Beset by Volatility and Usage Questions, Bitcoin Attracts Record Investment

Bitcoin had a rough first quarter, leaving open questions about its ability to break into the mainstream of global payments. But that didn’t stop investment cash, which poured into startups supporting the digital currency at a record rate. That’s according to a quarterly report released Friday by Coindesk Research, which follows Bitcoin.

Venture capital totaling $229 million, a record quarterly sum for Bitcoin, was injected into startups in the January through March period, bringing the total invested since Bitcoin’s emergence in 2009 to $676 million. Two companies, stealth startup 21 Inc. ($116 million) and Coinbase Inc. ($75 million), a provider of both consumer and merchant accounts, accounted for the bulk of the first-quarter cash.

Coindesk Research expects Bitcoin investment to hit $916 million this year, easily outpacing Internet investment at an equivalent time in the Web’s development. Total Internet investment in 1996, for example, was $638 million, the report says.

Bullish investor sentiment came amid a quarter that saw Bitcoin’s price plummet and then see-saw between $200 and $300. While the currency started the year just over $319, it plunged to a low of $177 within two weeks, and has since floated around the $250 mark. Bitcoin’s historic volatility has left observers wondering how long its current, relative stability can last. January’s break below $200 took Bitcoin under what Coindesk Research calls “an important psychological marker.” Overall, Bitcoin finished the first quarter down 24% from the end of 2014.

At the same time, questions about adoption continue to plague the digital currency. New merchants accepting Bitcoin dropped to an all-time low in the quarter, with just under 2,000 added. That’s far fewer than the more than 16,000 added in the first quarter of 2014. Overall, some 88,000 merchants now accept Bitcoin.

Still, the problem may lie more on the consumer side than among merchants. Merchants are attracted to Bitcoin’s low cost of acceptance and can avoid its volatility by converting it instantly into dollars. Major companies like Microsoft  Corp. and Time Inc. began accepting the currency in the fourth quarter alone.

But merchants have been disappointed by lackluster usage rates among consumers, the report indicates. Usage, in turn, has been hampered by low levels of awareness and a general difficulty in obtaining Bitcoin. While Bitcoin wallets have been growing steadily, questions remain about how many of these accounts are lying dormant.

Wallets, which is where most of the investment capital is focused, grew from 3.2 million at the end of 2013 to 7.9 million a year later, according to the report, which forecasts they will reach 12 million by the end of 2015.

Bitcoin ATMs make it easier to get the currency, but these remain relatively scarce, and consumers are put off by high transaction fees, the report says. There are now 374 machines deployed worldwide, with half of these in North America, and Coindesk Research forecasts 750 by the end of the year. But deployments are slowing down, with just 32 in the first quarter, compared with 104 in the fourth.