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Investors See Opportunities in Bitcoin's High-Risk Market

July 31, 2013
URL: http://www.entrepreneur.com/article/227644

During a panel discussion at Mediabistro's Inside Bitcoins conference in New York City on Tuesday, one of the panelists, serial entrepreneur Brock Pierce, posed a question: "Is Bitcoin Friendster, MySpace or Facebook?"

In other words, is Bitcoin here to stay, or will it soon decline or disappear altogether, taking investor dollars with it?

That's the question on the minds of entrepreneurs, venture capitalists and laypeople alike. In simple terms, Bitcoin is both a decentralized, open-source digital currency and a peer-to-peer payment system. Users are able to send bitcoins to each other over the Internet, and to convert them into fiat currency, such as U.S. dollars and euros, and back again using online exchange platforms. Cryptographic procedures enforce scarcity and ensure the security of transactions.

Once the preserve of hackers and crypto-geeks, Bitcoin is increasingly being seen as a legitimate platform on which to build businesses. The Winklevoss twins, known for their tussle with Mark Zuckerberg over the ownership rights to Facebook, led a $1.5 million investment in payment processing platform BitInstant earlier this year.

But while some high-profile investors are taking a chance on it, Bitcoin remains a volatile market. When you invest in a Bitcoin company, you're taking a risk not only on that startup but also on the overall Bitcoin space, said Pamir Gelenbe, partner at Hummingbird Ventures, a European early-stage venture fund, during Tuesday's panel.

Gelenbe compared the current Bitcoin landscape to that of Internet companies in 1994, in the sense that outsiders view the space with skepticism. He and other investors on the panel said they look for entrepreneurs with a solid track record. "I'm excited about the leap that's occurring from semi-professionalism to companies that will be around for a while," said Tuur Demeester, author of investment newsletter MacroTrends. Demeester recommended Bitcoin to his readers as an investment in early 2012, when its exchange rate was only $5.

Related: Winklevoss Twins Move to Launch a Bitcoin Fund

Demeester believes an opportunity exists for new Bitcoin exchange markets, although established exchanges such as MtGox and Bitstamp currently handle a combined 70 percent of all U.S. Bitcoin trade, according to Bitcoin Charts. Gelenbe, however, said his firm wants to invest in companies, not in currencies; he would prefer to fund startups that could easily switch over to other digital currencies that may gain primacy and ones which are not likely to face regulatory trouble.

The total value of all bitcoins in existence, currently 11.5 million, has increased from about $10,000 three years ago to about $1 billion today. Between July 2012 and April 2013, the price of a Bitcoin rose from about $10 to an all-time high of $266 before plummeting spectacularly below $60. A flurry of media attention covered the rise and fall. On Wednesday, the price of a Bitcoin fluctuated between $103 and $111.

Thompson Clark, an editor at financial intelligence company Agora Financial, outlined the reasons why Bitcoin could outlive the media hype. In times of global economic instability, precious metals and cryptocurrencies such as Bitcoin become more attractive as expressions of value that aren't subject to government manipulation. Fiat currency loses value over time due to inflation, whereas Bitcoin so far has been a deflationary currency, meaning that it gains in value over time despite fluctuations in its exchange rate. The limited supply of bitcoins -- there will never be more than 21 million in existence -- means that demand alone will determine its value.

And there are social benefits too, according to the panelists. "Fiat currency encourages consumption," and that leads to planned obsolescence of consumer products and waste that harms the environment, said Clark. In a world where money keeps its value for longer periods of time, or actually increases in value over time, people will be more thoughtful about how they spend it, he said.

As for that all-important question posed by Pierce? It's too soon to tell, he said. But everyone on the panel said they think that Bitcoin will continue its move into the mainstream. "It's just a better money," Clark said.

Related: SEC Cracks Down on Alleged Bitcoin Ponzi Scheme