The US Dollar exchange value of the controversial crypto-currency Bitcoin is back above $300 after a crash and a few bad weeks. At the time of writing, Bitcoin is trading at $305. There is little doubt that the spectacular rise of Bitcoin in the last few hours is due to the announcement of the first U.S. licensed Bitcoin exchange, reported yesterday by the Wall Street Journal.
Last week, investors including three of the world's most respected financial institutions - The New York Stock Exchange, a subsidiary of USAA, and BBVA (NYSE:BBVA) Ventures - invested $75 million in the Bitcoin service provider Coinbase, bringing its total capital to $106 million. According to Coinbase, this is the first time that financial institutions have made a major investment in a Bitcoin company.
"With this investment, we are tapping into a new asset class by teaming up with a leading platform that is bringing transparency, security and confidence to an important growth market," said NYSE President Tom Farley. "We look forward to supporting Coinbase's growth utilizing our global distribution capabilities and market expertise."
The Series C funding round was led by Silicon Valley venture-capital firm Draper Fisher Jurvetson, which previously invested in Coinbase. Other VC investors in this round include Andreessen Horowitz, Union Square Ventures and Ribbit Capital, all of which also previously invested in the firm.
The Bitcoin exchange will allow users to buy and sell Bitcoin. Coinbase's founders say they have been working for five months to win licenses from state financial regulators. They have regulatory approval in half of U.S. states, including large population centers like New York and California. For now, Coinbase can do business with account holders only in states where it has approval. The exchange will initially be limited to users in the U.S., but there are plans to expand overseas. Coinbase will take a small percentage - likely less than 1% - of most transactions.
In 2013, the price of Bitcoin rose from $13 at the beginning of the year to an all-time-high of $1124 in November, but Bitcoin investors have been disappointed by the evolution of Bitcoin in 2014.
However, it's important to bear in mind that Bitcoin isn't a stock, but a currency whose popularity and applications are rising very fast. Today, there are more and more options for consumers who want to spend their crypto-coins. Overstock (NASDAQ:OSTK) became the first large retailer to accept Bitcoin in January 2014. Microsoft (NASDAQ:MSFT) now accepts Bitcoin for online sales of selected products, and PayPal (NASDAQ:PYPL) and its parent company eBay (NASDAQ:EBAY) are warming up to Bitcoin.
But most merchants convert the bitcoins immediately - often on-the-fly - to U.S. dollars or other national currencies, which brings the exchange value of Bitcoin down.
The total volume of Bitcoin transactions, and the venture capital investments in the Bitcoin ecosystem, have been on the rise in 2014. Consumers spend bitcoins online, and investors bet on the innovative potential of Bitcoin and it's underlying blockchain technology. Technology expert Peter Diamandis said the Bitcoin is going from deceptive to disruptive, and listed Bitcoin among his top tech picks for 2015.
The enthusiasm of venture capitalists and institutional investors shows that the real value of Bitcoin is basically independent of whether it trades at $10,000 or $1. In both cases, it's Bitcoin potential to create the next wave of financial killer apps that is important.
Bitcoin permits cheap money transfers, and that alone enables a wave of next-generation applications, for example to micro-payments and international remittances. Startup ChangeTip, which recently receined $3.5 million funding, allows cheap and easy Bitcoin micropayments integrated in the main social networks, and Bitcoin allows international money transfers at much lower cost than Western Union (NYSE:WU).
The high volatility of Bitcoin - quick demonstration: now Bitcoin is trading at $259, down from $305 when I started writing yesterday - should discourage forex investors. It seems more interesting to invest in the companies that are betting on the growth of the Bitcoin ecosystem and using Bitcoin technology to create the Next Big Thing.
Bitcoin Shop (OTCQB:BTCS), one of the first U.S. publicly traded companies in the digital currency ecosystem, runs an online store where customers can purchase products in Bitcoin. Their income is independent of the Bitcoin exchange rate, and will grow with the increasing adoption of Bitcoin payments.
Winklevoss Capital expects to get regulatory approval to launch a U.S. Bitcoin exchange in the first quarter, the Winklevoss twins told Reuters on Monday. They are also about to launch a Bitcoin exchange-traded fund, the Winklevoss Bitcoin Trust ETF (COIN), which will be available to all investors on NASDAQ.
Overstock is creating a blockchain-based stock exchange, codenamed Medici, which could sidestep traditional stock exchanges such as NYSE and NASDAQ and issue corporate stock directly over the Internet.
"There is an opportunity to recreate the financial world as we know it in the parallel universe that is the blockchain," Overstock CEO Patrick Byrne told Wired. "We are writing rules for this whole new universe."
Besides Counterparty, the platform selected by Overstock for Medici, the most interesting ongoing innovations in the crypto-currency space include the "programmable money" technology of Ethereum and the "sidechains" of Blockstream, which recently received $21 million seed funding. It's to be expected that options to invest in these technologies become available in 2015.