At around this time last year, the peer-to-peer decentralized virtual currency bitcoin was riding sky high as it was trading close to $1,200 per unit. Bitcoiners were celebrating, while the rest of the outsiders were wondering why a digital currency would trade at such an astronomical value, especially considering it was trading at just a few dollars earlier in the year.
Fast forward to the present, the price of the cryptocurrency is standing at around $360. 2014 was quite an interesting year for bitcoin: exchanges filed for bankruptcy, cyberattacks were common, governments and central banks started to introduce regulatory legislation and of course, the price had fallen.
Despite the ailments inflicted upon bitcoin and the significant decline in its value, venture capitalists are still pouring their money into it. According to CoinDesk, bitcoin venture capital investment will reach $300 million this year. While still far behind conventional investments into the tech, energy and health sectors, it’s an immense sum for an industry experiencing growing pains.
What exactly is the allure behind venture capitalists investing in the fledgling currency?
Most tech experts purport that the blockchain, public ledger technology and its cheaper and faster payment processing system is enticing businesses and investors to participate in the exciting bitcoin industry. Although avid bitcoiners wish to replace conventional fiat money, such as the United States dollar, euro and British pound sterling, with bitcoin, the general consensus is that this won’t happen.
Ostensibly, there are still financiers who are betting against bitcoin and foresee the end of digital currencies within the next decade. Prominent billionaires akin to Warren Buffett, Jamie Dimon and Marc Faber have written off bitcoin. Of course, there are just as many supporting bitcoin, such as Bill Gates, Larry Summers and Richard Branson.
Here are three reasons why venture capitalists are still investing in bitcoin amid a drop in price:
1. Payment Disruptor
Right now, paying for items in bitcoin and transferring virtual currency units to others costs nothing, or at the most very little. It’s so cheap to pay with bitcoin that retailers accepting the digital currency are offering discounts, like Overstock.com. Indeed, merchants are saving a lot of money incorporating bitcoin technology into their business model.
Traditional payment system providers - Visa, MasterCard, major financial institutions and perhaps even PayPal - are upset over this. However, if there is a product or service that saves the consumer money then there will be a phalanx of individuals flocking to said brand. Although the adoption rate of bitcoin is still far behind that of an American Express or Visa, there are still plenty of consumers enthusiastic about the prospect of the digital currency, particularly with mobile payment technology gradually being ubiquitous.
2. New Technology
Venture capitalists may not necessarily be investing particularly in bitcoin itself, but rather companies that delve into the world of digital currency. In other words, investors are possibly pouring money into companies that are developing new methods and technologies affiliated with bitcoin. As previously noted, bitcoin is cheaper to use than MasterCard, but that’s because of its technology. If investors see room for growth then there will be an influx of money being thrown at it.
The old adage on Wall Street is "buy low, sell high." The same thing is being transferred over to bitcoin. A year ago, investors were terrified of getting involved in the digital currency market because bitcoin was above $1,000, and it was certainly possible it would drop. Low and behold, bitcoin has crashed to under $400. If bitcoin resurges then venture capitalists will expand their holdings.
Intense proponents of bitcoin, like Marc Andreessen and Roger Ver, maintain that the virtual currency is here to stay. The question at the moment is really though is whether it could become bigger than a Visa or a MasterCard and if so is it worth investing in.
Image: by Jonathan Waller via Flickr.