The cryptocurrency market may be in its early stages, but Bitcoin has hit the $1,000 valuation for the first time, only eight months after it first climbed above $100.

For those who are still unsure about what Bitcoins really are; they represent a kind of self-regulating currency, or token, whose value is ultimately determined by how much individuals are willing to exchange for.
 
Bitcoin transactions are processed by mining them, a procedure involving computing power and mathematical problems. Each problem solved by a computer results in new Bitcoins being processed and awarded.
 
The total number of Bitcoins is limited to 21 million to ensure they are not devalued, and users store the currency in a digital wallet – a public encryption key verifying transactions.
 
Part of the reason for Bitcoins being so popular is that they can be transferred person-to-person, without going through a bank, and the fees associated are much lower. They can be used in any country around the world and accounts cannot be frozen.
 
As with any technological development which grips the world and threatens to significantly disrupt what many would argue is an outdated process, there are a host of enterprising individuals hoping to piggyback on the rising wave and create a package of services.

Early Bitcoin movers

One such venture was covered by GrowthBusiness back in October when London-based Coinfloor closed a funding deal involving early-stage investor Passion Capital and TransferWise co-founder Taavet Hinrikus.
 
On securing its growth capital, Coinfloor opened its doors and allowed users to open accounts and begin trading in Bitcoins. The business is hoping to become the ‘world’s most reputable and trustworthy digital currency exchange’ and has partnered with banks to create secure bank accounts, of which the fist in place was a Santander majority-owned bank in Europe.
 
Despite securing backing from Passion Capital, the firm behind investments in Duedil, GoCardless and Adzuna, and Taavet Hinrikus, the first employee at Skype and brains behind fast-growing money transfer system TransferWise, Bitcoin is still un unregulated entity which is volatile and extremely hard to predict the movements of.
 
So how does an investor go about valuing a business building off the back of Bitcoins? And what are they looking for?
 
Stefan Glaenzer, co-founder of Passion Capital, led the investment into Coinfloor and says that his approach varied very little from how he would size up any start-up.
 
‘You always invest in team, technology and traction,’ he explains. ‘Those are the three criteria really.’
 
‘The team is led by CEO Mike Lamb and contains James McCarthy, who has previously launched a Bitcoin exchange in the very early days.’

Glaenzer says that the entire team has been very influential in the whole Bitcoin community so have the complete package. Investing at this stage, he adds, is all about the team, as he cannot judge anything else.
 
The start-up investor’s first exposure to Bitcoins came back in late 2009 when Passion Capital invested in Flattr.com, a social micro-payments entity.
 
Having conducted their usual market screening of that particular market, Glaenzer and his team came across Bitcoins and were interested by what they saw.
 
‘I tried it to buy some back then but found it really hard, so forgot about it,’ he reveals.
 
‘It wasn’t until the beginning of this year that I really became hooked on them, and spent lots of time trying to understand the construct.’

New disruption

Glaenzer compares the Bitcoin phenomenon to the one that occurred back in 1994 with the World Wide Web – a feeling that something is happening without really knowing what is ultimately going to happen.
 
Coinfloor is attempting to make the buying and selling of Bitcoins 100 per cent interesting to amateurs as well as professional traders and hedge funds.
 
‘The solution they had in mind with the trading engine was better than all others we’d seen,’ he says.
 
Going forward, Glaenzer says that the volatility we are seeing is a state of an immature market. The trading volume compared to other asset classes is still relatively low, but players like Coinfloor will ultimately manage its way to becoming a more stable currency.
 
For Bitcoins to stabilise and enter the more mainstream market, Glaenzer would like to see adoption from retailers. Spreading into different verticals, as the World Wide Web was successful in doing, would help with this.
 
In pressing Glaenzer about how Bitcoins might develop, he raises the issue of trust and looks back to his PhD in the 1980s on foreign exchange markets as an interesting comparison.
 
‘Everything is built around trust. I think of Bitcoins as gold designed for the digital economy.

‘Bitcoin is coming out of trust in a distributed network. It is going to be an interesting question if we are going to see a new form of trust emerging.’
 
Coming back to how the investor made the decision to back Coinfloor and what promise the saw, Glaenzer says that Coinfloor had two of the three T’s he looks for as a backer. After the promising team, the platform prototype [technology element] presented was very good, he says. As for traction, well that is just going to have to wait, as the business is too early stage.
 
‘In every case you start at zero in a start-up, then it’s all about a better problem solution on offer,’ he adds.
 
It was the complete set of skills held by the founders at Coinfloor that ultimately attracted Glaenzer and Passion Capital – the knowledge that if anyone is going to make a success out of the buying and selling of Bitcoins, it would be them.
 
‘The development of Bitcoins has come a long way in 2013, but we are still at a very early stage,’ he warns.
 
And for those of you wondering if Glaenzer was one of those individuals you read about in the news who realise they are sitting on a forgotten goldmine, well the difficulties he first encountered in acquiring Bitcoins put pay to that.