While bitcoin remains a mystery to many, a significant number of venture capitalists are beginning to take an increasing interest in the field. The first half of 2014 saw USD128m worth of VC cash invested in 22 deals, according to StrategyEye data.
Now, Berlin-based Bitbond has raised EUR200,000 (USD267,000) from Point Nine Capital and angel investors. Bitbond is a peer-to-peer lending service that allows small businesses to raise capital in bitcoin. The company claims that by connecting borrowers and lenders directly, borrowers receive loans at affordable interest rates, while lenders gain higher interest rates compared to other fixed income asset classes. Businesses are examined before Bitbond’s team before being listed. While the amount is relatively modest, the deal highlights the growing interest from investors in the bitcoin landscape.
“We've been watching bitcoin for a while, it's very intruding and programmable money is an ingenious concept. It's still not adopted in the mainstream and it still has question marks over regulation, but if this works it’s really going to revolutionise the way we deal with money,” says Point Nine Capital partner’s Pawel Chudzinski. “It has amazing potential and power to change things, make things easier and enable us to do things with money that we can't do today. It's very hard to innovate in the financial ecosystem as it is today, and it's much easier to do that with a thing like bitcoin”
For the average consumer bitcoin is still a mystery. Even the majority of those who know of it through the media are more likely to associate it with security breaches and complex technologies than a financial tool they might actually use. The impact of digital currencies in our daily life still seems a long way off. However, we are beginning to see more bitcoin startups looking are towards familiar business models and applying virtual currencies to it. Mobile wallets are one of the primary types of company emerging. Apple is beginning to validate their approach in re-allowing bitcoin mobile apps on the apps store. However, mobile payments in themselves are still far from common in our daily lives. But as bitcoin adoption grows the technology is arguably becoming less abstract as it is applied to models we recognise.
“It's a marketplace, which is a key focus area for us, so we like this kind of business. Secondly it's in the fintech space which is increasingly a field of our interest and third it's in bitcoin which we've been developing and interest in for a while,” says Chudzinski. “It's at an early stage, but it already has some very encouraging early activity on the platform. It's not just an idea, it's an early stage company with real activity going on.”Global Lending
Peer-to-peer lending is an area where bitcoin can have a genuine impact and improve a service rather than just sit there as an alternative, almost novelty, payment method. Bitbond is capitalising on bitcoin’s ability to seamlessly, cross boarders without incurring charges to allow companies to receive cash from anywhere in the world.
“Peer-to-peer lending has been around for a long time, but Bitbond uses bitcoin to do it differently and to do it internationally,” says Chudzinski. “Lending is generally a very local business, but with bitcoin you can make it international. That's how bitcoin has the potential to change lending, by making international loans much cheaper and easier to access.”
This application of bitcoin to improve tried and tested business models, which companies and consumers can clearly see the benefits in, will be key in driving future venture capital investment in the space.
“We didn't think it would be a good thing for us to invest in the very basic infrastructure of bitcoin like mining because our key focus areas for investments are marketplaces and online software,” says Chudzinski. “If we find something that uses bitcoin to implement the businesses models that we typically look for then we would go for it.”
As well as the number of investments increasing, the rounds are also starting to get bigger. Payment processor Bitpay landed USD30m in June, while bitcoin-mining hardware company Bitfury and storage firm Xapo both raised USD20m.
“Adoption is progressing every day every week. In e-commerce there are new shops, there are new online services, more of them are adopting bitcoin and more people use it. Adoption is continuously increasing,” says Chudzinski. “There are still some VCs who say ‘this is a crazy fad and we're not touching it,’ but some are interested.”
Bitcoin’s greatest hurdle to overcome is its image problem. It’s anonymous nature that makes it a useful tool for money laundering and other illegal activities. Then there are the hacks. The high-profile ‘robbery’ of some 850,000 bitcoin (worth USD700m at the time) from the Mt. Gox bitcoin storage service highlighted in the minds of many how risky the technology still is. There’s also the potential for regulators to simply ban transactions in it being processed, as is the case in China and whip out the crypto-currency landscape.
However, UK Chancellor George Osborne recently announced that the government will explore what role virtual currencies can play in the region’s financial system and consider what regulations may need to be put in place to make it safe. It’s a potentially big validation for bitcoin and an open approach to it could create new hubs of innovation.
“It's important that the UK is making very strong signals that they will be regulating bitcoin in a positive way, I think that's very important,” says Chudzinski. “Germany is also relatively open on regulations and it's possible that Europe will, through friendly regulations, produce globally significant bitcoin companies because it might be easier for entrepreneurs to operate from here versus Asia or the US.”