Bitcoin's Long Year
The real capitalists have taken over.
What a year it's been for Bitcoin. Scandal! Intrigue! Long-awaited acknowledgement by the Internal Revenue Service!
Bitcoinworld has never been boring, but 2014 stood out as an especially eventful period in the digital currency's short history. The year began in January when Bitcoin poster child Charlie Shrem was arrested for money laundering in connection with the digital drug marketplace Silk Road; it ended in December with him being sentenced to two years in jail.
Shrem's sentencing will make him the first notable Bitcoiner behind bars. Accused Silk Road operator Ross Ulbricht and others affiliated with the site are still awaiting trial, and Trendon Shavers, Bitcoin's version of Bernie Madoff, was only just arrested in November.
That was just the beginning of the bad news. February brought the ignominious collapse of Mt. Gox, the world's largest Bitcoin exchange, which had custody of 744,408 bitcoins or roughly 6 percent of the global supply.
Ryan Selkis, who blogs under the handle Two Bit Idiot and broke the news of Mt. Gox's demise, was worried that the site's downfall would sink the whole currency.
"When Mt. Gox happened, I thought that was a better-than-average or good chance that regulators and authorities would step in and basically crack down on all the major Bitcoin players in the industry and make it impossible to do business," said Selkis, who is now working on a Bitcoin investment fund. "If the industry can survive Mt. Gox, I'm pretty bullish on its health and its ability to weather many storms in the future."
The death of Mt. Gox was arguably the end of the Bitcoin old guard
The death of Mt. Gox was arguably the end of the Bitcoin old guard. All the players that were dominant in the younger days of Bitcoin—Mt. Gox, Silk Road, Shrem's company BitInstant—have fallen. Even the Bitcoin Foundation, a nonprofit trade association formed by lead developer Gavin Andresen and other early members of the community, was racked by a series of resignations and its authoritative position undermined.
Meanwhile, Newsweek doxed a California retiree, Dorian Nakamoto, who is probably not the creator of Bitcoin. The resulting media frenzy inspired Bitcoin fans to send money and model trains to the engineer, and death threats to Newsweek reporter Leah Goodman. A hacker hijacked an email account associated with the true creator, the pseudonymous Satoshi Nakamoto, but failed to produce more evidence of the mysterious cryptographer's real identity. After nearly six years of being tortured by the mystery, we started to wonder if Satoshi's real identity even matters.
There was some good news, too: the IRS finally explained how to account for Bitcoin on your taxes, and New York financial regulators made headway on an official BitLicense for digital currency businesses.
We also saw the price of a single bitcoin fall from a peak of more than $1,200 at the end of last year to about $321 at the time of this writing. The currency is down 52 percent year over year, writes Quartz, which called it "the worst investment of 2014."
If 2013 was the year of unbridled hype, 2014 may have been the year of true greed. While some amateurs plugged money into the rapidly inflating currency and promptly lost half their retirement savings, the real capitalists were moving in.
At the very end of 2013, the Silicon Valley A-list venture capital firm Andreesen Horowitz led a $25 million investment in Coinbase, which facilitates merchant payments in Bitcoin. Xapo, a more sophisticated Mt. Gox, set a record for Bitcoin funding when it raised $40 million in July. Circle, which is "trying to build a financial services market" for Bitcoin, raised $17 million. BitPay, another merchants servicer, raised $30 million. A payments processor raised $8.5 million and a mining company raised $14 million.
This little roundup is hardly comprehensive, but it should give the right impression: there was a lot of venture capital invested in Bitcoin in 2014.
"Last year there was a lot of hype due to the rapid rise in prices," said Nicolas Christin, an assistant research professor at Carnegie Mellon University who studies Bitcoin. "This year, it is more about people going 'long' with it—not necessarily people interested in making speculative investments with it."
In other words, we're seeing high-risk, high-reward investors bet serious money on Bitcoin having massive long-term returns. That investment has spurred improvements in design, usability, and availability of the currency in an unprecedented way. We'll likely see the full impact of that trend next year—and maybe the stock photos will even get better.