Venture capitalists show no sign of shying away from investing in start-ups related to Bitcoin even as authorities step up their scrutiny of the virtual currency and its possible connection to money laundering and other illegal activities.
Investment has jumped in recent months as Bitcoin, the prominent digital currency not backed by a government or central bank, has begun to gain a footing among businesses and consumers, a key step for it to go mainstream.
Start-ups such as Coinbase and BitPay Inc, which help facilitate Bitcoin adoption by merchants and consumers, have raised millions of dollars so far. Interest is also growing in bitcoin trading, investment funds, and "mining" - the process of creating the digital currency.
Bitcoin, until recently a niche alternative currency touted by computer geeks and anti-government advocates, has garnered attention from a growing list of notable investors such as Andreessen Horowitz, which has invested in Facebook, Twitter and Groupon, and Founders Fund, which includes three founders of PayPal. Some devotees promote Bitcoin, which exists solely in cyber form, as the future of money, and in some investing circles it has created a buzz reminiscent of the early Internet age.
"What keeps me up at night is 'are we missing out on investments?' because if this is what I think it can be, we will regret not being even more active," said Micky Malka, founder of Palo Alto, California-based Ribbit Capital, which has invested in three bitcoin firms, including San Francisco-based Coinbase.
Bitcoin startups raised nearly $12 million from venture capital investors in seven deals in the three months ended June, according to CB Insights, a New York-based venture capital data firm. That compares with just five deals totaling less than $2 million in the previous four quarters.
More money is expected to flow into the bitcoin market, where the amount of venture capital financing remains modest compared with some sectors like social networking. Some industry participants estimate available money for funding ranges from $65 million to $100 million, while the number of bitcoin startups in the United States is probably in the hundreds.
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Last week, SecondMarket, a platform for facilitating investment in privately held companies, launched the Bitcoin Investment Trust, which allows sophisticated investors to gain exposure to the price movement of Bitcoin without the risks of direct bitcoin ownership.
The move comes three months after Cameron and Tyler Winklevoss, the twin brothers famous for their legal battle with Mark Zuckerberg over the founding of Facebook, filed plans to launch the Winklevoss Bitcoin Trust, an exchange-traded product that would allow investors to trade the digital currency like stocks.