Bitcoin isn’t just for buying and selling cupcakes and cameras anymore.
A crop of entrepreneurs – backed by investors such as Andreessen Horowitz and BitAngels – is betting that the technology behind the virtual currency can be used for a range of financial tasks now handled by banks, exchanges, e-commerce providers and other middlemen.
Invictus Innovations, Ripple Labs and other startups are harnessing Bitcoin’s underlying code for such tasks as authentication (making sure a buyer isn’t posing as someone else) and verification of payments (to ensure that a transaction is valid).
If successful, the new tools could reduce the fees shouldered by buyers and sellers in the $1.22 trillion global electronic-commerce market, as well as in financial services, cloud computing and other areas.
“People are just starting to realize that Bitcoin isn’t a currency and a payment system, it’s the Internet of Money,” David Johnston, co-founder of BitAngels, a group of investors in Bitcoin-related startups, said in an interview. “It’s a really exciting time.”
BitAngels is considering more than 30 projects in the Internet-of-Money category, Johnston said.
There’s growing recognition, even among financial firms, that Bitcoin’s underlying design can be used for any transaction requiring some degree of verification.
While bitcoins probably won’t be viable as a currency, the basic technology “could hold promise,” Goldman Sachs wrote in a report this month. Bitcoin’s future as the Internet of Money was one of the hottest topics at the CoinSummit conference in San Francisco this week.
Bitcoin captured the attention of investors and innovators last year, fueling a rally that drove the value of the digital money to about $1,200 from $12.
More recently, scrutiny from governments, bans in China and India, and the collapse of online exchange Mt. Gox have cast doubt on the viability of Bitcoin as credible replacement for fiat currencies.
The price of Bitcoin plunged almost 10 percent this week after China’s central bank ordered banks and payment companies to close the trading accounts of more than 10 Bitcoin exchanges. Bitcoin was valued at about $500 on Wednesday, according to the CoinDesk Bitcoin Price Index.
The software behind Bitcoin relies on a public record of every transaction that’s ever made. When someone spends all or part of a Bitcoin, the change in ownership is recorded, ensuring that the same unit of money can’t be used twice.
The owners of computers solving and verifying these transactions are rewarded with new bitcoins for their work.
Bitcoin’s building blocks, designed to validate each transaction, are adaptable for any type of exchange, regardless of whether they are attached to a currency. Called a blockchain, the currency’s underlying design opens up possibilities for other industries, according to Marc Andreessen, who is looking to fund startups focused on this new category.