Bitcoin

Imagine you could send your money from one part of the world to another in a matter of minutes and without paying outrageous fees to the banks. Bitcoin is an innovative way to do this. It was invented by Satoshi Nakamoto in 2008 and published as open-source software. Bitcoin is a peer-to-peer system that does not rely on any centralized authority to supervise transactions. The security and certainty of these transactions are guarded against by the use of high-level cryptography. There are several ways to obtain bitcoins, including exchanging them for another currency, services or products, or by making available processing power of your own computer to verify and record transactions into the public ledger. Although merchants are increasingly accepting Bitcoin, it has yet to grow significantly in the retail space. The reason is that although it offers much lower fees than the 2-3% charged by credit cards, those fees are borne by buyers and not by vendors. Another major obstacle to its acceptance has been the negative press it has received, due in part to its use in payment for illicit goods.

About Circle

Circle is a Bitcoin startup run by Jeremy Allaire. It offers the users a digital wallet through which they can send money to people with any other digital wallet. The service aims to resolve the problem of having to pay bank transfer fees which range from 15$ to 60$ and waiting for 2-3 days for the completion of payment. Circle offers different services to help consumers buy and hold Bitcoins, with the main aim of creating a virtual platform where its customers can easily transfer money both domestically and internationally through its computer network in a cheap and quick way, avoiding any fees. Circle’s edge on the competition is that it offers seamless and instant US Dollar and Bitcoin conversion, and a stable and insured platform. Future monetization remains a large hurdle.

 

About Goldman Sachs

The Goldman Sachs Group, Inc. is a leading global investment banking, securities and investment management firm that provides a wide range of financial services to a substantial and diversified client base that includes corporations, financial institutions, governments and high-net-worth individuals. Founded in 1869, the firm is headquartered in New York and maintains offices in all major financial centers around the world.

 

The Deal

On Wednesday, Goldman Sachs made public its commitment to invest $50m into Circle Internet Financial, in what has been interpreted as a “vote of confidence” by Jeremy Allaire, co-founder and CEO of Circle.

Circle had previously received other funds from venture capital firms like General Catalyst Partners, Breyer Capital and Accel Partners, but Goldman Sachs is the first major investment bank on Wall Street making such a substantial investment in a Bitcoin-focused company.  The investment brings the total fundraising of the startup up to around $76m. In partnership together with Goldman Sachs, IDG Capital Partners, a major Chinese investment firm, is co-leading the financing round.

The company is trying to squeeze in the rapidly growing industry of peer-to-peer payments, currently led by companies like Venmo, a PayPal-owned application, which allows its users to quickly transfer money among each other, though still not on an international level – unlike Circle’s strategy. Here, the role played by IDG Capital and Goldman Sachs is to provide capital in order for the startup to expand across borders and, especially, to break into the Chinese market.

Notwithstanding a decrease in the public interest for the virtual currency, whose price on Wednesday was floating around $225 – far below its peak of $1,200 in 2013 – financial institutions still have demonstrated a particular interest for this new technology which might now be further ignited after Goldman Sachs’ significant investment, ahead of competition. In the past year many professionals all around Wall Street have placed their bets joining Bitcoin ventures and in January the announcement of a major investment of the NYSE in Circle’s rival Coinbase, another platform for trading virtual currency.

Circle is planning to use the fundraising for product development and expansion both domestically and internationally, marketing a new feature that would enable its users to hold, send and receive U.S. dollars as well as Bitcoin with no fees charged by payment processors and money transferees.

 

Rationale

Despite reduced interest in Bitcoin following the astonishing bubble of 2013, investors are starting to take a second look at the cryptocurrencies.  However, this time the curiosity is not due to currency’s inherent value, but rather for the underlying system’s capabilities as a payment mechanism.

This appears to be the case with Goldman Sachs, where the interest is deemed to be in the technology more than the currency itself, the strategy being to invest in “companies and solutions that have the promise to transform global markets through technical innovation”, as declared by Thomas F. Jessop, head of the principal strategic group at Goldman. Further pointed out by Yahoo Finance Technology reporter Aaron Pressman, “Goldman isn’t interested in speculating in Bitcoins. It’s focusing on how Bitcoin operates.”

It may be however, that the decision to back Coin in the already hugely competitive market for payment platforms represents a much more strategic approach. With giants such as Apple, Google, and eBay competing alongside a slew of additional startups, it is not clear how the future of payments will look. Goldman may be positioning itself as to hedge against the risk of being caught-out in any one of the possible eventualities. If Bitcoin really is the future of payments, then Goldman will no doubt be rewarded.

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