Founders Fund’s Peter Thiel. Image: JD Lasica/Flickr (CC BY 2.0)
Founders Fund has taken a big punt on the rising cryptocurrency.
Bitcoin last night (2 January) closed at a value of $15,392, no doubt spurred on by news that PayPal co-founder Peter Thiel’s Founders Fund has a stash worth potentially hundreds of millions of dollars.
Founders Fund is understood to have acquired between $15m and $20m of bitcoin in recent years, according to The Wall Street Journal.
It isn’t clear if Founders Fund has sold any of these holdings.
Another noted Silicon Valley investor, Tim Draper of Draper Fisher Jurvetson, is understood to have acquired about 30,000 bitcoins in 2014. If he hasn’t sold any of these, he could be sitting on a bitcoin goldmine with a current value of $450m.
According to CoinDesk at the time of writing, a single bitcoin is worth $15,392 while a similar cryptocurrency, Ethereum, is currently worth $897 per unit.
What is bitcoin?
Bitcoin is a cryptocurrency invented in 2009, based on a white paper by a so-called Satoshi Nakamoto (no one has figured out if they are a real person or not).
Bitcoins are not physical but represent balances that are kept on a public blockchain ledger, using public and private keys in the cloud and not on any single server. The public key is an address and the private key is a secret code that can be used to authorise bitcoin transmissions.
According to Investopedia, today’s market for bitcoin exceeds $7bn. Under the rules set by Nakamoto, there can only be 21m bitcoin in the world; currently, the number in circulation stands at around 16.5m.
Bitcoin can be created or ‘mined’ by solving complex mathematical problems, and some believe that the coins will hold their value due to the limited supply, in a similar way to silver, oil and gold.
Is this a Dutch tulip auction about to happen?
No one knows. Money doesn’t grow on trees but it appears to have grown on networks, and you could joke that the geeks have found a way to print money.
But, laughing aside, bitcoin is being studied by stock exchanges all over the world. Last month, the cryptocurrency launched on the Chicago Board Options Exchange.
That said, other countries are clamping down, with China, Singapore and South Korea having instigated crackdowns on cryptocurrencies.
The prevalence of cryptocurrencies has kickstarted a phenomenon known as initial coin offers (ICOs) whereby a cryptocurrency is launched with the backing of willing investors. The popularity of ICOs is seemingly enormous and last year looked set to surpass equity investment as a source of funding for start-ups.
According to ICO Bench, a tracking site for ICOs, there are about 205 upcoming ICOs, 340 ongoing ICOs and 410 completed ICOs so far. Last June, the Bancor token project based on the Ethereum blockchain raised $154m in an ICO.
But ICOs are also associated with attacks led by cyber-criminals and, according to Chainalysis, around 10pc of ICOs last year succumbed to various scams, including phishing and Ponzi schemes.
Out of an estimated $1.6bn invested in ICOs by September, about $150m ended up in the hands of criminals. And some of the heists have been considerable. The DAO, for example, raised $150m in its ICO, only to see $55m of that siphoned off by cyber-criminals months later.
So, who is right? Do cryptocurrencies such as bitcoin represent the future of money, or will hapless investors end up holding bits rather than bulbs when the whole thing blows up spectacularly?
After all, bitcoins are based on the value put on them by a like-minded crowd, and they are not linked to any sovereign state or gold standard, nor are they protected by a standing army.
However, savvy investors such as Thiel and Draper believe in them and perhaps do see something that most people don’t.
Only time will tell.
Founders Fund’s Peter Thiel. Image: JD Lasica/Flickr (CC BY 2.0)
