Pantera Capital Management LP, the hedge fund that manages money for Fortress Investment Group LLC (FIG:US) executives, invested about $10 million in Bitstamp Ltd. months before the startup emerged as the world’s dominant dollar-Bitcoin exchange, according to three people briefed on the deal.
The infusion late last year ranks among the largest single investments in a Bitcoin venture and is part of a broad Pantera strategy to build a brand in the Bitcoin world, the people said. London-based Bitstamp’s share of dollar-Bitcoin trades multiplied from mid-February to as much as 50 percent after the collapse of Mt. Gox, once the world’s top Bitcoin exchange, according to data from Coinometrics, a Bitcoin research firm.
“Bitstamp is well-run and is taking the market share of Mt. Gox,” said Jonathan Levin, a founder of Coinometrics. “That said, there is still room for improvement.”
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The investment, led by Pantera founder Dan Morehead, followed an invite-only getaway at Lake Tahoe last year for leading Bitcoin entrepreneurs including the head of Bitstamp, Nejc Kodric. It shows how Wall Street is working with Silicon Valley on Bitcoin ventures, and the power of institutional funds to create standouts in the nascent business, which has evolved over five years from an intellectual novelty into a global financial network.
“Finance people are now recognizing the force multiplier of combining their deep knowledge of finance with new, possibly game-changing technologies,” said Chris Larsen, chief executive officer of San Francisco-based Ripple Labs Inc., which is developing its own virtual-currency network and also has Pantera as an investor.
Pantera disclosed in a December regulatory filing that it had formed a $147 million fund called Pantera Bitcoin Advisors. In an e-mail to Bloomberg News days later, Michael Novogratz, a principal and director at Fortress, called Morehead “our man when it comes to Bitcoin.”
Since then, Pantera hasn’t announced any deals or described the vehicle’s aspirations. The hedge fund circulates a daily update of Bitcoin news, called BitFlash, as well as periodic research notes. The web address panterabitcoin.com redirects to Pantera Capital’s main page. The firm has purchased at least 18 other Bitcoin-themed Internet domains, including coinlux.com, bitvault.com and satoshitexasholdem.com, according to online registry records.
Helena Maus, a spokeswoman for Pantera, declined to comment, and Morehead and Novogratz, 49, didn’t respond to e-mails about the investment. Bitstamp CEO Kodric responded to an e-mail by saying he had “no news” to disclose on Pantera.
Bitstamp was founded in 2011 by Kodric and Damijan Merlak, both from Slovenia. It drew users in part because it connects with the European Union’s integrated money-transfer system, called the Single Euro Payments Area. Unlike some Bitcoin exchanges, it maintains a stable relationship with a major bank, Milan-based UniCredit SpA (UCG), Kodric said in an e-mail.
Bitstamp has sought to build a reputation for stability amid little regulatory oversight of Bitcoin and disruptions at exchanges including Tokyo-based Mt. Gox. It invited a third-party firm to look over its books last year, and it has promised quarterly audits to demonstrate solvency.
Bitstamp has lured customers who are willing to submit to anti-money laundering procedures, such as identity verification, while making Bitcoin-dollar transactions, said Levin of Oxford-based Coinometrics. Many of the rest have migrated to BTC-e, an exchange based in Bulgaria, he said.
Last year’s investment in Bitstamp was part of a strategy by Pantera and Fortress to provide venture capital to a prominent Bitcoin company early in the fund’s life, two people briefed on the plan said, asking not to be named because Pantera’s investments are private.
“They want to do digital-currency-specialized stuff only, so they are a little different than other Silicon Valley firms,” Brock Pierce, a California venture capitalist, said of the fund in an interview. “They’ve been in stealth mode for a while.”
Pantera and Fortress have met throughout the past year with Bitcoin entrepreneurs, investors and others associated with the digital currency in San Francisco, New York and elsewhere as a prelude to investments, according to the people.
One gathering, which Pantera dubbed Bitcoin Pacifica, took place in Lake Tahoe around the time of an early October financial technology conference in Las Vegas called Money 20/20, the people said.
Pantera flew about 30 people, some on private jets, from Bitcoin start-ups to Tahoe, where Morehead and some Fortress executives have homes, for several days of hiking, boating, wine and dining, according to people briefed on the meeting. Fortress principal Novogratz attended briefly.
Bitstamp co-founder Merlak’s Facebook page shows him complaining of frigid temperatures in Tahoe on Oct. 5, and he posted a snapshot of the gathering’s program on Instagram. Kodric, visiting from his home in Kranj, stayed at Morehead’s house in Tahoe, the people said.
Shakil Khan, a Bitcoin investor and founder of CoinDesk, a digital-currency information website, said well-run Bitcoin startups are bound to be wooed by multiple venture backers.
“The number of good companies out there is relatively small so they can pick and choose their financing,” Khan said in an interview.
The investment wasn’t Pantera’s first in a Bitcoin-related business. Earlier last year Pantera participated in a $9 million funding round for Ripple Labs, the digital-currency business that counts Google Inc. and other Silicon Valley funds among its backers, including Lightspeed Venture Partners in Menlo Park.
Morehead was chief financial officer and head of macro trading at Tiger Management, the pioneering hedge fund founded by Julian Robertson, 81, that closed in 2000. Alumni of Robertson’s firms are often referred to as Tiger Cubs, and some have attracted investment from Robertson himself.
Morehead has experience with currency-trading firms, helping found a platform named Atriax that at one point included Deutsche Bank AG (DBK), Citigroup Inc. (C:US) and JPMorgan Chase & Co. (JPM:US) as members. Steven Waterhouse, a partner at Pantera, helped found an investment firm in 2012 that was acquired by Fortress in 2013.
Pantera’s links to Fortress, the New York-based hedge fund and private-equity firm that sold shares to the public in 2007, could lend credibility to companies in which it invests, helping them find a bank to work with, or draw on financial expertise, said Pierce, the venture capitalist.
“A group like that should be able to deliver the kinds of relationships that startups need,” Pierce said. “I’d take Pantera over a lot of other firms.”
Since Pantera’s fund was announced in December, the price of Bitcoin has fallen from about $1,000 to as low as $522 after regulators cracked down in countries including Russia and China, and after the collapse of Mt. Gox.
The price of Bitcoin was $630.15 at 9:01 p.m. yesterday in New York, according to the CoinDesk Bitcoin Price Index.
Fortress revealed on Feb. 27 that it had bought $20 million in Bitcoin in 2013, and that it had an unrealized loss of $3.7 million on the purchase.
“Put a little money in Bitcoin,” Novogratz told attendees at a banking conference in New York on Oct. 24. “Come back in a few years and it’s going to be worth a lot.”
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