Founders Fund, a venture capital firm co-founded by Peter Thiel, has taken a large position in bitcoin, the Wall Street Journal reported Jan. 2. Citing unnamed sources, the paper said that Founders bought $15 million to $20 million of the cryptocurrency beginning in mid-2017, a stake that has since appreciated to hundreds of millions of dollars. It is unclear if the firm has sold any of its holdings.
Thiel big on payment methods, in general
Thiel started PayPal Holdings Inc. (PYPL) – a payment system to which bitcoin is sometimes compared, often unfavorably – in 1988, together with serial entrepreneur Elon Musk and other co-founders. Thiel was also an early investor in Facebook Inc. (FB) and other notable Silicon Valley success stories, making his investing decisions particularly influential. The price of bitcoin popped on the news, passing $15,040 – a 14% daily gain – at the time of writing.
The cryptocurrency began the year at around $1,000 and reached a high above $19,000 in December, before crashing below $11,000 and then recovering some of those losses. Bitcoin's price is famously volatile, and double-digit swings within a matter of hours are not uncommon. The steep gains and losses it experienced in 2017 are far from unprecedented: bitcoin's price climbed by nearly 50,000% from 2010 to 2011, then fell by more than 90%; from 2011 to 2013 it repeated the trick, climbing by more than 50,000% and falling by more than 80%.
Has Bitcoin gone mainstream?
Bitcoin's early appeal following its release in January 2009 was to libertarians (and some criminals) who saw its distributed, decentralized nature as making it possible to undercut the banks and other institutions that had recently precipitated an acute global financial crisis. Fashions change quickly in the world of cryptocurrencies, however. By 2015 mainstream financial institutions were taking Satoshi Nakamoto's innovation seriously, but they were mostly interested in divorcing bitcoin proper from the novel sort of network that powers it: a sort of distributed ledger called a blockchain. (See also, How Bitcoin Works.)
A couple of years later, financial institutions are even more excited about the topic, but many have quietly shelved plans to build their own blockchains (if these projects were blockchains in the proper sense) and have focused instead on building out the financial infrastructure around bitcoin itself. CME Group and Cboe have launched futures contracts tied to bitcoin's price, and a recent conference in New York featured a panel of experts discussing the introduction of derivatives to cryptocurrency markets. (See also, Four Problems with Bitcoin Futures.)
A good or bad sign for Bitcoin?
It is still relatively rare to hear of mainstream players taking direct stakes in bitcoin: either long, because of the risk and stigma surrounding it, or short, because of the sharp gains that characterized 2017 and previous bitcoin bull markets. Thiel's decision to invest could indicate a shift in attitudes – if it does not spur one itself. Or he could remain an outlier: Thiel is an outspoken libertarian and arguably a product of first-wave bitcoin enthusiasm, rather than the current surge in interest on the part of mainstream investors. As a Bay Area Donald Trump supporter and an openly gay Republican, he's also demonstrated ample willingness to flout conventional expectations.
Then again, CNBC reported in October that more than 120 hedge funds were focused exclusively on cryptocurrency investments, a four-fold increase from the previous year. It is possible that, as happened previously with mortgage-backed securities and junk bonds, large investors will overcome their hesitation after watching a few of their peers make outsized returns.
Or, as Thiel reportedly warned investors in the Founders Fund, bitcoin could turn out like so many risky venture capital bets: it could wind up being worth nothing.
Investing in cryptocurrencies and other Initial Coin Offerings ("ICOs") is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or other ICOs. Since each individual's situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein. As of the date this article was written, the author owns approximately 0.04 bitcoin and has a long position in PayPal Holdings Inc.