As a VC, my interest in the Bitcoin ecosystem is not ideological but mercenary. I see the opportunity for Bitcoin to disrupt multi-billion-dollar markets, but in doing so also create new big markets. There are three key markets in Bitcoin:

Wallet. Holding your Bitcoins for you, serving some of the checking account functions of a bank.

Exchange. Converting from USD to Bitcoins and back.

Payments. Helping merchants accept Bitcoins for their transactions.

As a rule of thumb, VCs like to see billion-dollar markets to get excited. How can each of these markets get to be a billion dollars in size?

It is free to get your own Bitcoin wallet, a piece of software on your computer that you can use to send or receive Bitcoins. However, this entails storing your Bitcoin private key on your computer, which risks loss or theft. Increasingly many Bitcoin users are turning to hosted wallets, which hold the money for you, and are accessed over the web. But you have to trust that your hosted wallet will not run off with your money (which has happened before). Because client wallets are free, hosted wallets have typically been free, as well.

Let’s assume that one day in the future, hosted wallets will be able to charge 0.5 percent of funds in the account as an annual fee. This is likely a high estimate, but not impossible if the wallet offers enhanced security, insurance against loss, and perhaps some kind of escrow or other fraud purchase protection. For the wallet market to be worth $1 billion, this would imply that $1 billion/0.5% = $200 billion in Bitcoins would need to be held in hosted wallets. This means that the market cap of Bitcoin would need to be at least $200 billion, relative to $1.5 billion today. Bitcoin would need to appreciate by almost 150x to reach this level. Bitcoin has gone up by 30x in the last year, so that isn’t impossible to believe. Two more years like that would get you there.