Bitcoin might be in a bear market, but venture capitalists don't care

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Let’s start with the bad news

Every quarter, Garrick Hileman and Danqing Ying put together the excellent ‘State of Bitcoin’ report for the digital currency information website, Coindesk. Today we’re going to look at some of the key findings. But let me first update you on the bitcoin price action.

The high for the year came on 1 January at $313, and the low two weeks later at $177. It currently stands at $220 (£160), so it’s down around 30% so far this year. And it’s down around 82.5% from its November 2013 all-time high of $1,240.

The bear market continues. It’s now more grinding than precipitous – but in my eyes at least, it probably isn’t over.

Turning to Coindesk’s report, we’ll carry on for the moment with the bad news (there is plenty of good news to come, don’t worry). Consumer adoption of bitcoin is so far disappointing.

There are now 8.5 million wallets (a wallet is where you keep your bitcoins – it’s a bit like an email address). That’s a growth of one million this year alone.

That may seem positive, but it doesn’t necessarily mean that there are a million more bitcoin users. Many people – and, more importantly, many bots – have more than one wallet – 12 million wallets are forecast by the year end.

The number of merchants accepting bitcoin has grown by 7% this quarter, but their annualised revenue from sales denominated in bitcoin is flat.

The reason given for this is lack of consumer adoption. Part of the reason for lack of consumer adoption is the falling price, but also that mainstream media mentions are in decline. Bitcoin’s getting less and less exposure.

As a medium of exchange, bitcoin may not seem to be progressing. Those people who do own bitcoins seem to hoarding rather than spending. But there is one area – not covered in the Coindesk report – where this is not the case. This is the booming sector that is the online black market.

For obvious reasons (it’s on the dark net and it’s illegal) it’s hard to get data on this. Coindesk makes no attempt to cover it. But the fact remains that here bitcoin is the currency of choice.

This is significant. Black markets, without deep pools of venture capital to fall back on, are usually the first to make new technology work on a practical basis. Their adoption proves that bitcoin works.

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It might also go some way to explaining how bitcoin transactions are on the rise. There are now more than 100,000 per day.

Venture capitalists don’t care about the price of bitcoin

Bitcoin venture capital (VC) investment now stands at a total of $676m. A third of that – $226m – was raised this year alone. The most high profile raising was for 21 Inc, which raised $116m in February.

I’m not entirely sure what 21 Inc does. Nor is anyone else; that’s the bizarre thing.

There’s a whole load of speculation as to what it is 21 Inc does – ranging from ‘internet of things’ to payment provision. But there’s no faulting their mystique – $116m, and it’s still ‘undercover’. Amazing.

The other noted fundraising was in bitcoin exchange and wallet provider, Coinbase. It raised $75m, valuing the company at $400m.

It’s not just the amount of venture capital pouring into the sector that is so impressive, but the individuals who are pouring the money in. Look at the roll call of high-profile investors: Richard Branson, Citigroup CEO Vikram Pandit, Netscape pioneer Marc Andreessen, former Thomson Reuters CEO Tom Glocer, PayPal founders Peter Thiel and Max Levchin, eBay co-founder Jeff Skoll, Dropbox CEO Drew Houston, Expedia CEO Dara Khosrowshani – the list goes on.

Then there are the big players from Wall Street migrating to jobs in the bitcoin space. These include credit derivatives pioneer Blythe Masters, who formerly headed JP Morgan’s proprietary trading desk, Jason Weinstein of the US Department of Justice, Duncan Niederauer of the NYSE, and various other Goldman Sachs, JP Morgan and Citi alumni.

Why so much interest from big players and big capital, when bitcoin seems to be in recession?

One reason for this movement is that regulatory regimes – particularly in the UK, where it is widely agreed that Osborne and the Treasury have got it right – are now legitimising bitcoin.

But the main reason is that bitcoin is about so much more than just bitcoin.

Bitcoin is more than just an alternative money system

The technical breakthrough behind bitcoin was an ingenious system of record-keeping – a huge database called the blockchain. On the blockchain, every transaction that has ever taken place is recorded – and no transaction is complete until it is recorded.

Think of it as a structure of permanent memory that grows organically. This structure of memory is distributed across the blockchain network and has so far proved unhackable – despite numerous attempts. In fact, the hacking attempts have further strengthened it.

Coders and innovators are now looking at what other applications this system of permanent memory might have beyond an alternative money system. The possibilities are enormous. Outlining those possibilities is a Money Morning in itself – in fact, there’s probably a whole book in it.

From the registering and trading of ownership of just about any kind of asset you can think of (stocks, bonds, vehicles, houses) to the internet of things and private communication; from the elimination of spam to micropayments and notarisation; from new voting systems to reputation, identification and attribution, and remittance and payments. The possibilities are enormous, and are only now starting to be envisioned.

What’s frustrating is that this is all so early stage that as a UK investor it’s still very hard to gain exposure to it all. But opportunities will soon present themselves. I’m so excited about it that I’m getting involved with one particular start-up (more on this another time).

But that gives you all the more time to get to grips with how bitcoin works. Here’s a reminder of my handy little guide to getting started with bitcoin.

1. Go to Blockchain or Coinbase and get a wallet. All you need is an email address and password. You will then be told your wallet address. Copy it.
2. You now need to deposit some money. In the UK, you could go to Bittylicious. Paste your wallet address where it says “bitcoin address”. Now deposit £20.
3. Get a friend to do the same.
4. Practice sending each other small amounts of money.
5. Go to a café that accepts bitcoins and buy yourself a coffee.

Well done. You’re now part of the revolution.