As bitcoin price slumps, investor interest holds steady

Jennifer Longson, owner of EO Cups and Cakes in San Francisco, sales a half dozen of her cup cakes Thursday, April 25, 2013 in San Francisco, California. Longson is one of the few retailers that will accept the virtual currency known as bitcoins. less Jennifer Longson, owner of EO Cups and Cakes in San Francisco, sales a half dozen of her cup cakes Thursday, April 25, 2013 in San Francisco, California. Longson is one of the few retailers that will accept the ... more Photo: Lance Iversen / The Chronicle Photo: Lance Iversen / The Chronicle Image 1 of / 3 Caption Close As bitcoin price slumps, investor interest holds steady 1 / 3 Back to Gallery

Bitcoin has had a rough go of it recently.

In a 48-hour period in January, the digital currency and payment system declined 34 percent in value. It rebounded some — a bitcoin was worth $235 at the close of last week according to CoinDesk — but still trades at a tiny fraction of its $1,200 peak in December 2013.

With the decline, bitcoin businesses have struggled to continue operations. Last month, one company, CEX.io, said the tumbling prices forced it to temporarily suspend its bitcoin mining services. Mining operations are the backbone of the bitcoin network, running the computer program that processes all bitcoin transactions in exchange for a chance to unearth new bitcoins in the process.

Virtual currency has faded from the public eye, too. News coverage has declined precipitously, according to a media study by CoinDesk and Bitpay. Google searches for bitcoin fell off dramatically last May and have remained flat, according to Google Trends. And a recent survey by CoinCenter found 65 percent of people hadn’t heard of bitcoin at all, prompting the Bitcoin Foundation, a nonprofit bitcoin advocacy group, to this month launch a public awareness campaign to explain the relevance of bitcoin.

“The decline in value has definitely reduced mainstream enthusiasm,” said Gregory Kennedy, a Silicon Valley thought leader who writes regularly on bitcoin.

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“I haven’t heard anyone say that they were profitable from bitcoin in a long time,” he added.

And yet, as prices have dipped and the spotlight has dimmed, investment dollars have poured in and the number of bitcoin transactions has swelled.

Transactions rise

In the last quarter of 2014, investment in bitcoin startups hit a new record of $129 million, according to the analysis firm CB Insights. Investment in 2014 totaled more than $400 million. In January, the bitcoin exchange Coinbase received a $75 million investment — the largest ever in a bitcoin startup — from big-name institutions such as the New York Stock Exchange and USAA.

“There is some aspect of the luster of bitcoin dropping,” said Matthew Wong, an analyst with CB Insights. “But investors are interested in not just bitcoin but its underlying infrastructure. Investors don’t see health of the space tied to price. It’s a long-term play, and there isn’t any indication the deals will drop off anytime soon.”

Major financial institutions have expressed interest in bitcoin, too, both curious about its potential to reduce the cost of transactions by cutting out middlemen and eager to assess the possibility of its competitive threat.

Speaking at the Museum of American Finance on Wall Street this month, former Treasury Secretary Larry Summers even voiced his enthusiasm for digital currency. Such payment systems, he said, will one day be ubiquitous.

“There will be a moment when they will go from you are struck by their presence to you are struck by their absence,” he said.

Last December, daily bitcoin transactions passed 100,000 for the first time in the digital currency’s history. More than 80,000 merchants — Microsoft and Overstock.com among them — now accept bitcoin. And that number is expected to reach 140,000 this year, according to analysis by CoinDesk.

But a decline in mainstream interest, bitcoin believers say, may be a good thing.

“There was this weird bitcoin spotlight for a while and there were casualties of that,” said Patrick Murck, the executive director of the Bitcoin Foundation, alluding to bitcoin’s infamous volatility. “Now that the hype cycle has died down, I think you’re seeing a maturing of the technology and the ecosystem.”

But Kennedy said the decline in interest could also lead to a Bitcoin Winter of sorts, with funding tapering off alongside interest until more “legitimate” uses for bitcoin in everyday life emerge. Wong, the analyst, said he expects many smaller bitcoin companies will fold in 2015 as they struggle to prove their relevance to customers.

A ways to go

Nathan Lands, an entrepreneur and bitcoin evangelist, learned the hard way just how far bitcoin may have to go. He was forced to rethink his bitcoin wallet startup, QuickCoin, after its use waned just one month after its launch in June. Bitcoin wallets allow users to exchange funds with one another via smartphone, but it turned out there just wasn’t much demand for it.

Lands’ wife’s restaurant, Ramen Underground in Japantown, was also a bitcoin pioneer — one of the first restaurants in San Francisco to accept virtual currencies. But interest there has dwindled, too.

“We’re somewhere in between the 'experimenting’ and 'starts working’ (phase), which falls right after 'initial enthusiasm’ and 'reality sits in.’” he said. “The biggest hurdle today is giving people unique ways and reasons to use bitcoin beyond speculation. Right now, you really only have remittances as a legitimate use case. Everything else makes very little sense.”

QuickCoin, Lands readily admits, was a failure. But he’s not ready to give up on his bitcoin belief altogether. The new incarnation of his company, Blockai, hopes to use tactics such as gaming and music to entice novices to give bitcoin a try.

“Just having a better bitcoin wallet isn’t enough,” he said.

Kristen V. Brown is a San Francisco Chronicle staff writer. E-mail: kbrown@sfchronicle.com Twitter: @kristenvbrown

What is a bitcoin?

Bitcoin is a peer-to-peer payment system that uses units of digital currency that only exist online and are not controlled by any central authority, such as a bank or government. Bitcoins are stored in a virtual wallet, and users exchange funds via anonymous identification numbers, like a wire transfer between bank accounts. Transactions are processed on computers that run the open-source bitcoin software — those who volunteer their processing power have a shot at unearthing new bitcoins for themselves in a process called mining. The thinking is that bitcoins are precious: There’s only a fixed number of them, making owning a bitcoin a little like having a share of a company stock.