Betting on Bitcoin: Coinbase Wants to Be the PayPal of Internet-Only Currency

Does an Internet-only currency — not backed by any government entity — have a chance to become the way merchants and consumers transact business?

Coinbase not only believes so, but it has talked investors into giving it some start-up capital to build a much easier way for nontechnical users to pay with Bitcoin.

For those of you who don’t know (and let’s assume that’s a lot of you), Bitcoin is an Internet-created digital currency designed to avoid fees for transferring money and to eliminate the need for credit card companies.

Instead of being backed by gold or a government entity, Bitcoin is a bit of a rogue movement that creates value by solving mathematical calculations. The difficulty of solving the problems is what triggers the value, because of scarcity.

Since the open source concept was started in 2009, Bitcoin has experienced a wild ride.

On one side of the coin, it has been reported that Europeans have turned to the currency in fear of losing their savings in the collapse of countries like Greece and Spain. But on the flip side, the currency’s underlying value has fluctuated dramatically, and security breaches have occurred. Frankly, the whole thing could collapse if the community no longer decided to support it.

But this story isn’t about Bitcoin.

It’s about Coinbase, the company founded by Brian Armstrong, who is part of the current class of start-ups being incubated at Y Combinator. Armstrong has three months to get his company off the ground, at which point he will have the opportunity to pitch a roomful of investors on why Coinbase is worth putting even more money into. So far, he has raised $164,000.

“YC’s investment is a signal that legit investors are taking Bitcoin seriously, and I think it has a real chance of disrupting the payments industry,” he said.

The idea behind Coinbase is to make it a lot easier for less technical users to exchange coins.

It’s a bit like PayPal, where you can send and receive money using an email address, which is connected directly to your bank account. Armstrong also plans on making it easy for the functionality to be integrated into a shopping cart, or “buy” buttons on the Internet. He said merchants will be willing to adopt it, because it will reduce transaction fees.

Right now, transferring Bitcoins pretty much requires a PhD, or something close to it.

Armstrong knows that all too well. On a recent occasion, a bar in San Francisco’s Mission neighborhood hosted a meet-up to buy a beer with Bitcoin. “It was not as easy as it should have been,” admitted Armstrong, who said it required accessing Coinbase on his mobile browser and then copying and pasting a QR code from an app into the mobile browser.

In the end, he paid one Bitcoin for one beer — roughly $6.50 for a beer that normally costs less than five dollars (without a tip).

“It was kind of cool, but it was probably impractical,” he said. “We are making the long-term bet that a digital currency is going to be powering the transactions in the future.”