NEW YORK (MarketWatch) — Bitcoin is the hottest investing trend since the Internet, according to venture capitalists who have sung its praises. But the money hasn’t exactly followed.

Venture capitalists invested $74.1 million in bitcoin startups across 39 deals in 2013, according to data provided by CB Insights. That’s less than a third of what Internet companies raised in first-round funding in 1995, when Internet leaders like Yahoo, Inc. US:YHOO and eBay Inc. EBAY, -0.06% were just getting off the ground.

In fact, for all the predictions that bitcoin is on the cusp of blowing up the traditional financial system, investors have largely kept to the sidelines. The last round of funding raised by Oculus VR — the maker of virtual-reality goggles that Facebook Inc. FB, -0.89% agreed to acquire last month — was more than all of bitcoin’s VC haul in 2013.

“From an aggregate standpoint, a hundred million bucks in venture is a pittance. It’s a rounding error,” said Matthew Roszak, co-founder of the venture-capital firm SilkRoad Equity. He has a portfolio of 10 bitcoin investments.

Bitcoin funding: Less than biotech, banks

Some industries are likely attracting more funding because they are bigger. Software companies attracted $11 billion in VC funding last year, the most of the industries surveyed, according to the MoneyTree Report from PricewaterhouseCoopers and the National Venture Capital Association, which uses data from Thomson Reuters. The software industry also attracted the most deals, and when that number is taken into account, the average software investment isn’t among the highest.

Interest in bitcoin has started to pick up this year. VC investments in bitcoin-related firms rose to $64.9 million across 14 deals in the first quarter, nearly 90% of the money raised last year, according to CB Insights. If funding kept up that pace, it would top $200 million this year.

But it’s coming from the far back of the pack. The average bitcoin investment was $1.9 million last year. The average investment in biotech, on the other hand, was $9.6 million.

These small-potatoes investments have flown in the face of expectations that the digital currency will bulldoze the way the world uses money, leaving old intermediaries like banks and credit card companies in their wake.

“We’re still in the very early innings of the bitcoin industry as a whole. If you compare it to the Internet industry, we’re probably back in 1995 or 1996 and right now it’s all about infrastructure,” said Pamir Gelenbe, a venture partner at Hummingbird Ventures. His firm in late March led a $5 million funding round for the virtual-currency exchange Kraken.

Bitcoin is a virtual currency that is created through cryptography rather than by a central bank. Transactions are verified by a network of computers crunching cryptographic problems, and those machines are rewarded by earning bitcoins. The decentralized network through which bitcoins are transmitted has been trumpeted as having the potential to allow for the quicker and cheaper transfer of money around the world.

Marc Andreessen has been one of the most vocal in touting bitcoin’s potential, drawing parallels between the early Internet days of the mid-1990s and bitcoin of today. By Silicon Valley standards, Andreessen can be seen as something of a wise elder: co-author of Web browser Mosaic, the first widely used Web browser; co-founder in 1994 of Netscape Communications Corp.; and co-founder of venture-capital firm Andreessen Horowitz.

“Bitcoin gives us, for the first time, a way for one Internet user to transfer a unique piece of digital property to another Internet user, such that the transfer is guaranteed to be safe and secure, everyone knows that the transfer has taken place, and nobody can challenge the legitimacy of the transfer,” Andreessen wrote in a January post in the New York Times.

Marc Andreessen Bloomberg

“The consequences of this breakthrough are hard to overstate,” he added. Read: Bitcoin could get boost from Square and Stripe moves

Fred Wilson of Union Square Ventures, and Jim Breyer of Accel Partners have made similar statements about bitcoin’s game-changing potential.

“The global transformation in payments made possible by bitcoin and digital currency is one of the most significant investment opportunities in the past 30 years,” Breyer said in a March statement announcing a second round of funding for Circle Internet Financial.

Andreessen and Wilson have backed up their hopes with cash investments, to a degree. Roughly 40% of all of last year’s bitcoin funding went to the San Francisco-based Coinbase, which raised $5 million in a Series A round led by Union Square Ventures in May and $25 million in a Series B round led by Andreessen Horowitz in December.

But bitcoin investments are a fraction of investments in the mid-1990s in Internet companies.

First-sequence financing in Internet-specific companies in 1995 was $250.2 million and total financing was $507.8 million, according to the MoneyTree Report from PricewaterhouseCoopers and the National Venture Capital Association, which uses data from Thomson Reuters. The first year of data available for Internet-specific investments is 1995, according to the MoneyTree Report.

Mt. Gox, Silk Road

So what’s holding venture capitalists back? For Jeff Clavier, a managing partner at the seed venture-capital firm SoftTech VC, hesitation stems from several risks in the bitcoin industry, including taxation and legal scrutiny.

The approach to taxation and regulation differs by country. Shortly before the deadline for U.S. taxes, the Internal Revenue Service said bitcoin will be taxed as property, not currency. Norway’s director general of taxation has said bitcoins will be treated as an asset. Rumors of regulation from China’s central bank tend to cause large swings in bitcoin’s price.

“ You don’t need to rush and put all your chips on the table-- ” — Jeff Clavier, SoftTech

The risks tied to bitcoin companies and entrepreneurs have been very real. Bitcoin’s early image was tainted by anonymity and illicit drugs, sparked by the infamous drug market Silk Road that accepted bitcoins as payment and was seized by federal authorities in October. The website had revenue of more than 9.5 million bitcoins in the two-and-a-half years it operated, which was worth about $1.2 billion at the time of its seizure.

The Japanese bitcoin exchange Mt. Gox, which was once the prominent venue for trading the virtual currency, disappeared in late February and later filed for bankruptcy, disclosing that it had lost thousands of its customers’ funds.

“If it’s really as transformative and big as people have been talking about, there will be extremely valuable companies built over the next few years,” Clavier said of bitcoin. “So you don’t need to rush and put all your chips on the table,” he added.

Shakil Khan, an angel investor and founder of the digital-currency focused website CoinDesk, said the problem could lie with the types of companies that are soliciting capital.

Jeff Clavier SoftTech VC

“One of the things which is apparent by looking at the audience, there is no shortage of institutional capital looking to make investments,” he said on the sidelines of the CoinSummit conference in San Francisco last month. “Unfortunately there’s probably a lack of companies ready to accept the funding due to professionalism, regulation,” he said.

But maybe it’s only a matter of time. The venture capital that didn’t show up during bitcoin’s tumultuous 2013, when prices surged from $13 to more than $1,000 and then back to around $500, may be waiting in the wings this year. That’s the hope, at any rate.

“The take-away from 2013 for many venture capitalists was the need to establish a bitcoin strategy, said Roszak of SilkRoad Equity. It was “the wake up and smell the bitcoin moment for them,” he said.

SilkRoad Equity, which is based in Chicago, took its name from the ancient trading route between Europe and Asia, he said. The firm’s name is also the reason he first found out about bitcoin, because of the now-defunct online drug market called Silk Road that accepted the virtual currency. Roszak has a portfolio of 10 bitcoin investments.

“A technology like bitcoin today is going to grow in scale and have its network effect come together much differently, much more quickly, than any other technologies we’ve seen,” he added.

— Sarah Squire contributed to this report.

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