Last week Coinbase, the five year-old digital currency startup, announced it had raised $100 million in Series D funding, valuing the company at $1.6 billion. This funding round represents a major milestone not just for Coinbase, but for the digital currency industry as a whole.
Coinbase’s business strategy is to make it easier for people and companies to buy, sell, and transact in digital currencies. It does this though two broad business lines: its digital currency exchange, called GDAX, and software applications that allow businesses and consumers to connect the traditional financial system to the new digital currency world.
GDAX, which makes money by charging a small percentage on each trade, has been experiencing phenomenal growth over the last 12 months, as both trading volume and prices of digital currencies such as bitcoin and ether (this digital currency built on the Ethereum blockchain) have soared. The second part of its business has seen more qualified success. While Coinbase was successful in signing up merchants to accept bitcoin on its e-commerce site, the overall transaction flow has been low because most consumers have not yet accepted digital currencies as a payment mechanism.
For digital currencies to fulfill their promise of an open, decentralized financial system, they need to achieve mainstream acceptance. In his 1991 book Crossing the Chasm, Geoffrey Moore describes the adoption cycle of innovative technologies. As a new technology is introduced to the market, it is adopted successively by different types of participants—starting with innovators and early adopters, moving to the early majority, followed by late Majority and laggards. The innovators and early adopters recognize the potential of the technology and are willing to invest, take risks, and accept an inferior user experience and functionality while they wait for the technology to develop. For adoption to “cross the chasm” to early majority (representing meaningful mainstream adoption), it needs to offer some incremental benefit over existing technologies. Those technologies that are unable to do this will eventually fizzle and die.
While digital currencies are hitting new highs and grabbing the headlines, overall adoption for payments, remittances, and banking applications remains low. In order for digital currencies to justify their lofty valuations (bitcoin and ether currently have a combined market cap of almost $100 billion), they need to offer a use case other than just speculation. Coinbase recognizes this, which is why they indicated that the new investment will be used to improve customer experience; expand and serve a more institutional client base; and invest in Toshi, a consumer app that makes it easier for people to use digital currencies.
There have been other significant announcements over the last few weeks that signal growing acceptance of bitcoin, ether, and other digital currencies, such as the Commodity Futures Trading Commission (CFTC) approval of LedgerX to operate a derivatives exchange and the announcement that the Chicago Board Options Exchange (CBOE) has similar plans. However, Coinbase, with its attention to digital currencies as an enabling technology and not just a tradeable asset, will likely have a bigger overall impact on the mainstream adoption of cryptocurrencies.
Richard Johnson is vice president of market structure and technology at Greenwich Associates.