Backed by Silicon Valley Cash, Bitcoin Begins to Mature

Bitcoin has been around for six years now, but most of us are still unclear on just what it is, let alone why it matters. The digital currency has been flying under the radar, appealing to a group of die-hard fans, like libertarians who want freedom from government control, and illegal drug traders -- who also want freedom from government control. But that Wild West world is giving way.

If you work in Silicon Valley, as Ryan Singer does, you can appreciate what it feels like to be excited about something much of the rest of the world has never heard of. Singer’s startup, Domus Tower, is developing Bitcoin technology that will speed up stock trades.

He understands that Bitcoin sounds new and strange and possibly scary, and ticks off some frequently heard concerns: "Are your identities safe on it? Are children safe on it? Is it a method for spreading pornography? That was basically all anyone said about the Internet until suddenly it became normal."

Bitcoin is hardly “normal” - yet. Lots of people have reasons to distrust it, thanks to a string of high-profile scandals.

• Silk Road Mastermind Ross Ulbricht Convicted of All 7 Charges
• MtGox bitcoin exchange reopens so users can stare listlessly at their loss
• Bitcoin 'exit scam': deep-web market operators disappear with $12 million

As a result, Bitcoin’s value has careened wildly from north of $1,200 at the top (in 2013) to less than $230 now.

Scams and scandals aside, people are curious. Bitcoin was the No. 4 Google search question last year in San Francisco and Oakland. As in, “What is Bitcoin?”

So: What is Bitcoin?

It’s money, tradable like dollars or gold, but there’s no central bank, no controlling institution. A distributed network of computers keeps track of who owns what and where. And these days, you can buy a lot more than illegal drugs with Bitcoin, like a Tesla Model S or a new couch at Overstock.com. The more Bitcoin catches on, the more it attracts the attention of people who want to see just how far it can go. Namely, venture capitalists.

Tim Draper has invested in 35 Bitcoin startups to date, and he’s just one VC. A couple others include the famous Winklevoss twins, Tyler and Cameron. Draper says it’s not just Bitcoin the currency that has lots of possibilities. It’s also the way that a distributed network without middle men makes all kinds of financial transactions cheaper and faster.

"Bankers are nervous," Draper says. "Every time you buy something at the store with a credit card, the bank’s taking 2½ to 4 percent. The bank takes somewhere between 8 and 16 percent when you’re sending money to another country. Those businesses are going to be flattened by Bitcoin."

Or banks and the like will get in on the game, too. Already, regulators at the state and federal level are crafting laws. One bill in the California Assembly would establish the first guidelines for people and companies keen to use virtual currency here. New York’s moving even faster, because Wall Street is already getting in on the Bitcoin boom.

Jerry Brito runs Coin Center, a Bitcoin research outfit in Washington, D.C., which reported last month that 6.2 percent of U.S. survey respondents say they've used Bitcoin.

"For example, there are now Bitcoin derivatives and Bitcoin derivative exchanges (approved by the Commodity Futures Trading Commission) where you can trade Bitcoin options of different kinds. And if you wanted to invest in Bitcoin, you would not have to hold the Bitcoin itself. You could simply invest in a fund.

"There needs to be greater regulatory certainty," Brito adds. "Right now, we’re getting there. At the federal level, the Treasury Department has issued guidance that explains how Bitcoin businesses must comply with the Bank Secrecy Act, with anti-money-laundering and Know Your Customer regulations, and there are companies today that are venture-backed, that are run by serious people, and are complying with those regulations."

Below: Venture capitalist Tim Draper talks about Bitcoin.