The current Bitcoin acceptance market

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Bitcoin has a long road ahead before merchants widely accept the currency, but bitcoin acceptance is expanding and accelerating.

Silk Road, the illicit online black market, was an infamous early adopter of bitcoin, taking advantage of the currency’s anonymity. The U.S. FBI forced Silk Road to shut down in October 2013.

Since then, many legitimate online retailers began to accept bitcoin as an alternative payment method alongside PayPal and other digital wallets. Initially, bitcoin-acceptance was led by small merchants seeking publicity from the enthusiastic bitcoin community. Now bitcoin acceptors increasingly include known brand names – writes Chris Dickey, Associate, specializing in Credit Card Issuing,First Annapolis.

Overstock.com has been a flagship brand driving notoriety by publishing its bitcoin sales figures. Overstock’s bitcoin sales are currently $15,000 per day, and are expected to double by the end of this year1 (Overstock processed $1.6 million in bitcoin sales in the first quarter of 20142).

Dell, Dish Network, and Expedia are among the other well-known merchants now accepting bitcoin online. European merchants have processed almost $40M in the first three quarters of 2014, a growth rate of over 1000% year-over-year.3 Throughout 2013, bitcoin acceptance increased slowly, but the trend has been accelerating this year as more major merchants begin bitcoin acceptance.

Figure 1: Notable Bitcoin Merchant Acceptance Announcements

Source: First Annapolis Consulting research and analysis.

Coinbase and BitPay act as the bitcoin acquirers for most of the mainstream bitcoin-accepting merchants and PSPs. These are a new class of acquirers that are willing to accept the risk of bitcoin price volatility and don’t need traditional acquirers to process payments. These companies convert bitcoin to USD, or another fiat currency, immediately after payment, reducing the merchant’s exposure to volatility risk.

The numbers published by Coinbase and BitPay indicate that over 75,000 merchants worldwide accept bitcoin, an estimated 90% of which are e-commerce merchants (10% brick-and-mortar).

The biggest sectors are retail (computers/technology, electronics, apparel), travel, and food. The average ticket price of a bitcoin transaction at present is $400+, significantly higher than many other payment methods. And, mid-to large-size companies are showing the most interest in accepting bitcoin as a payment method.

We believe that the acceptance base has room to accelerate as the current base already includes a number of key merchant aggregators such as Square, Shopify, Intuit, and Etsy, who allow their merchants, primarily SMEs, to accept bitcoin on a turn-key basis.

BitPay describes signing up 500 to 1,000 new merchants per week, a figure that is increasing 20% month-over-month. Mainline payment providers are increasingly enabling bitcoin. Digital River, PayPal, Braintree, and Global Payments have referral agreements and technical integrations with Coinbase or BitPay, allowing merchants of all sizes to integrate bitcoin payments. It is unclear how many of their merchants have taken advantage of this service, but as acceptance rises bitcoin’s turnkey nature and PSP support will make integration easier.

Bitcoin has notoriety, but what does it mean for merchants, acquirers, and PSPs – should you accept and/or commercialize now? While Overstock has reported some success with bitcoin with few glitches, there remains uncertainty about the scale and stability of bitcoin’s future.

As of today, bitcoin is best suited for e-commerce merchants with a customer demographic of tech-savvy males aged 18 to 45 years old, bitcoin’s main demographic. Bitcoin’s value proposition for merchants includes: an opportunity to drive incremental customers, a reasonable cost of acceptance relative to credit cards (1% merchant fee is typical for CoinBase and BitPay charges a typical merchant fee of 0%, instead making money on FX conversion spread), and a payment guarantee from the acquirer (assuming there is one).

Payment acceptance service providers would be wise to put bitcoin on their medium-term radar and to learn and understand the commercial model and advantages and disadvantage in the meantime. The success of early adopters Digital River and Global Payments could quickly spur other providers to enter this market – either in the form of PSP facilitation or direct bitcoin acquiring and assumption of risk.

Bitcoin merchant acceptance has taken strides forward in the past year. Bitcoin is no longer seen as just an illicit way to do business, but rather as a legitimate alternative payment method. Acquirers like Coinbase and Bitpay are making it easier for merchants to accept bitcoin as a low cost, acquirer-guaranteed payment method. As a result, merchants are increasingly accepting bitcoin. That being said, current penetration is still low suggesting prudent investment.