Could Bitcoin's frothy venture funding dry up?

Recent regulatory developments could slow the pace of investments in 2014, one expert said

Bitcoin: What is it, really? A digital currency? An investment? An Xbox game? For many people it's not clear, but that hasn't stopped venture capitalists from going gaga over it.

Since earlier this year, startups dealing in the technology known as Bitcoin have grabbed millions of dollars from some very prominent Silicon Valley VC firms. The amount totals at least some US$50 million, all for a technology that could be gone, or pushed deep underground, if financial regulators decided to ban it.

Half of that $50 million went to Coinbase earlier this month in a major funding round led by Andreessen Horowitz. Coinbase acts as a Bitcoin bank of sorts, providing a suite of services including an exchange for buying and selling bitcoins, a payment processor, and a so-called wallet service for storing bitcoins.

Other startups attracting investor interest since May include BitPay, another payment processor that lets online merchants accept payment in bitcoins; Circle, which offers its own payment acceptance tools and an exchange; itBit, yet another marketplace for trading bitcoins; and BTC China, which has been described as the country's largest exchange but recently was forced to stop accepting deposits after banking regulators took action.

During one particularly manic period in late November, Bitcoin was trading on some exchanges for well over $1,000 -- now it's down to about $625, according to CoinDesk, which measures its per-minute value based on various criteria.

Some bankers and regulators appear to be on the technology's side as well. In an early December report, Merrill Lynch said the technology could become "a major means of payment for e-commerce and may emerge as a serious competitor to traditional money transfer providers." And in Washington, D.C., federal officials in November offered cautionary support for the technology, partly for its potential to promote more efficient global commerce.

But BTC China's recent setback sent Bitcoin's value plunging, as other governments around the world have offered varying levels of support for it. In recent weeks, authorities in New Zealand, Denmark and the European Union have all issued warnings against the technology and have questioned its viability. Consumers are not protected through regulation when using virtual currencies as a means of payment and may be at risk of losing their money, the European Banking Authority said in a statement.

Given these concerns and the volatility, it could become harder for startups to raise money, and the investments are riskier too, one expert said.

Earlier in the year, the feeling among some investors was that they had hit something big, "but hype alone isn't good enough anymore," said Mark Williams, a finance professor at Boston University who has been tracking Bitcoin. "The honeymoon is over," he said.

In the venture capital world, timing is everything. Had China blocked BTC China's deposits two months earlier, "VC funding would have been more difficult to land," Williams said.

Increased regulation, oversight and restrictions are also fundamentally at odds with one of Bitcoin's primary purposes -- to be a currency free of any central authority. And if the red tape makes it harder to get hold of bitcoins, that could reduce the profit opportunities for startups. Consumers will be less likely to buy something with BitPay, for example, if they don't have any bitcoins to buy it with.

Therefore, startups may now face more pressure to demonstrate to VC firms that their investments will pay off, Williams said.

Meanwhile, Bitcoin may or may not be a proxy for virtual currencies overall, which could also affect how much funding startups can get in the new year. Views differ on Bitcoin's role.

"Bitcoin is the standard bearer for the fledgling e-currency industry," Boston University's Williams said. "The success or failure of Bitcoin will have a ripple effect on the many startups anticipating an e-currency revolution. ... Bitcoin's success is their success."

The investor community, however, might see things differently. They're not investing in the Bitcoin currency so much as in its underlying infrastructure, which could serve other virtual currencies in the future, said Barry Silbert, an active angel investor in the industry. So if Bitcoin fails, it may not even matter to them, or to the startups.

Startups' biggest challenge right now is getting more banks on their side, according to Silbert, founder of the Bitcoin Investment Trust, a private fund for handling Bitcoin investments. "Price volatility is a distraction to VC firms," he said.

But others still see plenty of froth next year. Like Heineken, for example. "Our vision of the future?" the Dutch brewing company posted this week on Twitter, "Drink real beer, pay with virtual money." They didn't mention any virtual hangovers, though.

Zach Miners covers social networking, search and general technology news for IDG News Service. Follow Zach on Twitter at @zachminers. Zach's e-mail address is zach_miners@idg.com

Join the newsletter!

Or

Sign up to gain exclusive access to email subscriptions, event invitations, competitions, giveaways, and much more.

Membership is free, and your security and privacy remain protected. View our privacy policy before signing up.

Error: Please check your email address.

Tags internetbusiness issuese-commerceinvestmentsInternet-based applications and servicesBitPayBTC ChinaCoinbaseCircleitBit

Keep up with the latest tech news, reviews and previews by subscribing to the Good Gear Guide newsletter.

Zach Miners

IDG News Service
Show Comments

Brand Post

Most Popular Reviews

Latest Articles

Resources

PCW Evaluation Team

Jack Jeffries

MSI GS75

As the Maserati or BMW of laptops, it would fit perfectly in the hands of a professional needing firepower under the hood, sophistication and class on the surface, and gaming prowess (sports mode if you will) in between.

Taylor Carr

MSI PS63

The MSI PS63 is an amazing laptop and I would definitely consider buying one in the future.

Christopher Low

Brother RJ-4230B

This small mobile printer is exactly what I need for invoicing and other jobs such as sending fellow tradesman details or step-by-step instructions that I can easily print off from my phone or the Web.

Aysha Strobbe

Microsoft Office 365/HP Spectre x360

Microsoft Office continues to make a student’s life that little bit easier by offering reliable, easy to use, time-saving functionality, while continuing to develop new features that further enhance what is already a formidable collection of applications

Michael Hargreaves

Microsoft Office 365/Dell XPS 15 2-in-1

I’d recommend a Dell XPS 15 2-in-1 and the new Windows 10 to anyone who needs to get serious work done (before you kick back on your couch with your favourite Netflix show.)

Maryellen Rose George

Brother PT-P750W

It’s useful for office tasks as well as pragmatic labelling of equipment and storage – just don’t get too excited and label everything in sight!

Featured Content

Product Launch Showcase

Don’t have an account? Sign up here

Don't have an account? Sign up now

Forgot password?