Gold and Bitcoin, two of my favourite things! I recently had a chat with Jay Shore, CEO of Coinabul and Jon Holmquist, Head of Marketing at Coinabul.com, about Bitcoin, gold and how Coinabul works.
Julia: What was it that got you interested in gold and Bitcoin?
Jay: I was comparing the two markets side by side, and realized there was a distinct similarity between precious metals and Bitcoin. Both have no central issuer, both have natural scarcity and supply control, both markets are highly volatile, and both are highly liquid. The main difference is that Bitcoin is easily transferred online, whereas gold is easily transferred offline. I also saw the potential for trading the Bitcoin markets day to day just like you have been able to with gold for decades, and the interesting indexes that emerged as a result of an exchange capable of supporting an appropriate conversion.
Jon: I became interested in Bitcoin by reading about poker weirdly enough. What got me interested were the few Bitcoin poker sites that popped up after the black Friday incident. Where a bunch of US based online poker sites went down because of financial restrictions. The US government was regulating how they could transfer money for players that wanted to deposit US dollars and play with real money. And what the banks and poker sites did, which was terrible, was they initiated money laundering tactics to try to get around the regulations. But these new Bitcoin poker sites didn’t even have to go through the banks. I thought it was a pretty novel solution to the problem.
After reading about it, I started really getting into the Bitcoin community and I saw gold as another extension of that initial opportunity I viewed. I’ve always liked saving, and gold is a very safe investment which is appealing to me.
Julia: Why sell people gold for bitcoins?
Jay: My motivation behind Coinabul was the obvious market demand for a secure way to store your accrued Bitcoin market gains or mining profits in a way that provides an inflation proof, Bitcoin-volatility-proof offline medium. Precious metals have proven to be a fantastic investment medium over many years, providing a safe way to store wealth without worrying about issues with long-term inflation. Bitcoin is a great way to transfer value, but can experience drastic volatility as evidenced by the crash from $32->$2 over the latter half of 2011. The need for a safe store for Bitcoin profits that has nothing to do with fiat money was obvious, and we made it our goal to provide the best possible value for long term profit storage for the Bitcoin community.
Jon: The gold industry is plagued by fraudulent transactions and chargebacks; Bitcoin eliminates any ability to counterfeit, double spend or chargeback. So there is in essence no transaction fraud that occurs on the Bitcoin network. So what this allows us to do in the gold industry is eliminate all chargeback risk which eliminates chargeback insurances, which means we’re able to cut down on our premium prices by a couple percentage points.
We’re a fairly small gold dealer and we’re able to compete with some of the largest gold retailers in the world after only a year of operation.
Julia: You and Jay Shore started Coinabul together?
Jon: Jay is the founder; I hopped on a few weeks after he started building the company. I do marketing, customer support, and some aspects of business development. Jay handles everything else, including tech!
Julia: Jay is the tech guy that has set up all the software behind your website and ordering system?
Jon: Kind of: Jay is the “everything” guy. He has upwards of a decade of web application development experience, he’s done a lot of e-commerce work, he’s done private consulting for many years and now he’s set up Coinabul. Jay has been around the Bitcoin community for a very long time. He’s trusted by just about everyone.
Julia: Who do you purchase your gold from?
Jon: We have a number of suppliers that we’ve created relationships with. It can be a bit of a hard industry to break into; you have to have a lot of personal contacts. Jay has created these contacts for us. We have relationships with specialized brokers who store large amounts of gold that they order directly from manufacturers, as well as the manufacturers themselves; both have stringent minimum quantity requirements that we must adhere to. Our products come with documentation; it depends on the manufacturer, but most of our products come with serial numbers. We only purchase our inventory from the most direct to-manufacturer route as opposed to the majority of dealers who rely on the general public to be their supply chain, exposing their customer base to the risk of counterfeit products.
Julia: What personal information do you collect from your customers? If I purchase some silver coins from you guys, what information are you going to ask me for?
Jon: We collect shipping information and we require an email if you want to open up an account. We ask for only what we need to ship gold to our customers in accordance with our AML policies, and for most customers this tends to be very little. Sometimes shipping companies will require an ID on location, for your safety and ours. With Bitcoin we can accept international payments easily. This means transferring funds from somewhere like the European Union to the US costs less than a penny with Bitcoin. We have a lot of international customers which means we are dealing with customs pretty much every day, and have the export process down to an art.
Julia: So Bitcoin allows you to operate globally largely because it significantly reduces the cost of international payments?
Jon: Yup! That’s part of what makes Bitcoin so exciting.
Julia: Bitcoin exists in a legal grey area at the moment. What has it been like trying to comply with applicable legislation?
