What Venture Capitalists Need to Know before Investing in Bitcoin
Bitcoin and blockchain spaces have received much attention in recent years as investors recognize massive opportunities in the spaces – they themselves can enter into the cutting edge of financial technology.
Financial technology, in general, has received attention as banks cut down on bank branches, looking to bring their services into the 21st century. Bitcoin has caught a lot of attention but there are key things any investor in the space should know.
For one, if you’re looking to invest into the Bitcoin space, remain humble. Bitcoin doesn’t actually need your participation. Its deflationary coding will ensure that the idea Bitcoin proliferates. Many firms in the space celebrate the same innovation they’ve made: they all make Bitcoin easier to use. In reality, Bitcoin and the core wallet it’s pretty easy to use anyway.
For that reason, many Bitcoin startups are redundant. Why, for instance, is there a need for so many wallets? Competition for competition’s sake? And, furthermore, what new features do they bring to the table? Most importantly: how do they profit?
Many of these same concerns can be lobbied at Bitcoin exchanges, as well, who, like banks, must endure cumbersome AML and KYC regulations while buying and trading bitcoins at no more than a 5% profit margin, and much more often at 1%. In total, bitcoin exchanges become the very regulatory mechanisms Bitcoin participants proclaimed to overcome.
To boot, many Bitcoin users prefer privacy over middlemen. Instead of using a startup like Coinbase or Circle, they might oftentimes opt instead for LocalBitcoins, an early Bitcoin company that allows users to meet in public and trade bitcoins for cash.
The most pressing need for VC’s to consider in the Bitcoin industry is know your customer and anti money laundering procedures. Currently, due to the pseudonymous nature of bitcoin, there are many questions regarding how the technology might be regulated.
Another issue facing VC’s in the Bitcoin space has, once again, to do with the laws on the books. We’ve seen issues play out before, such as the case with Charlie Shrem, who took money from the Winklevoss twins – self-proclaimed founders of Facebook – only to be sentenced to prison for two years shortly thereafter for money laundering. He sold bitcoins to someone reselling on the Silk Road, online drug marketplace.
For any VC’s entering the space, vetting the operators of their company will be paramount. Are the startups they are looking to invest into run by anti establishment libertarian types who might ignore the regulations? Ensuring that’s not the case will prove very important to any venture capitalist on the cutting edge of financial technology.
At the end of the day, those Bitcoin participants doing the most intellectually and consumer relevant work in the blockchain space are not those show-boating, so patience in finding a diamond in the rough will be key for any investors into the Bitcoin space, and public blockchain space generally.
Featured image from Shutterstock.
