Bitcoin is the hottest investing trend since the Internet, according to venture capitalists who have sung its praises.
Venture capitalists invested $74.1 million in bitcoin startups across 39 deals in 2013, according to data provided by CB Insights. However, that’s less than a third of what Internet companies raised in first-round funding in 1995, when Internet leaders like Yahoo and eBay were just getting off the ground.
“From an aggregate standpoint, a hundred million bucks in venture is a pittance. It’s a rounding error,” said Matthew Roszak, co-founder of the venture-capital firm SilkRoad Equity. He has a portfolio of 10 bitcoin investments.In fact, for all the predictions that Bitcoin is on the cusp of blowing up the traditional financial system, investors have largely kept to the sidelines. The last round of funding raised by Oculus VR — the maker of virtual-reality goggles Facebook Inc. agreed to acquire last month — was more than all of Bitcoin’s VC haul in 2013.
Some industries are likely attracting more funding because they are bigger. Software companies, for instance, attracted $11 billion in VC funding last year, according data from Thomson Reuters and CB Insights.
And interest has started to pick up this year. VC investments in Bitcoin-related firms rose to $64.9 million across 14 deals in the first quarter, nearly 90% of the money raised last year, according to CB Insights. If funding kept up that pace, it would top $200 million this year.
But it’s coming from the far back of the pack. The average Bitcoin investment was $1.9 million last year. The average investment in biotech, on the other hand, was $9.6 million.
These small-potatoes investments have flown in the face of expectations that the digital currency will bulldoze the way the world uses money, leaving old intermediaries like banks and credit card companies in their wake.
“We’re still in the very early innings of the bitcoin industry as a whole. If you compare it to the Internet industry, we’re probably back in 1995 or 1996 and right now it’s all about infrastructure,” said Pamir Gelenbe, a venture partner at Hummingbird Ventures. His firm in late March led a $5 million funding round for the virtual-currency exchange Kraken.
Bitcoin is a virtual currency that is created through cryptography rather than by a central bank. Transactions are verified by a network of computers crunching cryptographic problems, and those machines are rewarded by earning bitcoins. The decentralized network through which bitcoins are transmitted has been trumpeted as having the potential to allow for the quicker and cheaper transfer of money around the world.
Marc Andreessen has been one of the most vocal in touting bitcoin’s potential, drawing parallels between the early Internet days of the mid-1990s and bitcoin of today. By Silicon Valley standards, Andreessen can be seen as something of a wise elder: co-author of Web browser Mosaic, the first widely used Web browser; co-founder in 1994 of Netscape Communications Corp.; and co-founder of venture-capital firm Andreessen Horowitz.
“Bitcoin gives us, for the first time, a way for one Internet user to transfer a unique piece of digital property to another Internet user, such that the transfer is guaranteed to be safe and secure, everyone knows that the transfer has taken place, and nobody can challenge the legitimacy of the transfer,” Andreessen wrote in a January post in the New York Times.
Fred Wilson of Union Square Ventures, and Jim Breyer of Accel Partners have made similar statements about bitcoin’s game-changing potential“The consequences of this breakthrough are hard to overstate,” he added.