As this is written, news broke that Andreessen Horowitz, a Silicon Valley–based venture capital firm with $2.7B under management, led an investment of $25M in Coinbase Inc., a provider of online bitcoin accounts and transaction services.  With this, Coinbase achieved its second round of funding, and one in which existing investors Union Square Ventures and Ribbit Capital also took part.


Bitcoin: Economic protocol for the Internet

The Andreesen Horowitz website puts bitcoin in an interesting perspective:

“The press tends to portray bitcoin as either a speculative bubble or a scheme for supporting criminal activity. In Silicon Valley, by contrast, bitcoin is generally viewed as a profound technological breakthrough. The Internet is based on a set of core protocols that specify how information such as text, photos, and code should be transmitted. The designers of the Web built placeholders for a system that moved money, but never successfully completed it. Bitcoin is the first plausible proposal for an economic protocol for the Internet.”

This is a resounding leg-up for bitcoin, which has been facing adverse publicity on account of rampant speculation and governmental crackdowns on its rapid spread.

JP Morgan’s me-too cryptocurrency

In the second development, the Financial Times reported yesterday that JPMorgan Chase & Co. (NYSE:JPM) filed a patent application with the USPTO for a computerized payment system that has a number of features that are similar to bitcoins:

–       Anonymity. No names or account numbers need be provided.

–       Virtual and electronic. Digital cash would be stored in an online wallet.

–       Transaction trail. A public record of the transactions would be created, akin to the “blockchain” code of bitcoins.

The patent application describes the invention as a “method and system for processing Internet payments using the electronic funds transfer network.”

Why bitcoins could fail

Obviously, the action in cryptocurrencies is heating up, but renowned banking analyst Richard X Bove, of Rafferty Capital Markets, struck a note of caution earlier this month. He said the fledgling bitcoins could either fail because of destruction of their value due to speculation, or if a single player secured 50% or more of the market.

Was Bove prophetic?

Last week, the People’s Bank of China placed a ban on Chinese financial institutions buying, selling or quoting a price on bitcoin, saying the cryptocurrency posed a threat to China’s financial stability.  The step was aimed at protecting the status of the Chinese yuan as the statutory currency.

The move sparked a panic in the bitcoin market and its price crashed from a recent high of $1,240 to a low of $576 on triple its normal volume.

According to Bove, his apprehensions were proved correct. “The volatility in the coin’s price combined with the fact that one government could have such a significant impact on pricing pointed out the two weaknesses that I had outlined,” he says in a follow-up note issued yesterday.

Bove on the future of cryptocurrencies

Despite his above misgivings, however, Bove is rather confident on the future of crytocurrencies, saying that even bitcoin fails, other (or multiple) cryptocurrencies would rise to take its place. “Make no mistake one or more digital currencies, which are not controlled by governments, are coming,” he says.

Bove on JP Morgan’s patent application

Bove is candid that he had not expected a “powerhouse like JPMorgan” to make an entry in the digital cash arena. If JPM’s patent is approved the bank would derive a massive advantage in cryptocurrency and there could a real threat to traditional payment systems such as credit and debit cards.