BUSINESS
05/31/2013 04:50 pm ET

Bitcoin Companies Attract Frenzy Of Venture Funding

Bitcoin is becoming such a real and sizable instrument of commerce that investors are now pouring into new ventures aimed at furthering its use, financing new exchanges and payment systems for the virtual currency.

“Almost any [bitcoin] company that’s anything has gotten funding in the last six weeks,” said Michael Terpin, a Las Vegas-based serial entrepreneur who is currently an early-stage venture capitalist in several bitcoin ventures.

Two weeks ago, in between wonky speeches and hors d'oeuvre at a San Jose technology conference, Terpin and other investors discussed the idea of launching a so-called distributed incubator to provide bitcoin-related ventures with finance, office space and mentoring. That idea became BitAngels, a network of investors that has pledged to crystallize early-stage startups in Austin, San Francisco and New York.

On Monday, when BitAngels was formally announced, the group already included 65 investors who collectively pledged to put $6.7 million into bitcoin businesses. By the end of the week, the number of investors had ballooned to 90 and funding had doubled, said David Johnston, the group's executive director.

“Even the people that were visionary and early are continuing to buy more into it,” Johnston told The Huffington Post. “They’re bullish on the system.”

The mere existence of an investment firm specializing in expanding the financial infrastructure for bitcoin amounts to a remarkable turnaround for the currency; in its three years of existence, bitcoin already has traveled from obscurity to rampant speculation to the prospect of fading away forever.

After peaking in late March at a value of $266 per bitcoin, the currency plunged in value, bottoming out at below $50 in early April. But since then, bitcoins -- which are created by computers using sophisticated mathematical equations -- have recovered dramatically, recently fetching about $130 each.

Johnston and Terpin say the enthusiasm has been remarkable given major obstacles to the wider adoption of the currency. The prospect of a government crackdown has loomed as evidence mounts that bitcoin and other digital currencies have become popular means of illegal transactions involving sex, drugs, weapons and fake passports.

Earlier this week, the federal government indicted a Costa Rica-based digital cash exchange, Liberty Reserve, alleging that it ran a massive money-laundering operation that handled as much as $6 billion. Liberty Reserve dealt mainly in the trade of LR, a lesser-known digital currency.

Since then, Mt. Gox, the largest bitcoin exchange, has tightened identification standards for traders, eliminating the anonymity many bitcoin users have said is integral to the virtual currency's success.

“What’s been very interesting is that there’s been a lot of potential bad news that in a smaller market would have meant the death of bitcoin,” said Terpin.

But capital is flowing into bitcoin-related ventures with abandon, the investors said. Some companies are working on providing more secure methods for bitcoin transfers, hoping to reform the reputation of bitcoin payments as unsafe. Others are figuring out how to efficiently transfer bitcoin via text messaging, something that could be useful for remittances.

A few are working on making sure bitcoins can be used even in places with poor access to telecommunications. And three more companies are figuring out the logistics of creating a stock-and-bond exchange using the same transfer technology behind bitcoin.

“The analogy is to the building of the viable commercial Internet a few years ago,” Terpin said. “Back then, there was a real backlash against the Internet as a tool for commerce. I remember a media executive I talked to in 1993 or 1994, when I was selling him on how fast I thought the Internet was going to grow, I told him it was 20 million people and he just laughed in my face. He asked how many of those people were grad students in Czechoslovakia.”

“I see the same dynamic here,” he added.

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