Nov 30th, 2012 by JoeC
I have been using Coinbase to buy bitcoin lately and have found it to be the simplest, lowest cost, if not the fastest alternative for online purchasing I have tried. They use convenient and very low cost (15 cent) ACH transfers to withdraw money from a bank account you designate to buy bitcoin, or into which to deposit money when you sell bitcoin. Because of the ACH transfer, it currently requires a US bank account. Their fee is only 1%, which is much lower than other services like Bitinstant, which charges 3.99% and also entails “surprise” charges by other intermediaries like TrustCash, which can raise the total charge to over 10% depending on how much you buy.
No worries, mate
Beside the low cost, a big attraction of Coinbase for me is its one step simplicity. Aside from my own bank, there are no intermediary institutions or services involved. Other exchanges require one to make a cash deposit into, for instance, a Bank of America branch, this then becomes a Trust Cash voucher, which entails its own fee, which is then sent to the exchange, which extracts yet another fee. At every stage, I worry that something’s going to go wrong, or I will have done something wrong without knowing it and I’ll end up in a finger-pointing argument where no one wants to take responsibility and meanwhile, I’m out the money.
Coinbase relieves me of these worries. When I input an order to buy, I’m told exactly how much will be deducted from my bank and I’m notified by email when the order completes. I can monitor the progress of the order on the site and even cancel uncompleted orders if necessary. There are no flaming hoops to jump through, no other “surprise” services or fees involved.
Another reason I like Coinbase is that it’s backed by Y Combinator, the high-tech seed fund. This certainly lends it a lot more credibility and trust that it’s not some fly-by-night operator with no experience in running such a business.
But, no free lunch
The downside of Coinbase is that it’s slow. I have been experiencing 3 or more business days delay between placing an order and having the bitcoin I purchased be available to me. This is due to the ACH transfer time and the old, creaky traditional banking system. If you use PayPal you’re familiar with this delay when moving money into or out of your attached bank account. Also at this time, Coinbase limits orders to $100/day, although one can issue orders over successive days even while there are outstanding earlier orders. So in theory, one could have as much as $300-$500 “in transit” simultaneously. Note: the $100 limit will be lifted in the near future. See the Q&A below for more details.
For this reason, Coinbase would not be, at least at this point, a a reasonable API to use for instantaneous transfers in and out of dollars for people who don’t want to deal with bitcoins directly. Services like BitPay exist to do just this.
But, to buy bitcoin as an investment or to simply build up one’s reserve to make a big purchase, using Coinbase is a simple, cheap and in my experience, trustworthy way to do it.
Also, I think the time is coming soon when “auto-fill” bitcoin clients will be available that keep your bitcoin wallet topped-up with a certain amount of cash by issuing low-limit purchase orders to a service like Coinbase and automatically transfer the bitcoin into your wallet. Further, I think the time is coming when people will make purchases and publish prices directly in bitcoin, rather than their local currency.
A few days ago, I had the opportunity to ask a few email questions of Brian Armstrong, the principal of Coinbase. He very kindly took time out to answer them.
Q&A with Brian Armstrong
Your site seems to indicate you’re pretty much a one-man operation so far. True?
Yes and no – I’ve been working with a number of contractors, but so far I’ve been the only full time employee. That looks like it will be changing soon though as I’ve been ramping up hiring efforts.
What was your background coming into coinbase? Financial industry? Pure
I studied computer science and economics at Rice University in Houston, TX. I’ve worked at some larger companies like IBM and Deloitte, but my most recent experience working at another Y-Combinator startup (Airbnb) was most helpful because I was working on their fraud prevention systems. Airbnb moved a large amount of money all over the world and dealt with some significant fraud challenges. It was also just really fun to work on a startup, so that is partly what gave me the confidence to apply to Y-Combinator with the idea and start my own.
Now that you have ACH transfers working, have you seen a marked increase in users?
Yes, adoption has been great – it may be the easiest way to buy and sell bitcoin in the U.S. right now since it’s a consumer friendly payment method. Once we raise the daily transaction limits it will be more viable for larger purchases.
What was the most difficult part of integrating ACH transfers?
Both fraud and compliance played a big role here. I don’t want to get into too many details, but suffice to say it was a challenge and I’ve spent a lot of time investing in our relationships with these partners.
Has your relationship with YCombinator made a difference in getting ACH approvals, or any other aspects of running the site?
Yes, I think it helped a great deal. Y Combinator has been amazing providing mentorship through this process, and I’d highly recommend the program to anyone interested in starting a tech company.
You’ve said that the majority of users funds are kept offline. Does that mean the bitcoin wallets are offline?
We don’t use the standard client with wallet.dat files – we’ve coded a custom bitcoin client – but each user does have their own wallet, which is just a collection of addresses. What we keep offline is specifically the private keys of our offline addresses. These are stored in safe deposit boxes at the bank, encrypted, on three USB drives and with paper backups.
When will it be possible to have transfers made directly to a bitcoin address the user adds, rather than the server wallet you maintain?
Would this mean uploading your own private keys (and therefore your own addresses)? If so, it’s a feature we’d like to add, but it hasn’t been the most requested so it hasn’t made it to the top of the list yet.
Do you run mining servers? Why or why not?
No, I don’t do any mining personally, nor does Coinbase. We have our hands full running a wallet, so we’re leaving this piece to the professionals!
Do you envision any new functions or services to add to your offering?
Yes, plenty But we typically announce them on the blog once they’re ready so I don’t want to share any details yet.
When do you foresee raising the $100/day limit? By the way, does that allow for multiple trades totaling more than $100, but in different stages of completion?
We definitely want to raise those limits, and will most likely do so in the next 2-3 months (don’t hold us to a specific date just yet – but that is the goal). Yes, after your first trade completes successfully you can do $100 each day, even if the previous ones have not completed yet.
What are your goals for coinbase? Merely volume and size?
Our goal is to make bitcoin easier to use, and (longer term) to help bring fast, cheap, international payments to the whole world. Bitcoin represents a fundamental leap forward in payment technology, and it’s going to bring massive efficiences to many areas of commerce. The best way we can contribute to this is to make it easier to use for non-technical users and merchants. So that is a big goal. I expect we’ll spend many years on that before running out of ideas.
What kinds of API apps would you like to see?
Mobile! This is the next logical step. But after that I think the API will be used by merchants in a number of interesting ways. I’d like Coinbase to become more like a platform where thousands of apps can be build on top of it (many of which may make no mention of bitcoin itself to end users). Bitcoin could almost act like a glue, hooking together the various payment methods of the world, and leading to greater efficiency.
Do you have any plans for exploiting the scripting capability of the bitcoin server code?
Not yet since there are plenty of smaller/more obvious things we need to build first. But scripting is one example of what makes bitcoin so powerful and I think a lot of cool innovations will come out of this down the road.
Hope it helps and thank you for the opportunity!