Bitcoin Start-up Gets Thumbs-up from Investors; Rakes in $25 million in VC Funding

Coinbase’s user base growing at a whopping 31% each month*

As a follow-up to our earlier story about how Bitcoin has revolutionized the way digital currency works, San Francisco-based Coinbase Inc., a provider of online Bitcoin accounts and transaction services, raised $25 million in venture capital funding. The $25-million funding round was given by Andreessen Horowitz, an investment firm spearheaded by Marc Andreessen, the co-founder of Netscape. Coinbase’s existing backers Union Square Ventures and Ribbit Capital are also pooling in additional funds. Coinbase has about 600,000 users who buy, sell, and store the virtual currency online.

Rise of the titan

shutterstock_135616787Coinbase was founded in June 2012 by Fred Ehrsam and Brian Armstrong. In September 2012, Coinbase got a seed capital of $600,000 to help it cover basic operating costs

Coinbase is an online platform that allows users to buy Bitcoin, a virtual currency that uses a peer-to-peer consensus system to confirm and verify transactions. It is a medium of exchange that doesn’t require a central authority or physical tangibility to deter counterfeiters and regulate the money supply. Bitcoin can be stored in a digital wallet and used to pay merchants for goods or services. The virtual currency has garnered huge popularity in recent months, with about 300 merchants signing up with Coinbase so far, including content-aggregation site Reddit.com and dating site OKCupid.com.

Bitcom-based payment systems are poised to become the game changer in the tech world. Not at all surprising when one considers these facts: The number of people using Coinbase’s Bitcoin wallet, currency exchange, or payments platform for merchants had doubled to 600,000 in less than two months; 10,000 people are signing up every day for Coinbase’s services; and Coinbase is now the most widely used Bitcoin service in the US.

Revenue generation model

In April 2013, Coinbase claimed that about 116,000 members converted $15 million into Bitcoin, up from $1 million in January. What’s more, the volume of dollars that Coinbase is converting to Bitcoin is increasing at a rate of about 15% a week, and its user base is growing at a weekly rate of about 12%, according to Coinbase.

Coinbase generates revenue by charging a 1% fee for converting dollars into and out of Bitcoin. As more number of people use Bitcoins as an investment option as well as use this virtual currency to buy goods and services online, they will need virtual wallets, software tools, and merchant outlets that will accept the digital money.

Sensing the huge opportunity, many me-too rival companies are jumping into the Bitcoin bandwagon. Stealing Bitcoin’s thunder is start-up company OpenCoin of San Francisco, which raised a seed round of more than $2 million in April 2013.

A bit of money

Despite the several security concerns raised by regulatory bodies, Bitcoin has gained credibility last month after US law enforcement agencies said that Bitcoin could be a legitimate means of exchange in the future. Given this scenario, Bitcoin’s value has shot up to a large extent because investors are looking to cash in on its growing popularity. It is pertinent to note that Bloomberg LP, the parent company of Bloomberg News, is an investor in Andreessen Horowitz.

In addition, Bloomberg reports that California-based investor Boost VC has invested in startups such as BitBox, which offers secure Bitcoin storage, and BitPages, which lets people accept Bitcoin payments across the globe. BitAngels, an investing body that is funding digital currency-related startups, raised $6.7 million earlier this year to invest in Bitcoin startups.

Tim Draper’s DFJ Global Network, an early-stage VC fund, has invested in mobile payments provider Gliph Inc., and BitPay Inc. has raised capital from Founders Fund. The Winklevoss brothers of the US are setting up an investment trust to invest in Bitcoins. Peter Thiel, a Silicon Valley venture capitalist, Fred Wilson, who financed Twitter, and Jim Breyer, who financed Facebook, are all putting in millions of dollars into the virtual currency. Yet not everyone has faith in the Bitcoin’s bullish run and some experts believe that the bubble will soon burst.

*Source: Bloomberg, company data, and Reuters

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