Bitcoin Auction in U.S. Won by Venture Capitalist Tim Draper

Jul 02, 2014 11:25 am ET

(Updates with comment from Vaurum CEO in ninth paragraph.)

July 2 (Bloomberg) -- Venture capitalist Tim Draper was the single winning bidder for a cache of bitcoins at a U.S. government auction, part of a larger pool of the virtual currency seized from the Silk Road website.

Draper, the co-founder of investment firm Draper Fisher Jurvetson, will work with startup Vaurum to help provide access to bitcoins in developing economies and use the about 30,000 bitcoins won in the auction as a source of liquidity, according to a statement that Vaurum posted on publishing service Medium today.

“Bitcoin frees people from trying to operate in a modern market economy with weak currencies,” Draper said in the statement. “With the help of Vaurum and this newly purchased bitcoin, we expect to be able to create new services that can provide liquidity and confidence to markets that have been hamstrung by weak currencies.”

The auction attracted 45 bidders, including New York brokerage SecondMarket Inc., and 63 bids were submitted during the 12 hours of the auction on June 27, according to the U.S. Marshals Service. The agency, which didn’t disclose the winner’s identity, said yesterday that it notified the bidder and transferred the money.

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 arresting its operator last year, represented a rare opportunity to secure a large cache of the virtual currency. While the actual price of the winning bid isn’t known, the cache sold on June 30 was worth about $19 million at current exchange prices.

Vaurum Startup

Vaurum is a Palo Alto, California-based startup that enables companies including banks and brokerages to trade and store bitcoins on behalf of customers. Earlier this year it raised $4 million in seed funding from investors including Draper, Battery Ventures and America Online Inc. co-founder Steve Case. Vaurum said it was incubated last year by Boost, which invests in bitcoin startups and was founded by Tim Draper’s son, Adam Draper.

“All in on Vaurum, Bitcoin, and Bitcoin adding a tremendous amount of value in the developing world,” Adam Draper said in an e-mail.

Vaurum said it has started trading platforms in emerging markets where it is also difficult to get access to bitcoin.

Providing Liquidity

“Collectively, we’ve been brainstorming to come up with new ways to help grow global bitcoin adoption,” Vaurum Chief Executive Officer Avish Bhama said in the statement. “What we came up with is a way to leverage our exchanges and utilize the auctioned pool of bitcoins, as well as market making strategies, to help provide liquidity in these underserved markets.”

Draper’s and Vaurum’s vision of bitcoin as a more stable alternative to some currencies stands in contrast to executives like JPMorgan Chase & Co. CEO Jamie Dimon and Warren Buffett who have expressed doubts about bitcoin.

Bankers including Dimon, 58, have predicted bitcoins probably won’t last after governments subject them to rules and standards akin to those for other payment systems.

“I wouldn’t be surprised if it’s not around in 10 or 20 years,” Buffett, the billionaire chairman and CEO of Berkshire Hathaway Inc., told CNBC in March. “It does not meet the test of a currency.”

SecondMarket, Rangeley Capital, Pantera Capital Management, Bitcoin Shop and Coinbase Inc. all said they were among bidders in the auction with offers that fell short.

Supply, Demand

Dan Morehead, CEO of Pantera, said that the spectacle of the U.S. government auctioning bitcoins suggested that “supply creates its own demand.”

“The publicity created a tremendous amount of demand,” Morehead wrote in an e-mail. “We had several large new players bid.”

Micky Malka, founder of Ribbit Capital, a venture capital fund which buys bitcoins and backs bitcoin companies, echoed that sentiment today.

“We bid, and we are happy to see that there are a lot of institutional buyers interested in bitcoin, which clearly have a lot potential,” Malka said.

Because liquidity on the exchanges is low -- a trade of 500 bitcoins can move prices -- the auction offered a chance to avoid paying a premium. More bitcoins may be sold later, U.S. Marshals have said.

Silk Road

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.

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. One bitcoin fetched about $644 yesterday, 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 hotel bookings to psychiatric services to luxury homes have started accepting bitcoins.

--With assistance from Jing Cao and Serena Saitto in New York.