Is Bitcoin the Future of E-Commerce?

Last week, (OSTK) became the latest e-commerce site to accept Bitcoin, extending the conversation over whether the electronic currency will be able to not just survive, but become a part of the transactions mainstream.

Bitcoin is now listed on along with other options such as Visa (V), MasterCard (MA) and eBay’s (EBAY) PayPal. And at least its debut was considered a success — the site did about $124,000 in Bitcoin transactions and generated significant buzz.

But as to whether Bitcoin’s use on OSTK signals a broader trend for e-commerce … well, it’s probably a bit too early to tell.

Overstock’s escapade into Bitcoin feels a bit more natural than it would with other e-commerce sites because of its CEO, Patrick Byrne — a libertarian with a rebellious streak. In fact, Byrne recently said of Bitcoin, “It is a form of money that no government mandarin can will … into existence.”

Bitcoin, which was launched during the financial crisis, has seen a surge in interest over the past year. It uses a sophisticated peer-to-peer online network and caps the supply at 21 million units — this cap means that unlike with governments and currency, Bitcoin can’t simply make more Bitcoins. Instead, the price of existing Bitcoins shifts based on supply and demand.

For e-commerce purposes, there are some interesting advantages. Buyers do not have to pay transaction fees, and Bitcoins make foreign payments fairly straightforward compared to using government currencies.

So it’s at least practical enough that a few other well-known online operators have come to accept Bitcoin, such as OKCupid, Reddit and Zynga (ZNGA).

However, these are companies that tend to have more tech-savvy customers, and thus customers who would be more likely to hold Bitcoin in the first place. As for companies like (AMZN), it could take some time to jump on the bandwagon, if they ever do at all.

The fact is that mainstream consumers really just do not understand the complexities of Bitcoin. Plus, many are turned off by well-founded fears. It is no secret that criminal organizations have used bitcoins to hide their illicit activities, and millions of dollars’ worth of Bitcoin has disappeared from online marketplaces.

Even governments have gotten antsy about Bitcoin, including China, which is cracking down on Bitcoin and other virtual currencies — that has prompted the country’s top online marketplace, Alibaba, to ban the sale of Bitcoins.

Plus, Bitcoin holders might be enticed to actually hold onto their currency, considering the frequent spikes in Bitcoin’s price. Some “investors” have watched their holdings double or more overnight, so why spend Bitcoins over dollars when your Bitcoin could be worth twice as much in a couple of days?

Bottom line: Bitcoin might eventually have a larger role to play in e-commerce, but it would take significant changes in the currency’s ecosystem to achieve.

Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO StrategiesAll About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

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