Having grown up in Latin America, Micky Malka is no stranger to financial turmoil.
Coping with currency swings proved apt training for Malka, an entrepreneur-cum-venture capitalist—and one of bitcoin’s biggest bulls.
The 39-year-old Venezuelan joins higher-profile investors, such as Marc Andreessen and Fred Wilson, in betting that the virtual currency will keep gaining traction as a way for people to buy and sell things online. These bitcoin backers are holding firm even as a barrage of bad news—including the shutdown of Mt.Gox, once the largest bitcoin exchange—makes others leery of the digital money.
“I have no doubt on the future of bitcoin because the concept of money becoming digital in all shapes and forms is here to stay,” Malka said.
Malka began investing in bitcoins in 2011 to pay a contractor in Argentina and bypass government money-transfer restrictions. He founded venture capital firm Ribbit Capital the following year with $100 million to invest in financial-services startups and bitcoin companies such as Coinbase Inc. and BTCJam. Andreessen’s Andreessen Horowitz and Wilson’s Union Square Ventures also back Coinbase.
Unlike most venture capital firms, Ribbit also invests directly in the virtual currency. Social+Capital Partnership, founded in 2011 by former Facebook Inc. executive Chamath Palihapitiya, also invests in bitcoins. The two firms together control at least 5 percent of the bitcoins mined, according to Palihapitiya, whose fund is an investor in Ribbit Capital.
That indicates that the firms’ holdings may be worth about $360 million at current exchange rates, based on the 12.4 million bitcoins in existence, according to Bitcoincharts.com, which compiles prices and currency data, and the CoinDesk Bitcoin Price Index.
“There’s more money to be made owning bitcoins than bitcoin companies,” said Palihapitiya, whose fund doesn’t directly back bitcoin companies. He and Malka declined to comment on the value of their holdings.
Bitcoin, subject to large swings, can test the mettle even of investors willing to stomach risks. Tokyo-based Mt.Gox filed for bankruptcy in Japan today amid reports that hackers had pilfered about $473 million in bitcoins from the exchange. Its shutdown this week had sparked a 10 percent slump in the virtual currency.
Introduced in 2008, bitcoin captured the attention of technologists, investors, and governments last year, fueling a rally that drove it to a record of about $1,200 from $12. Scrutiny from regulators, bans in China and India, and stumbles by merchants and service providers have fueled volatility and a decline in the value of bitcoins, which were trading today at $576.
Mt.Gox Chief Executive Officer Mark Karpeles resigned from the Bitcoin Foundation, an advocacy group for the digital money, which provided information to federal prosecutors this week that aided a probe into Mt.Gox.
“Mt.Gox is the only exchange that wasn’t backed by venture funds or institutional investors,” said Malka, who is on the foundation’s board. “It will take time for the rest of the bitcoin ecosystem to prove that this is a bad apple and not a problem of the entire ecosystem.”
While Malka says there’s a chance the currency will flop, he predicts that more businesses will use the currency as an alternative to traditional means for investing and carrying out transactions. He sees it as a payments system that can serve economies, like Venezuela’s, that restrict the flow of money via capital controls and as a hedge against inflation, like precious metals.
“It’s not going to be a smooth or overnight success,” he said. “Financial services is the biggest industry which has not been disrupted by technology.”
Wilson, a managing partner at Union Square Ventures, and Margit Wennmachers, a partner at Andreessen Horowitz, said their firms remain bullish on bitcoin.
Venture funds have invested $86 million in bitcoin companies, mostly over the past 12 months, Wedbush Securities Inc. wrote in a Feb. 18 report.
Venezuela’s hyperinflation, one of the legacies of Hugo Chavez’s 14 years as president, drove Malka to come up with alternative financial services and embrace bitcoins, he said.
“I started my first company much earlier than I planned because I lost my first job in the financial crisis triggered by Chavez’s first failed military coup in 1992,” said Malka, who in 1993 founded bond broker Heptagon Grupo Financiero in Caracas, when he was 19.
Malka, who graduated with a degree in economics from the Universidad Católica Andrés Bello in Caracas, later started five other financial services companies, including Patagon, an online brokerage. Malka and Wences Casares, who co-founded the company, sold Patagon to Banco Santander SA for $750 million in 2000.
After running the business in Spain and founding a bank for low-income borrowers in Brazil, Malka moved to San Francisco in 2007 because he “wanted to play in the major leagues,” he said.
In 2011, Malka and Casares started Bling Nation Inc., a mobile-payments company. After ditching hardware and focusing on software, the company was re-introduced as Lemon.com, which LifeLock Inc. bought in December for $50 million, they said.
Malka then established Ribbit Capital, seeking to invest in technology startups innovating in financial services. Ribbit has so far backed 11 companies including Borro Ltd., which offers cash for luxury goods such as jewelry, watches, and cars. Coinbase is an online bitcoin storage service, while Brazil’s BTCJam lets people borrow from each other using bitcoin as a benchmark.
Directly investing in bitcoins is an uncommon and risky strategy for a venture capital fund, according to Josh Lerner, a professor of investment banking at Harvard Business School.
“Venture capital agreements have strict prohibition on investing in futures and currency,” he said.
It’s still a risk worth taking, said Palihapitiya, whose fund has been delivering an average annual return on investment for limited partners of 40 percent to 60 percent since its inception in 2011.
“My LPs don’t care if I invest in bitcoins or bitcoin companies, as long as my returns are good,” said Palihapitiya, whose fund has also invested in Bling Nation.
Ribbit Capital has done even better, returning 400 percent since its debut, two people with knowledge of the situation said. Malka declined to comment on his fund’s performance.
Buying risky assets is more typical of hedge funds, said Lerner.
Fortress Investment Group LLC, a New York-based private-equity and hedge-fund manager, said it bought $20 million worth of bitcoin last year and recorded a paper loss of $3.7 million on the investment, according to a filing today.
When venture investor Jeremy Liew was considering whether to back bitcoin startups, he said he turned to Malka, who has spoken on the virtual currency at five conferences in the past year.
“We were interested in bitcoin, and Micky helped us get up to speed,” said Liew of Lightspeed Venture Partners, which is an investor in Malka’s fund. Lightspeed has since backed three bitcoin companies, including China’s largest bitcoin exchange, BTC China, and has seven indirect investments through a bitcoin incubator that supports early-stage startups.
While companies and regulators are still debating how to treat bitcoin, others have embraced it.
David Marcus, president of EBay Inc.’s PayPal payments unit, said he finds bitcoins “fascinating,” and he only invests in the virtual currency with personal funds as a limited partner in Ribbit Capital. PayPal itself won’t offer bitcoin services until regulatory issues become clearer, Marcus said.
“Venture capital is about taking risk, and you can’t be focused on financial services without investing in bitcoins,” Marcus said of Ribbit’s strategy. “There are very few venture capitalists focused on financial services, and that makes Malka sharp and truly unique.”