin support in November 2012. With an Alexa ranking of 18, the firm is arguably the biggest commercial bitcoin merchant online, in terms of popularity.
“BitPay made the integration straightforward, but the biggest challenge has been [that] people don’t want to spend bitcoins when the value fluctuates so much,” Mullenweg says. “When we introduced support bitcoin was around $12, so our nominally $100 upgrade in bitcoins would be worth over $6,000 now.”
Nevertheless, like many merchants, Automattic took a punt on bitcoin. After all, why not? The cost of entry is practically zero and it provides another payment channel for customers. For Mullenweg, however, it also served another purpose.
“The benefit has been mainly that bitcoin aligns strongly with the philosophy of our company,” he says. “It’s a decentralized, open source way to exchange value and a platform, just like WordPress is an open source, often distributed way to publish on the web.”
The education problem
Mullenweg is naturally clued into bitcoin, but the same isn’t true for many online vendors. Education has been the biggest hurdle, says Fred Ehrsam, co-founder of Coinbase, which offers a payment processing service for merchants in addition to its wallet service.
“99.9% of merchants do not currently accept bitcoin or have a good understanding of what it is.”
This is gradually changing as bitcoin gains mind share, he says. But the next biggest question from merchants is how much people will actually use it. Bitcoin payment processors face a catch-22 problem. Their business model rests on two types of person: the merchant and the customer that wants to pay that merchant in bitcoin. Before they can build up a sufficient quantity of merchants, enough potential customers for those merchants must exist to make it worth the merchant’s while. Without enough merchants, customers won’t bother trying to spend their bitcoins.
“The biggest thing I’ve learned is how important consumer adoption is to merchants – more so than the economics themselves oftentimes,” Ehrsam says.
Customer adoption is still an issue. Bitcoin-based revenues have been marginal, says Mullenweg, although he won’t confirm actual numbers.
Nevertheless, merchant adoption is increasing, as larger numbers of online and real-world vendors decide that if they build bitcoin support, the customers will surely come. Coinbase launched its merchant tools just over a year ago, and now it has about 17,000 merchants on the platform.
“Growth is similar to what we’ve seen on the consumer side, albeit on a different order of magnitude as merchants have been the natural laggard to consumers, at about 30% month over month growth,” Ehrsam says.
Safety in numbers
BitDazzle, an e-commerce marketplace designed purely for merchants wanting to sell their goods in bitcoin, says that bitcoin transactions have doubled each month since it launched in mid-October.
The service, operated by Cashie Commerce, uses Coinbase’s merchant tools. Revenue numbers are proprietary, but it saw a 300% increase in transactions on Black Friday, and a 400% increase in transactions on Cyber Monday, says Cashie Commerce CEO Hieu Bui.
One of the advantages for merchants selling through a site like BitDazzle is that aggregating vendors creates an easy, visible place for customers who want to spend their bitcoins.
“The advantage for our sellers is that we are allocating significant resources to drive traffic to BitDazzle,” says Bui. “They get the benefits of those efforts on top of anything else they are doing to market their products.”
Accounting can still be a challenge for vendors who accept bitcoin, although the real issue here is for those who fail to convert their bitcoin into fiat currency immediately at the point of sale. BitPay converts bitcoins to dollars at transaction time for Automattic, meaning that it is accounted for like any other payment.
The vast majority of Coinbase merchants, too, use its instant exchange feature where they lock in the local currency amount of each purchase to avoid volatility risk. The firm provides a downloadable CSV file that merchants can export for their accountants.
However, a surprisingly sizeable number of BitPay merchants are holding a bitcoin balance. About 45% of its merchants choose to get some if not all of their settlement in bitcoin, says BitPay’s Stephanie Wargo.
This year, many bitcoin merchants will still be testing the waters, hoping for revenues from a relatively new virtual currency that vast numbers of people still have no affinity with. However, with the value of the currency going up and with new payment features beginning to work their way into wallet software, things are likely to change. What will really encourage customers to get involved with the virtual currency is support for bitcoin by larger brand names. Given the mind share that the virtual currency gained last year, this could be something that we’ll see in 2014.
As more people begin carrying the currency, more bitcoin revenue will begin trickling down to lesser-known vendors, but most merchants shouldn’t expect the virtual currency to become a significant portion of their revenues for a while.
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