Venture capitalists are turning to one of the shadier parts of the internet for places to invest. A report written by Tesarah E. Needlemen and Spencer E. Ante in the Wall Street Journal revealed that start ups involved in the virtual currency industry have begun to attract investment from venture capitalists. The old adage good money after bad comes to mind.
According to the report, Wednesday will see a $5 million investment into Bitcoin start up Coinbase from private capital firms like Union Square Ventures. The investment will be one of the biggest in the growing industry, and it shows that Bitcoin, and the virtual currency market in general, is being legitimized by real investor capital.
Last month OpenCoin Inc, another Bitcoin centered start up, received $2 million from venture capitalists including Andreessen Horowitz. Fred Wilson, a managing partner at Union Square Ventures, said, "You'll see lot more venture money being poured into this space," in conversation with the Wall Street Journal.
Coinbase, the start up set to receive $5 million, operates a service that converts Bitcoins to dollars for users. The service charges a 1 percent commission and that is its revenue stream. In addition, the company allows investors to buy Bitcoins and store the currency in an online wallet.
Bitcoins are not a stable currency. That much is clear from the company's recent trading. The currency is open to cyber attacks, and its base is simply not secure enough to justify legitimization right now. That being said, if Bitcoin manages to shore up its problems in the coming year or so, it could very well be good enough for investors to put money in. If that happens, the Union Square Ventures bet will pay off in a big way.
Back in April, Bitcoin's value hit well above $200 per coin, but since then prices have fallen to just above $100 per coin. Today the coins were trading at around $113. Bitcoin is a very small asset class, and it relies on cyber security for its value. Because of its worth, all Bitcoins are currently worth around $1 billion, and due to their vulnerability to cyber attacks, there is clear price manipulation potential.
Venture capitalists usually know what they're doing. A $5 million investment in a Bitcoin start up is a high risk-high reward investment. It seems unlikely that Coinbase will ever be a huge company, but, if it does grow, Union Square gets a big payout.