Bitcoin – the controversial online currency that has soared in value this year – has captured the imagination of those in the investment community that see it as an opportunity to watch a classic "bubble" situation develop in real time.
Today, Bitcoin is trading around $135. At its peak a few weeks ago, it reached $266.
In January, it was trading at $15.
For a big group of investors, though, Bitcoin seems to be anything but a bubble.
"The most provocative feature of this dramatic rags-to-riches-to-rags-to-riches yoyo is that it is actually a diversion from the upcoming main event," says ConvergEx Group Chief Market Strategist Nick Colas. "Venture capitalists see a much larger narrative surrounding Bitcoin, and the capital they can put to work shaping the future of this novel currency far exceeds the $1.4 billion of Bitcoin value currently in the system."
Andreessen Horowitz is also putting its money where its mouth is. Earlier this month, the venture capital firm announced an investment in OpenCoin, a Bitcoin competitor.
Colas says venture capitalists look for three things when making an investment: "a huge (usually +$1 billion) market size, a disruptive technology, and lots of ways to play those two features."
That's Bitcoin, more or less.
Those thousands of tech-savvy folks who run the bitcoin system have created a new and very low cost method for transferring money around the world. For the potential 25 bitcoin reward of solving one of those 10 minute puzzles, they keep track of all the transactions created by users around the world.
The current system for money transfers – banks, brokers and other financial institutions – want a lot more for their efforts than a few thousand dollars six times an hour. Bitcoin is to money what Amazon is to retail or Netflix is to video content – a much more efficient way to meet the needs of millions of people around the world.
In order to make Bitcoin the "next big thing," however, Colas says VCs need to focus on remedying the security issues that have caused so much price volatility in the market for the virtual currency. The world's largest Bitcoin exchange has been subjected to multiple attacks by hackers in recent months, which almost invariably always causes a panic in the thin, fledgling market.
The other problem presented by Bitcoin for VCs, says Colas, is the currency's inherent anonymity. While this is arguably a positive factor for users of Bitcoin, it could be a problem on the regulatory front, given world governments' increased focus on cracking down on funding sources for terrorism and the illegal drug trade.
"My humble recommendation to venture capitalists to avoid further regulation or an outright ban is to quickly convince global charities to use the Bitcoin system for both donations and money transfers," writes Colas. "It is, after all, ideally suited to the purpose of taking in money in rich countries and efficiently moving it abroad to places with limited financial infrastructure."
He points to figures from the National Philanthropic Trust indicating that Americans gave $218 billion to charity in 2011, as well as the one million-plus U.S.-based charities who "presumably ... all have bank accounts to process payments and would like a more efficient way to distribute funds."
It's in the hands of the VCs now.
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