My 2 bits about the Bitcoin phenomenon

There is a lot of discussion about the BitCoin, the digital currency which is to be issued in finite quantity (21 MM Bitcoins in the next few years). The BitCoin has seen a sudden rise (and then a significant reversal) in its value over the past 2 months.

People who try to justify the value of the BitCoin point to its advantages:
1) Frictionless medium of commerce, devoid of banking interchange fees
2) Ability to conduct commerce across borders and circumvent local governmental/regulatory money restrictions

This logic holds good if the BitCoin holds its value over time or has a mildly increasing value over time (as was the case from its inception till early April 2013). Merchants who held the currency had the added advantage of BitCoin appreciation in addition to the 2 points above.

But the last few days (the decline from $266 to $120 per BitCoin) shows the risk of this 'asset' for merchants. Imagine a merchant that sold a widget worth $266 for a Bitcoin at the peak of its value. If the merchant held on to the BitCoin and exchanged it for dollars today, he would have to take a loss of more than 50%!

Clearly the lack of stability is a bigger negative than the 2 points noted above (unless you are a merchant in a country where you are willing to take the risk of getting an X% lower payment in an international currency than your local currency).

Thus I feel the usage of the BitCoin for international commerce will diminish.

Some of the latecomers to the party don't seem to fully comprehend the economics of this 'asset'. They think that the finite liquidity of the BitCoin, along with the divisibility of the BitCoin (upto 0.00000001 Bitcoins) make this a viable 'asset' class and medium of exchange (along with points 1 and 2 noted above).

I think the whole BitCoin phenomenon is similar to the Dutch Black Tulip bubble in the 17th century.

Companies that solve complex problems are issued BitCoins (similar to lucky or meticulous Dutch farmers who produced a single deviant tulip). This process is called 'mining'. These 'miners' are the only group of people on the planet who are given economic benefits by a herd of cheering 'investors', for doing an activity that adds no economic value to humankind (solving meaningless math problems).

I think this is going to end badly unless the Central bankers/ Governments caution investors against the perils of this digital tulip.

Should retailers honour rivals' gift cards ?

In December, HH Gregg announced that it would honour gift cards sold by it's now bankrupt rival, Circuit City till the Super Bowl weekend (click here). HH Gregg checks the balance on the gift card and the balance can be applied for a 20% discount on merchandise only(click here).

Similarly, Toys'R'Us announced on January 12 that it would honour KB Toys gift cards (click here). They give a 15% discount coupon in return for the KB Toys gift card: "The gift card exchange can be made at Toys"R"Us stores' Guest Service Center. KB Toys Gift Cards must be surrendered at time of purchase, and only one 15% Toys"R"Us coupon will be granted per gift card surrendered. The 15% Toys"R"Us coupon cannot be combined with any other "R"Us offer for the same item and excludes"...certain toy categories with high-value toys. KB Toys had earlier announced that its cards would be honoured only at local toy stores where they were purchased.

The business question is: "Should retailers honour rivals' gift cards?

It seems to make business sense to allow customers to use rivals gift cards, especially if the face value of the card is only allowed for a 15-20% discount.

However there are many disadvantages to an exchange program which does not check the value of the rival gif card and offers a discount on a purchase. These include:

Gift card fraud: As this NRF link (click here) shows, gift card fraud is a big issue. There are various forms of internal fraud (perpetrated by store employees) and external fraud (such as use of fraudulent credit/debit cards, cloning of gift card, etc). Retailers use advanced analytics to recognize patterns in their fraud detection programs. However detecting fraud on a rival's gift card is extremely difficult. Also if the exchange program does not check the value of the card (like Toys "R" Us), expect a flurry of fraudulent activity.

There are many websites which trade gift cards (e.g., the Star Gift Card Exchange ). They buy gift cards at a significant discount to value (click here). I would bet that a lot of fraudulent gift cards get traded in these exchanges. However these exchanges are fairly savvy about not buying cards of bankrupt retailers.

Value to the customer: While the HH Gregg exchange program offers a fair value to the customer (one might consider swapping a $X free item at Circuit City for a $X discount at HH Gregg), the Toys'R'Us program offers no value to a genuine gift card holder. Why would you exchange a $X gift card (which is accepted at a local KB Toys store) for a 15% discount on one toy (from the lower-value categories)?

I would love to hear your thoughts....