Bitcoin Auction Draws Wall Street, Silicon Valley Bidders

Jun 25, 2014 1:06 pm ET

(Updates to include analyst’s comment in sixth paragraph.)

June 25 (Bloomberg) -- Buyers from Wall Street to Silicon Valley are lining up to bid on a cache of bitcoins worth about $17 million, underscoring the interest in the digital currency even after its boom and bust.

Pantera Capital Management, a San Francisco hedge fund backed by Fortress Investment Group, and SecondMarket Inc., a New York brokerage, are among those seeking to buy bitcoins from the U.S. government at an auction scheduled for June 27. A broad swath of interested parties, from individuals to institutional investors, have requested information from the U.S. Marshals Service, which is handling the sale.

“I know of small and large investors who are talking about investing in this,” said Jaron Lukasiewicz, chief executive officer of Coinsetter Inc., a New York-based exchange. “And there are probably some hidden players out there -- hedge funds who are looking to get into the market.”

The auction of 29,656 bitcoins, part of more than 144,000 the FBI transferred to U.S. Marshals after shutting down the Silk Road marketplace and arrested its operator last year, represents a rare opportunity to secure a large amount of the virtual currency. Because liquidity on the exchanges is low -- a trade of 500 bitcoins can move prices -- buying from the government offers a chance to avoid paying a premium.

“If an investor wanted to buy this much bitcoin all at once in the open market, they could bid the price of bitcoin up by 10 to 20 percent by simply filling out that trade,” said Gil Luria, an analyst at Wedbush Securities Inc.

Silk Road

Mark Williams, a former bank examiner and now lecturer at Boston University, said the interest from Pantera and SecondMarket amounts to “a speculative bet, not of new buyers, but the same market promoters.”

“This auction doesn’t validate Bitcoin but simply demonstrated that the U.S. government is anxious to get out before prices drop again,” Williams wrote in an e-mail. “The U.S. Marshals Service has over 29,000 reasons to sell by private auction and sell now.”

Bidders are required to deposit $200,000 and verify their identities. The U.S. Marshals will notify the winner or winners on June 30. More bitcoins may be sold later, the agency has said.

The sale excludes bitcoins the government obtained from computer hardware owned by Ross William Ulbricht, who the U.S. said ran Silk Road. The marketplace was an online bazaar where anonymous users allegedly bought and sold heroin, LSD, phony passports and computer hacking services. Ulbricht is contesting charges and filed a claim asserting ownership of the bitcoins.

Digital Assets

An e-mail from the U.S. Marshals, sent by accident, indicated interest from representatives of Rangeley Capital LLC, a New Canaan, Connecticut-based hedge fund, and DRW Holdings LLC, a Chicago trading firm. The companies declined to comment or didn’t respond to messages.

SecondMarket, which specializes in hard-to-trade assets, already runs a trust for investors that lets people buy into bitcoins without the risk or technical complications of owning them directly. SecondMarket began raising money in September for the trust, which now has $62.5 million in assets and is seeking to open it to smaller investors as well. The group is assembling a syndicate to bid for the bitcoins, according to CEO Barry Silbert.

“Our syndicate will open up bidding to a much larger universe of smaller purchasers, foreign buyers and those bidders that don’t want their identity revealed,” Silbert said.

Hedge Funds

The price of bitcoins skyrocketed in 2013 to $1,147 from around $12 as technologists and speculators flocked to the digital currency, before dropping sharply amid regulatory crackdowns in China, Russia and elsewhere. Its price was $562.39 today, according to the CoinDesk Bitcoin Price Index, which represents an average of bitcoin prices across leading global exchanges.

Bitcoins, which exist as software and aren’t controlled by any single authority or country, emerged in 2009 out of a paper authored under the pseudonym Satoshi Nakamoto. Since then, retailers selling everything from gummi bears to psychiatric services to luxury homes have started accepting bitcoins.

Pantera will participate in the auction, according to CEO Dan Morehead. While he declined to discuss the fund’s strategy, Morehead said in a prior interview his fund will buy bitcoins and invest in businesses that are building the infrastructure to make the digital currency more useful, and therefore more valuable.

Buy and Hold

“There will be a whole spectrum of opportunities in the digital currency ecosystem,” Morehead said in the interview.

The fund has invested in Ripple Labs Inc., a San Francisco startup, and Bitstamp Ltd., an online exchange.

Daniel Masters, a co-principal of Global Advisors Ltd., a Jersey-based hedge fund, said he was putting together a consortium of bidders for the bitcoins. Masters said he “certainly won’t be bidding a premium.”

“The fund’s strategy is, within reasonable constraints of prudence and liquidity and in avoidance of obvious risks, buy and hold,” Masters said.