The following guest post is by Alex Ferrara, partner in Bessemer’s New York office where he focuses on investments in the software and Internet sectors.
As Bitcoin tops the charts as the hot new tech phenomenon, there has been chatter of whether or not it will succeed as a mainstream currency, missing a more important point. Bitcoin is already a success, offering great potential beyond providing a new store of value or currency. What is perhaps more exciting about this relatively new innovation is the growth of the underlying network of participants, and the economic incentives that are promoting its growth. Roughly 30 plus years after the birth of the Internet, we may be starting to see an important new technology layer emerge that is designed specifically to enable secure online transactions. Disclosure: Bessemer is not currently invested in Bitcoin or any companies in the space, but always has an eye on what is hot in tech.
Bitcoin’s Volatility Is A Disadvantage, But Not A Fatal One
Signs of a Tipping Point
Opponents of Bitcoin claim that this virtual currency allows for exchanges made in the dark corners of the Internet where anonymous buyers can purchase any number of illicit items from anonymous sellers. While there might have been issues with illegal activities in the early days of Bitcoin, the market has changed dramatically in the past several months. For example Bitpay, a company that enables legitimate merchants to accept bitcoin as a form of payment now serves more than 10,000 merchants (an increase of 10x in the past 6 months) and is processing more in transaction volume than the infamous Silk Road marketplace. In addition, at least three of the leading U.S. bitcoin startups have demonstrated their commitment to preventing illicit activity by registering with the financial crimes enforcement network agency of the federal government and strictly adhering to the same anti-money-laundering processes followed by major U.S. banks. Lastly, several of these bitcoin companies have raised capital from leading venture capital firms, which not only provides credentialing but will allow them to invest in areas of infrastructure, compliance and customer awareness. Bitcoin is rapidly becoming a legitimate online currency alternative.
Transparency in the Cloud
One of the more fascinating properties of Bitcoin is that all historical transactions are publicly viewable via a public transaction ledger called the blockchain. This means that with the right tools, over time anyone will be able to see how consumers and merchants are using bitcoin and not only demonstrate the progress being made towards bitcoin’s role as a legitimate currency but also gain new insights into how consumers and merchants transact online. This also creates interesting implications for the future of online trust and credit that will be discussed in a future post. To date the bitcoin network has seen more than 15 million aggregate transactions with more than 50,000 senders and receivers transacting in a given day. It’s time for someone to start building the big data infrastructure and applications needed figure out what’s going on in this rapidly growing network.
The Value of the Network
While there is always the chance that Bitcoin as a currency could prove to be more Friendster than Facebook, the underlying model has already broken important new ground in the area of p2p transactions. The notion of an open global digital currency based not on fiat but rather mathematics is undoubtedly appealing, but just as important and innovative is Bitcoin’s underlying plumbing – the Bitcoin community and the network of participants (known as miners) that are facilitating these transactions. Together they add a valuable layer to the existing internet stack of technologies. Bitcoin may or may not ultimately prove to be the right implementation, but it is a compelling concept that offers a window into a potentially profound paradigm shift in how we think about the future of money on the web.
Alex Ferrara is a partner in Bessemer’s New York office where he focuses on investments in the software and Internet sectors. Alex’s previous board service includes Yodle, Shopify, OMGPop (acquired by Zynga), SelectMinds (acquired by Oracle), and Quadriserv. Alex was also involved with the firm’s investment in Pure Networks (acquired by Cysco), Skype (acquired by Ebay), SiteAdvisor (acquired by McAfee), Goal.com (acquired by Preform Group), Activ Financial, TeamViewer, and Gerson Lehrman Group.
Published by Forbes
