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Why Venture Capitalists Don't Care about the Price of Bitcoin and Neither Should You

Since the digital currency's conception, the main talking point of Bitcoin has been the price. When searching for 'Bitcoin' in Google, 'Bitcoin Price' is the top recommended search. Over at Google News, a quick search of 'Bitcoin' is guaranteed to find numerous recent articles about the price of Bitcoin. It seems everywhere you look the media is keen to report that the price of Bitcoin has fallen from the $1000s to the $200s.

 

On the surface, this price crash suggests that Bitcoin is an industry in despair. Why then are venture capitalists investing more in Bitcoin startups now than internet startups in 1995? Venture capital funding into Bitcoin startups totaled $335 million in 2014, up 342% on 2013. Furthermore, a huge vote of confidence was recently made when stealth startup Inc 21 raised $116 million.

The Bitcoin price drop doesn't seem to have deterred venture capitalists in the slightest. Let's take a look at the reasons why venture capitalists seemingly do not care about Bitcoin's price.

A low price does not make Bitcoin any less useful

Bitcoin's primary advantages are faster and cheaper transactions without reliance on a third party. As the nominal transaction fees are denominated in Bitcoin, it actually becomes cheaper, in terms of USD, to send a transaction when the price falls. Alternatively, if you want to pay with a consistent fee in terms of USD, you will now be paying a higher fee in terms of Bitcoin. This will result in a faster transaction because miners will prioritize processing your transaction to obtain a higher reward.

Bitcoin right now is mostly used to transfer value that is denominated in USD. An example of this when merchants use a payment processor to receive the equivalent  USD price in Bitcoin. Afterwards, they then convert the majority of their Bitcoin back into USD , removing price fluctuation risks. Alternatively, shorting Bitcoin on a trading platform, such as BTC.sx, can be used to hedge against a price decline.

As venture capitalists are observing, Bitcoin is currently resembling a payment system rather than a stand-alone currency. Therefore the majority of Bitcoin use-cases are unaffected by a declining price.

There are more accurate metrics available

Any stock market trader will tell you that a high stock price does not always equate to a lucrative business. Instead, they will also consider other indicators like the P/E ratio, dividend yield and P/B ratio. 

The same holds true for Bitcoin. The price is simple to understand and easy to track. However, price does not equate to growth. The more accurate barometers of Bitcoin's growth are transaction volume, unique wallet addresses and network hash rate. These are all following an opposite direction to the price - the network has recently started averaging over 100,000 daily transactions

However, these metrics go unnoticed by the media. To pull in large traffic numbers, focusing on Bitcoin's price has a broader potential audience and is more shocking. Despite this, venture capitalists are conducting their due diligence and see the underlying metrics that show huge growth.

Price itself is an unreliable metric

Some of you may be thinking that if Bitcoin was growing, demand will increase for the currency,  resulting in a price rise.  This is economics 101 right? But the main determinants of Bitcoin's price appear to be greed, fear and manipulation.

Those with the largest influence on Bitcoin's price remain large traders - known as whales - and early adopters that have the capital to move markets when trading Bitcoin. As the market capitalization of Bitcoin is still relatively small, it is possible for the price to reach dizzying heights when the whales get greedy; but also crash when the whales get scared. The increase in Bitcoin's demand from adoption is not yet strong enough to exert more influence than the whales can.

Bitcoin is (in)famous for being a financial Wild West. Due to slack regulation, price manipulation is rife. The best example of this is Mt. Gox's Willy Bot, which is at least partially responsible for driving the price up to the $1000s. The bot was used to purchase large quantities of Bitcoin - ramping up demand - with money that did not exist and could not be withdrawn from the exchange. Since the collapse of Mt. Gox, the price has been gradually correcting back to a 'natural' level now that the artificial demand no longer exists. 

The end result of these factors are that the price has weak correlation to Bitcoin's rate of adoption. As mentioned above, it seems that venture capitalists are more interested in other metrics and the use-cases being pitched by startups.

If price does matter, Bitcoin is still performing in the long-term

A common headline this January has been 'Bitcoin is the worst performing currency of 2014'. This is absolutely true - Bitcoin has depreciated even more than the Rubble. However, if you look beyond a one-year horizon a completely different picture emerges. Back at Bitcoin's conception in 2009, the new digital currency traded at less than $0.01. At a current price of $292, Bitcoin is the strongest performing currency of all-time.

Using the mainstream media's logic of a falling price equates to failure, then Bitcoin's long-term appreciation must equate to success. Marc Andreessen tweeted: " As a general rule, arguments that rely on cherry-picking specific date windows are not very good arguments". Clearly then, venture capitalists are investing in the Bitcoin industry for the long-haul.

In summary, venture capitalists are looking beyond the often-quoted price and seeing Bitcoin's true growth. Those that believe in the potential of digital currencies should not be deterred by a price crash either.

 

Written by Josh Blatchford, Chief Marketing Officer of BTC.sx, a bitcoin trading platform that allows traders to take long or short positions with up to 10:1 leverage.

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