3 Forces Shaping Next-Generation Bitcoin Exchanges
Recent bitcoin exchange funding deals reflect potential trends in that growing market.
Investors and venture capitalists have developed a healthy appetite for funding bitcoin exchange services in recent months.
As the exchange system represents a key element of the broader bitcoin economy, it’s unsurprising that these companies are able to secure working capital. A closer look at recent news events, however, reveals that underlying trends may be a motivating factor.
In the aftermath of Mt Gox’s much-publicized collapse, a new breed of exchanges has moved to fill the vacuum previously occupied by what was once the most popular bitcoin exchange.
From China to Silicon Valley, the companies behind the world’s most active bitcoin exchanges are raising funds and using those resources to build and deploy stronger and more user-friendly platforms, ones that go beyond Mt Gox in many key ways.
Overall, the funding rounds reflect three trends currently at work in the exchange space. Today's bitcoin exchanges are internationally focused, institutional investor-approved and compliant (or as much as possible) with local laws.
1. International markets
In the time since, the company has put that funding to work. As revealed in subsequent conversations with CoinDesk, OKCoin has begun to make big investments in its international services with an eye on capturing a significant market share outside of mainland China.
Today, the firm has roughly 100 employees and has even hired key talent from the US market in conjunction with its expansion.
From a broader perspective, exchanges can utilize funding to help integrate with the traditional financial system. This process also give exchanges the resources to build services that make it easier for users familiar with other platforms to interface successfully.
As noted by Changpeng Zhao, OKCoin’s chief technology officer:
2. Investor interest
Though it wasn't announced until March, Bitstamp raised $10m in new funding from Pantera Capital Management in 2013. The move gave the Europe-based bitcoin exchange a significant boost during a time of significant evolution in the exchange marketplace.
During the period Bitstamp purportedly received the funding, bitcoin exchanges were seeing larger volumes in response to the rising price of the digital currency. This was also a period of increasing interest among deep-pocketed investment groups, and Pantera’s deal would be the first of many to come.
The hedge fund itself further reflects its growing institutional interest in digital currency. Pantera is a bitcoin-focused investment fund formed in conjunction with Fortress Investment Group, Ribbit Capital and Benchmark Capital.
3. Legal realities
The Series A round was led by Hummingbird Ventures, an early-phase VC fund. Given the international – and 24-hour – nature of the bitcoin market, Kraken and other exchanges look to funding as a way to expand internationally. Yet, this deal also highlighted another major expense that bitcoin exchanges have to contend with: legal compliance.
Kraken CEO Jesse Powell told CoinDesk when his company announced its $5m round that, ultimately, much of that funding would be directed toward legal expenses.
Powell added that companies in the exchange sector no doubt face increased scrutiny due to the nature of their business and the still-developing regulatory environment for bitcoin.
As a result, it’s possible that exchanges may require additional resources in the future to maintain compliance.
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