Real money starts to pour into math-based currencies like bitcoin

Image: AP Photo / Mary Esch
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Chris Dixon, a partner at the venture capital firm Andreessen Horowitz, posted this brief observation on Tumblr the other day:

Three eras of currency
Commodity based, e.g. Gold
Politically based, e.g. Dollar
Math based, e.g. Bitcoin

Now Dixon’s firm and several other well known investors are putting some money—in this case, politically based US dollars—behind their conviction that the future of money is in “math-based” currencies like bitcoin. OpenCoin, a San Francisco startup that runs its own math-based currency, just announced a round of funding from Andreessen Horowitz, Founders FundLightspeed Venture Partners, Vast Ventures, and Bitcoin Opportunity Fund. News of the round was embargoed until this morning, and its size wasn’t disclosed.

The currency operated by OpenCoin is called “ripple.” Like bitcoin, it’s both a currency and a network for facilitating payments that relies on cryptography to run smoothly. Thus, math-based currencies: They are backed by one’s faith that the math works rather than trust in government or a metal’s inherent value.

But Ripple uses a different method of verifying that the network is sound and takes a novel approach to payments, allowing for transfers between other currencies, as well—from euros to bitcoins to heretofore fictional currencies that you might invent among friends. (Chris Larsen, CEO of OpenCoin, demonstrated to me a currency he created based in bicycle wheels that he trades with a coworker over the Ripple network, a sort-of absurd but logical extreme of what’s possible.) Bitcoin is also a payment system but only for transfers of bitcoins; exchanges with other currencies are done elsewhere.

There are 100 billion ripples—yes, that’s completely arbitrary—currently trading at about 1,000 ripples per US dollar among 3,349 accounts, as of this writing. That makes it much smaller than bitcoin, in terms of participants and transaction volume, but on the bright side, trading in ripples is less volatile than bitcoin.

OpenCoin intends to hold onto 25% of all outstanding ripples, Larsen said, with its business model staked on the hope that the value of the currency, or future currencies it may create, will rise. So in a sense, the venture capital firms investing in OpenCoin are investing in virtual money.

But another way of thinking about this round of investment is that Andreessen Horowitz and others foresee a day when math-based currency won’t just make your head hurt. They’re betting that it will be a mainstream way of thinking about money. As Dixon wrote in another recent blog post, which mentioned bitcoin, “What the smartest people do on the weekends is what everyone else will do during the week in ten years.”