Big-Name Investors Back Effort to Build a Better Bitcoin

The value of a Bitcoin has grown in the four years since the digital currency was invented, but there’s been little interest from mainstream business or technology investors in using it.

News today from OpenCoin, a startup that today launched its own digital currency called Ripple and tools for making transactions in other currencies, including Bitcoins, suggests that may change. The company says it has attracted early investments, of an undisclosed size, from established venture capital firms including Andreessen Horowitz, which reportedly made over $100 million when Microsoft bought Skype, and Lightspeed Ventures, one of the first investors in networking company Nicira, which sold to VMWare last year for $1.6 billion. OpenCoin has also received investment from the early-stage wing the Founder’s Fund, a venture firm owned by PayPal cofounder Peter Thiel.

Ripple, the currency developed by OpenCoin, is similar to Bitcoin in that it uses math to prevent counterfeiting and fraud. However, Ripple has features intended to make it more practical to use, and that enable Ripple to be used to make transactions with existing currencies. One major difference is that transfers made with Ripple can be confirmed in seconds; Bitcoin transfers take, on average, 10 minutes to be confirmed, and many sites that accept Bitcoins make users wait an hour for confirmation of their transaction.

“Bitcoin is focused more on the currency and less on the payments system,” says Chris Larsen, a cofounder and CEO of OpenCoin. “We’re trying to offer both.” Larsen previously founded the online lending and savings company e-loan, and founded OpenCoin with chief technology officer Jed McCaleb, who created the once-popular file sharing client eDonkey as well as the largest Bitcoin exchange, Mt Gox. OpenCoin currently has 14 employees.

The company’s website for Ripple is more polished and easy-to-use than most sites built for Bitcoin users. As well as sending Ripples to other people, users can also send and exchange U.S. dollars, Euros, Bitcoins, and other currencies using the site. Ripple’s design has those transactions automatically routed through exchange companies that are working with OpenCoin. Tools are also available to allow others to offer software or websites that make use of Ripple.

Transferring Ripples is free, while transactions that involve converting between currencies involve small transaction fees—typically 0.02 percent. That’s significantly less than the fees levied by existing financial companies, such as PayPal, credit card issuers, or banks, says Larsen, an advantage that he says will lead to online merchants experimenting with Ripple, and one that attracted OpenCoin’s investors.

“You can send e-mails for free, but not payments,” says Larsen. “Finally we might get finance to the place where e-mail or social networking has taken communication.”

“OpenCoin’s Ripple protocol, which enables free instant global payments in any currency, including Bitcoin, supports many of the advantages of a math-based currency like Bitcoin while also addressing some of the drawbacks,” says Jeremy Liew, managing director of Lightspeed Venture Partners. If math-backed currencies are made useful, as OpenCoin is trying to do, they will last, he says.

In recent years, technology investors have shown a lot of interest in payments companies such as Square and Dwolla, eyeing the lucrative transaction fees levied by credit-card companies. However, OpenCoin has a very different business model, since the company does not control Ripple even though it created it. OpenCoin plans to hand out some 50 billion Ripples in coming months, and more in the future, in an attempt to get the currency to function independently. Larsen says his company aims to turn a profit by retaining a chunk, likely 25 percent, of the total 100 billion Ripples that will ever exist, in the expectation that the currency gains value.

There are already signs that Ripple is finding favor with some devotees of Bitcoin, yet convincing people and companies outside that community to start using currency not issued by any government will be a tough sell.

Liew, of Lightspeed, notes that Bitcoin has already made significant progress. “While consumer usage is still largely confined to hobbyists, large Internet companies are starting to accept payments or donations in Bitcoin, including Expensify, Wordpress, and Reddit.”