Jeremy Allaire(Founder, CEO, and Chairman of Circle Internet Financial) provides an overview of the problems with legacy payment systems, the core innovations of bitcoin and digital currencies, and current and emerging applications of the bitcoin protocol.
Bitcoin is a new currency that was created in 2009 by an unknown person using the alias Satoshi Nakamoto. Transactions are made with no middle men – meaning, no banks! There are no transaction fees and no need to give your real name. More merchants are beginning to accept them: You can buy webhosting services, pizza or even manicures.
It’s not surprising Apple is rethinking its policy to allow its apps to accept virtual currency payments. Retailers, including Lord & Taylor, Overstock and TigerDirect, are syncing operations to make it easier for consumers with digital wallets to transact business with the cryptocurrency. The trend has venture capitalists bullish on bitcoin. Already, San Francisco Bay-area bitcoin start-ups have received more than $200 million in VC funding, and the number continues to grow.
Mining pools, such as the heavily funded super-secret 21E6 in San Francisco, are apparently going long on bitcoin by mining as many bitcoins as they can, making the bet that its value will exceed mining costs. 21E6 has raised at least $5 million in venture funding.
The second aspect of bitcoin that is exciting the venture capital community is the idea of consumers using the currency as a means of payment. Well-funded start-ups, such as BitPay, Coinbase and SnapCard, are trying to make bitcoin payments and purchases easy for the masses—both online and at brick-and-mortars.
Digital currency payment start-ups is where a lot of VC dollars are being funneled. BitPay recently closed a large round of funding led by Index Ventures. Coinbase may very well be the top-funded bitcoin start-up, with more than $30 million in venture funding to date.
BitPay has more than 30,000 enabled merchants in its network, with about 10 percent of those actively executing a bitcoin-based purchase in any given month. According to the start-up’s co-founder, Stephen Pair, there is a direct correlation between price rises in bitcoin and the transaction volume among merchants that accept it.
As the digital currency’s price remains relatively volatile, that may not bode well for the short-term prospects of their merchants in increasing the volume of consumer bitcoin transactions. BitPay also believes that, ultimately, business-to-business transactions via the currency will be a much larger market for them versus consumer transactions. Given the large cost of international wires and currency exchange, they may be right.
All this speculation in this new form of currency has led to the problem of how consumers manage their bitcoin holdings. I spoke with one investor, who told me he has dozens of bitcoin private keys (secret protective pass codes) and isn’t certain where they all are. That’s the digital equivalent of saying that you’re not sure where your money is kept. Start-ups like Xapo, Armory and, of course, Coinbase are hoping to address this problem by offering digital wallets to help consumers securely store their virtual currency savings.