Bitcoin sounds crazy. It’s in very early days and there are a lot of challenges before it gets mass adoption. I think they have to solve the volatility of Bitcoin to have any credibility in the market. As I have said before, that only happens with a true futures market that allows everyone to manage and transfer risk.
I was reading a thoughtful article about eCommerce, and this popped out at me. Since Amazon ($AMZN) reported less than stellar earnings the other day eCommerce was on my mind. Here is the accounting waterfall to get to profitability in an eCommerce company. It’s not like traditional commerce.
Gross revenue – Returns = Net revenue – COGS = Product margin – Free shipping one or both ways = Gross margin – Customer service – Merchant processing fees – Photography – Non-shipping cost of fulfillment – E-commerce operations = Sort of contribution margin – Marketing & promotions = True contribution margin.
To get markets to originate and work, there has to be a sticky utilitarian value to them. Embedded in Bitcoin are some of those utilitarian characteristics. How does the eCommerce accounting waterfall change without Merchant processing fees? Easy, take them out. But, until Bitcoin is stable, there needs to be some costs added in. Hedging costs.
The true contribution margin of eCommerce retail is roughly 2%. That’s a thin slice of salami. Take out the processing fees and it goes up to 4-7% depending on what the firm pays its processors. Doubling profits by changing behavior is a pretty good incentive to try and get customers to change. It’s unknown what it would cost a firm to hedge, but as long as that cost is 1% or less, it’s a winner.
That signals two things to the market.
1. For eCommerce firms to compete with Amazon, incorporating Bitcoin into their strategy seems like a good idea.
2. For anyone looking to do a Bitcoin exchange that manages risk, they need to be below the 1% cost threshold to make hedging a cost effective strategy. That is entirely doable with today’s technology, although customer acquisition costs might cause the exchange to lose money in the short run.
If I were a sole proprietor stand alone retail operation, I would be looking hard at switching my customers over to Bitcoin. I’d probably provide an incentive to get them to switch. It’s money in my pocket.