Jon: I’m not the legal expert, but we have a very good lawyer and Jay oversees the legal issues. We are compliant and we make an effort to follow all applicable regulations, and have internal KYC/AML policies that help keep everyone protected. In essence, we’ve structured all of our policies such that we are in compliance with stringent regulations that technically are not even applicable in order to maintain the highest level of safety for us and our clients.
Julia: Do you worry that at some point Bitcoin may become illegal or regulation may become so burdensome that you might have to close shop? Do you have plans for such events?
Jon: Bitcoin has helped to create a really strong foundation for us, but we’re not solely a Bitcoin business. We’re currently working on plans to integrate US dollar payment options. We are looking at other payment options that similarly to Bitcoin are hard to charge back so that we can keep our costs down.
If Bitcoin does become illegal we will discontinue it as a payment option. But the Bitcoin protocol is adaptable and if there is a new version of Bitcoin was developed that is legal under this hypothetical ruling, we will adapt and use that.
With the launch of the Bitcoin foundation, I think Bitcoin is in a better place that it’s ever been.
Julia: I would think that any payment option in USD would go through the traditional banking system and be subject to chargeback fraud. What payment services or options are you considering?
Jon: That’s the initial problem with USD, pretty much every payment method has some sort of chargeback process. So, we’re trying to find the methods that are the most difficult to reverse.
Julia: Bitcoin can be very volatile. How do you guys manage that risk?
Jon: Once we receive Bitcoins they enter our special market risk mitigation system to ensure as little volatility risk as possible, despite the sometimes inordinate volatility we can experience day-to-day. But the name of the game is really to eliminate as much currency risk as possible on both sides of the equation. On our website, our prices update both with the gold spot and with the Bitcoin spot. We have two spots running all the time. This means that if Bitcoin and gold move in opposite directions of one another there are huge opportunities for gains or losses for our customers.
We have an API that allows you to order from our site without having to interact with our site at all. Some of our customers use our API to create bots that wait for a market opportunities.
Julia: What is Coinabul’s sales volume?
Jon: We just released our first year statistics. We sold roughly 140,000 BTC worth of product in our first year. That’s about $1.7mil US, which solidly places us as one of the largest Bitcoin businesses.
Julia: Where are most of your customers based? Where do you ship to most often?
Jon: We get a lot of customer in the States, but I’d say it’s about 50/50 US and international. We get a lot of customers from the UK, and the Netherlands, occasionally we ship to Asia. We’re seeing a fair bit of growth in the South American market as well as the rest of Europe, Eastern and Western.
Julia: What plans do you have for Coinabul in the next year or two?
Jon: We would like to begin competing with the bigger players in the industry. Our first year has been spent creating an initial foundation of customers and gaining the confidence of the Bitcoin community. Our first few months were just about earning the market’s trust as everyone is initially dubious of the first player in a high-value market like gold. But now we have hundreds of customers, community trust and we’re one of the only merchants verified by Mt. Gox, the largest Bitcoin exchange.
Our long terms goal include taking our processing time, which is currently 1-2 weeks, to about 24-84 hours. Once we have that turn around we will be a lot more appealing to a lot more consumers as customers will then be able to order and have their gold within three or four days.
Julia: How big of a company is Coinabul? How many employees do you have?
Jon: We currently have 8 employees, but will likely have to expand our workforce substantially within the coming year.
Julia: Do you own precious metals and Bitcoin yourself?
Jon: I prefer silver and I’m very, very long on Bitcoin. Jay is a big metal-bug and has also been into Bitcoin for a really long time so has a fair few himself. Everyone at Coinabul is enthusiastic about Bitcoin. A lot of Bitcoin companies encourage accepting your pay check in Bitcoin. It supports the Bitcoin economy. But I don’t think anyone should be putting their kids college fund in Bitcoin right now.
Julia: Do you see Bitcoin and gold as money? Do you think in ten years you’ll be using Bitcoin or gold to pay your mortgage?
Jon: I personally do not see Bitcoin as money. I think it is a way to transfer funds securely and rapidly. It is quite frankly a better bank wire. So, a Bank Wire 2.0, only without the banks. Gold, at this point in time, is very similar. However, since it cannot be moved quite as rapidly, locally or internationally, I think of gold as more of a reserve or an investment choice. I doubt Bitcoin will ever be something I buy my groceries with, but I could see it being used as a tool to make large payments, such as mortgages or cars. Gold’s future is unclear, I think in the current economic turmoil that anything could happen.
Now, there is a huge opportunity for something Bitcoin-esque to make an appearance in the future that is more user-friendly focused on micro-payments and consumer payment processing. I think that the idea that Bitcoin has sparked will put a lot of credit cards in the shredder.