You'll Never Guess Who's Investing in Bitcoin

By Markets Fool.com

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Source: Flickr user Marc van der Chijs.

Goldman Sachs recently announced that it was partnering with a Chinese investment firm to lead a $50 million investment into Bitcoin start-up Circle Internet Financial. This deal represents the first large investment of its kind by a major bank, and it definitely could make a big difference in the Bitcoin space as well as the way we transfer money in our everyday lives. So what does Circle Internet Financial do, and why is it the first Bitcoin company to attract an investment from a major bank?

The deal, and why Goldman wants a piece of the Bitcoin business
To be perfectly clear, Goldman Sachs isn't actually buying any Bitcoins, nor has it expressed any intention or desire to do so.

What Goldman is doing is investing millions of dollars into Circle Internet Financial, a Bitcoin start-up with an innovative new idea aimed at changing the digital-payments business as we know it. Along with IDG Capital Partners (and several other investors), $50 million is being invested altogether. We don't know exactly how much of this amount came from Goldman, but Jeremy Allaire, CEO and co-founder of Circle did say that the majority of the investment came from Goldman and IDG.

As far as Goldman's goal, well, obviously it would love for its investment in Circle to produce a large monetary gain. However, there is likely a deeper motivation.

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The investment was made by Goldman Sachs' Principal Strategic Investments Group, which focuses on investments within the financial technology space. In other words, they invest in companies whose products they could conceivably use in Goldman's own business. So let's look at what Circle does, and why it could be different from the hundreds of other Bitcoin start-ups that have sprung up in recent years.

What is Circle Internet Financial, and what does it do?
Circle Internet Financial wants to use Bitcoin's underlying technology to transform the way consumers pay for things, by developing cheap, secure, and easy ways for people to transfer money.

The main thing that makes Circle different is a new feature it plans to integrate over the coming weeks. Circle is allowing consumers to hold U.S. dollars in their accounts but is allowing them all of the transfer capabilities of digital currencies. In other words, Circle is giving people Bitcoin, without the volatility or hassle of actually buying Bitcoins on an exchange. And the dollar-denominated account balances held in Circle accounts are FDIC insured.

In other words, Circle users can choose to hold U.S. dollars but can pay any merchant anywhere in the world who accepts Bitcoin. Circle will instantly convert the dollars into Bitcoin at the time of payment, and Circle users can also accept Bitcoin payments, which will be instantly converted into dollars. And Bitcoin is powered by a decentralized network of computers, not a company (like Visa) that can charge transfer fees.

In effect, for Circle users, Bitcoin isn't a currency at all. Rather, it's a new payment network that enables secure, instant, and nearly free payments.

Of course, customers who choose to hold Bitcoins in their accounts can still do so, and they can deposit and withdraw their Circle balances to their other Bitcoin wallets.

Bitcoin's future could be bright indeed
Bitcoin has attracted a significant amount of negative attention over the past few years, because of its reputation as a black-market currency, the collapse of a massive bitcoin exchange, and the extreme price fluctuations that saw the value of a Bitcoin rise from less than a penny in early 2010 to $1,200 by the end of 2013 and back down to about $225, where it currently sits.

However, there are a few things to note. First, all new technologies experience growing pains. For example, solar stocks such as First Solarwere going through the roof in 2008, crashed over the next few years, and are now stabilizing and consistently profitable.

And most importantly, the long-term value of Bitcoin may not be in the currency itself, but the technology that makes easy, low-cost transfers of money possible. That is what Circle Internet Financial is trying to capitalize on, and that's why Goldman Sachs is willing to throw millions of dollars behind it.

Bitcoin and its underlying technology are at the forefront of a technological revolution that could change the way we pay for things and transfer money, and it looks like Goldman Sachs wants to get in on the ground floor.

The article You'll Never Guess Who's Investing in Bitcoin originally appeared on Fool.com.

Matthew Frankel owns shares of First Solar. The Motley Fool recommends Goldman Sachs. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.