Several prominent venture capital firms are actively looking at investment opportunities in the bitcoin industry. The four year old virtual currency whose value exploded from less than a dollar in 2011 to about $260 this year is in the watch list of several venture capital firms including Facebook backer Andreessen Horowitz, Twitter backer Union Square Ventures and prominent venture capital firm Bessemer Venture Partners. The strong interest in the virtual currency comes as investors see early signs that bitcoin could be adopted as a mainstream currency for retail payments.
The Bitcoin Appeal
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The primary appeal of the virtual currency such as bitcoin is the low transaction fees when compared to transacting with credit cards or debit cards. The lower transaction fees are a result of one on one direct transaction that happens without the involvement of a middleman such as a bank. In addition, bitcoin allows free micro transactions such as buying a single candy bar that would be considered too small to do with a credit card or other electronic payments. The bitcoin currency system also protects against forced devaluation as governments have no ability to create new supply of the currency.
Some fund managers in the Silicon Valley see a huge payoff potential in bitcoin equivalent to that of social networks in the recent years. Jim Breyer, a partner at venture capital firm Accel Partners and an early investor in Facebook says he expects retailers to adopt systems built on bitcoin.
In some investing circles, the buzz around bitcoin is so great that it is reminiscent of the early Internet age. Micky Malka, founder of venture capital firm Ribbit Capital has already invested in three bitcoin firms and says “What keeps me up at night is ‘are we missing out on investments?’ because if this is what I think it can be, we will regret not being even more active,”.
Jacob Farber, a senior counsel at Chicago based law firm Perkins Coie says, “There’s been a changing of guard from a small circle of early adopters to serious business people with funding, who see Bitcoin as a payment system and a way of building a business and are not just in it for purely philosophical reasons.”
Notable Recent VC Investments
In October this year, Boston based Circle Internet Financial, which offers payment acceptance tools for merchants and a place for consumers to buy, sell, receive, and store bitcoins announced that it raised $9 million from venture capital firms Accel Partners and General Catalyst Partners. This was the single biggest bitcoin investment till date. In May, venture capital Union Square Ventures invested $5M in bitcoin startup CoinBase. Research firm CB Insights published data that in the three months ended June bitcoin startups raised $12 million in venture capital in seven deals, compared with only five deals totaling less than $2 million in the previous four quarters.
Though the amount of venture capital financing in the bitcoin market is modest compared with sectors like social networking, it should be noted that the increasing investments into bitcoin are happening against the backdrop of the threat of government intervention to restrict bitcoin activity. Industry insiders estimate that between $65 million and $100 million are available for funding. The number of bitcoin startups in the United States is estimated to be in the hundreds.
Impact On Job Market
The increased involvement of venture capital firms in the bitcoin market is a reflection of the changing perception towards the virtual currency as a contender for mainstream use. Given the increasing acceptance of bitcoin among merchants, it is likely that venture capital investment in the bitcoin domain will continue to grow though big money will come only when the uncertainty related to government threat is removed. The active participation of venture capital firms in funding bitcoin companies is a definite positive as it opens up new job opportunities especially in the compliance and software domains.
