Which bodes extremely well for them. They may quickly become the PayPal of bitcoin for providing a solid service allowing businesses to interface with BTC; as PayPal did for giving businesses and individuals a solid service to transact using the internet.
Does coinbase sit on the Bitcoins, or turn around quickly and convert to USD somehow (where?)?
Holding thousands of bitcoins as a startup seems like it would introduce a lot of volatility, even if the long-term prospects of bitcoin are good (still need to pay the employees).
Coinbase has an account on bitstamp where they hedge their net position. In times of high demand for btc, it sometimes happens that they run out of fiat on bitstamp and cannot process orders instantly.
I think that's old info, pretty sure Coinbase spreads around multiple exchanges now for their buys and sells. They haven't just used Bitstamp in quite a while.
Probably nothing. At worst Coinbase would only lose the fraction of their USD/BTC holdings that they have stored in Bitstamp, but they would continue business as usual.
Coinbase could abandon Bitstamp if they wanted to, since they have their own customers selling and buying coins (therefore providing a supply of coins, and a way to liquidate them). And Coinbase also trade coins on multiple other exchanges (according to their claims). This makes their overall Bitcoin trading activity decentralized with no single point of failure.
As far as the merchant end you can get the BTC turned into USD immediately if you choose. I integrated coinbase payments into my sites a few months ago. You also have the option of holding them in BTC. The technical side of what they are doing I'm not sure about that. Unless they have a huge pool of cash to buffer this money conversion they are probably selling the BTC behind the scenes.
Everyone asks the same question. It does not matter if Coinbase or Expedia "sits" on BTC they receive. As long as there are people willing to sit on them, the price is going to stay the same. The price/liquidity of BTC depends not on who exactly sits on BTC, but on number of hands that own it. More hands -> more demand -> higher price and liquidity.
Unless their employees, partners (hosting, etc) get paid in BTC, it actually does matter if they "sit" on the BTC they receive.
Many businesses and people still require to get paid in USD (EUR, etc) in order to do business. This may not always be this way, but as of today it is.
How does it matter for seller of BTC? Once you sold it, it can be owned by anyone, how is it your concern?
What's important is how many people own it. Not who exactly owns it. Today Coinbase/Bitstamp are doing good business by connecting people who want to buy BTC and sell BTC. As more people will get paid in BTC, more transfers will go directly from customer to employee without exchange intermediaries. But the real adoption does not depend on amount of transfers. That's secondary. Real adoption of money as money is in how many people hold it at every single moment of time. More people -> more demand -> more liquidity -> more value -> more trust.
And in Australia to a far lesser degree, Coinjar. I think VC-backed business in the Bitcoin space will be what eventually drives it forward, short of an amazing new concept that people can't resist such as social network, gambling, whatever.
We started with the speculation, then these companies will keep pressing business to support Bitcoin and then potentially it reaches a tipping point and has its own momentum.
