Bitcoin has a long way to go to gain widespread acceptance, but the venture capital market for Bitcoin entrepreneurs appears to be thriving.
On the heels of Philadelphia Federal Reserve President Charles Plosser saying Bitcoin has a long way to go to replace the US dollar as a currency, and many institutional forces looking at it from the perspective of a global payment system, not a currency, the growing tech startups innovating in the space remain unabated. Over 300 startups are now registered in an online database that tracks Bitcoin tech startups.
Add this to kind words of praise from the US Federal Reserve, Securities and Exchange Commission and Department of Justice, which was followed by two large banks getting involved: Merrill Lynch initiated coverage on Bitcoin like a stock, and last Tuesday Wells Fargo & Co (NYSE:WFC) organized regulators and financial professionals to establish “rules of engagement.” This is followed by an ever growing list of retail operations accepting Bitcoin.
Swedish VC firm has dry powder to invest in Bitcoin startups
The online database, organized by Joel Enquist and Ludvig Oberg, two Swedish venture capital investors, is an open source platform and encourages contributions with the goal of developing a community of Bitcoin entrepreneurs. The web site is backed by Creandum, which has €250 million under management, according to a report. Creandum has invested in many tech start ups, including well known names such as Spotify, iZettle and Wrapp, but ironically has yet to invest in a Bitcoin startup – but is keeping its eyes open to opportunity by monitoring the database it created.
Bitcoin startups and related digital currency businesses on the database have raised more than $90 million in publicly pledged venture capital, seed and crowd-funding, according to a report in the Wall Street Journal. The vast majority of funds raised to date – 67% — have gone to US startups, Coinbase, Circle, Ripple, gyft and 21E6, the report noted. The largest funding allocation – $31.7 million – went to Coinbase, the report noted. Coinbase operates out of San Francisco where it allows the buying, selling and storing of Bitcoins for commerce. The firm has been awarded funding from a variety of prominent angle investors and VC firms, including one of the original investors in Twitter Inc (NYSE:TWTR), Union Square Ventures.
Bitcoin not entire startup universe
While Bitcoin gets most of the attention, the database does include innovators in other digital currency start ups, including Quark, with the database listing commonality being “they all have a significant role within the bitcoin ecosystem,” according to the web site. “Bitcoin is interesting, but we’re still looking for a company within this space that provides an application that solves an actual problem,” said Creandum’s Joel Eriksson Enquist in the report. “And given that bitcoin is a global phenomenon, we’re also keen to find a company that is truly global.” They should have plenty of opportunity, as the field of EU startups remains generally underfunded.
The site includes payment processors such as InPay, a Bitcoin payment gateway or BIPS, the largest payment processor in Europe. The database not only includes the start-ups organizational structure, but also a comment section and a location where, if the start up fails, they can explain why it failed, presumably to assist other start ups.
Stable exchange needed to control volatility
The needed “killer app” for Bitcoin would be a stable exchange for buying and selling Bitcoins with a credible market maker system that would keep volatility in check. Major Wall Street investment banks have been in talks to develop such an exchange, but the primary sticking point is the inability to easily hedge a Bitcoin transaction. When market makers consider making a market in a given stock or commodity, one consideration is the ability to hedge the risk taken in one market by buying or selling in a related market. In Bitcoin a credible and liquid hedging methodology has yet to be developed.