Coverage: The Bitcoin auction

Always on the lookout for how to make money, hedge funds and venture capitalists are known for being ahead of the curve. Tim Draper, who runs a venture capital fund, is betting that bitcoins are it.

Bloomberg’s Olga Kharif and Carter Dougherty had the details of his latest move, winning bitcoins at a government auction:

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.

According to a Forbes story by Kashmir Hill, Draper refused to reveal exactly how much he paid for the bitcoins and that the move could be to generate press for his bitcoin start-up:

During a press conference Wednesday, Draper refused to reveal how much he paid for the Bitcoin — valued at about $17 million the day of the auction — stating only the obvious, that he “paid more than the other people in the auction.” According to a Marshals spokesperson, 45 bidders had made 63 bids.

Draper has been talking up Bitcoin for months now, and was one of the investors in May in a Bitcoin start-up called Vaurum, that had been incubated by Boost, which is run by his son, Adam Draper. The CEO of that start-up, Avish Bhama, was the person who spread the news to the press Wednesday that the mysterious, take-all bidder in the auction was Draper. This could be a very expensive way to generate PR for the start-up which describes itself as a “Bitcoin exchange for financial institutions.”

Paul Vigna’s story for The Wall Street Journal explained how Varium came into being:

Vaurum explained how the partnership came about in its post:

“Vaurum was incubated by Boost last summer which is where we met Adam Draper and Tim Draper, who are both early investors in us. Collectively, we’ve been brainstorming to come up with new ways to help grow global bitcoin adoption, and 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.”

Since trading around $580 on Friday, bitcoins prices have been rising, trading on Wednesday at $642, according to CoinDesk, as the market anticipated a strong spate of bids, showing demand from venture capitalists, entrepreneurs, and investors alike.

The coins auctioned off came from servers maintained by Silk Road, a notorious online drug marketplace that utilized bitcoin as its payment system, which the feds busted in October. The Marshals are still holding onto another 110,000 bitcoins that were maintained on the personal computer of Ross Ulbricht, the site’s alleged mastermind, who was arrested and is awaiting trial

The Los Angeles Times offered this context for why Draper would want to move into the bitcoin market in a story by Riley Snyder and Russ Mitchell:

Draper says he’ll use the digital currency in a new business to bring bitcoins to the developing world.

Bitcoins are among the oddest but potentially most profound phenomena to hit world currency markets in modern times. They’re not physical coins but pieces of software code traded over the Internet. Their origins are mysterious: Legend has it they were created in 2009 by a man with the alias Satotoshi Nakamoto.

Since then, bitcoin markets have developed and some online retailers — including Tiger Direct, New Egg and Overstock — are accepting bitcoins for payment. Bitcoin ATMs are popping up. California recently changed state law to allow use of bitcoins and similar alternative currencies.

Federal regulators are studying the currency closely. The IRS recently ruled bitcoin is a property, legitimizing its use. Bitcoin holders lost millions in the collapse of Tokyo bitcoin exchange Mt. Gox this year.

Still, demand for bitcoins continues to grow. Bitcoin prices dived during the Mt. Gox contretemps, but have headed upward since.

While it might seem like a fad to some or just plain crazy to try and develop a new currency, others see bitcoin as the next big way to make money – although a risky one. There are obvious similarities to any currency market, but besides country risk, investing in bitcoin means the government could take everything away tomorrow. But as many in the financial business know — the greater the risk, the bigger the payout and it seems like that’s what Draper is counting on.