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The rise of bitcoins

Ajit Deshpande - - 0 Comments

Bitcoin, the online, decentralized commodity introduced by pseudonymous developer Satoshi Nakamoto, had its most volatile trading day and week last week. The currency rose to more than $260/bitcoin on April 10th, then fell to less than $100 in a matter of hours on the same day, and eventually ended the week at $95. With approximately 11 million bitcoins in circulation, the market-place is just larger than $1 billion in value at this time, down more than 60% from its April 10th peak. Clearly, it’s a nascent market with lots of volatility so far!

So what is this whole bitcoin thing about? The bitcoin concept was introduced in Jan’09 to deal with inefficiencies in the banking system, such as government control, slow speed, high transaction fees etc. By being scarcity-controlled and ‘mining’ dependent just the same way as gold, but at the same time decentralized, anonymous and online, bitcoins do help solve a number of these inefficiencies. More importantly, since bitcoin mining needs compute power as a resource, the value of the currency could represent a good opportunity cost benchmark for computational infrastructure and personnel. Bitcoin usage isn’t currently that widespread, but if the currency does continue to increase in relevance and grow in value, it could actually become representative of the new, IT-driven world economy.  On the flip side, if bitcoin does not gain widespread acceptance as a currency, then it will need to quickly find other uses to remain relevant – like the ornamental value from owning gold or the day-to-day usage value for commodities like oil and metals.

Should VCs consider investing in this space? Absolutely! Bitcoins might not end up being *the* standard for online peer-to-peer exchange, but they do represent the kind of high risk, high reward innovation that should attract super-smart entrepreneurs. On the VC side, many things around the bitcoin make it compatible with classic early-stage investing: potential for becoming a large market with exponential growth, nascence in the mining infrastructure and the marketplace around bitcoins, compatibility with information technology, limited standardization etc. So recent short-term volatility aside, let’s hope things do work out for the bitcoin in the long run, because this might be an opportunity for venture investors to strike virtual gold!

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