(The following condensed book excerpt originally appeared on American Banker, the sibling news brand of Traders. Read the full excerpt here.)
On June 5, 2013, Barry Silbert, the 36-year-old founder and CEO of SecondMarket, called an all-hands meeting to announce a new direction for his brokerage firm.
Since its founding in 2005, SecondMarket had earned a reputation for trading exotic assets. The news that day would only reinforce it – and would give even some of SecondMarket’s employees cause for concern.
A former investment banker, Silbert had built a successful company by making it possible for hapless investors to unload illiquid paper. Auction-rate securities were one of several asset classes for which he had almost single-handedly made a market amid the chaos of the financial crisis. (An effort to do the same for shares of privately held community banks didn’t work out.)
Though auction-rate securities had been his trading desk’s most profitable asset for a while, he knew that wouldn’t last. No new ones had been issued in years, and the secondary market for them was beginning to dry up. Silbert needed to find a new asset class to trade in.
The company, Silbert told his staff, was going to open a private fund for accredited investors that would invest solely in bitcoin. The move would effectively put SecondMarket’s future at the mercy of a volatile digital currency that most people thought was a passing fad, a mere tool for peddling drugs online, or a Ponzi scheme. Nobody even knew the real identity of bitcoin’s creator, who used the handle Satoshi Nakamoto. “Highly unorthodox,” the financial blogger Felix Salmon tut-tutted when news of Silbert’s plan broke.
But Silbert had become a true believer. “Barry called bitcoin ‘the biggest opportunity of my career,’ ” recalled Michael Moro, the director of SecondMarket’s trading desk at the time.
Nearly three years later, Silbert’s bet doesn’t sound quite so crazy anymore.
Bitcoin’s market capitalization has grown nearly sevenfold over that period to $6.8 billion. Investors have poured more than a billion dollars of venture capital into startups that are experimenting with bitcoin and the technology underlying it, an innovation called the blockchain. And while naysayers still abound, big Wall Street firms are more curious than skeptical. Even national governments and central banks are taking a look.
Meanwhile, Silbert has gone all-in, and in doing so positioned himself at the heart of the bitcoin and blockchain industry. Ask anybody in the world of bitcoin today who is the best-connected member of the community, and odds are they will direct you to this boyish entrepreneur, a man who may be uniquely suited to bridge the gap between rebel entrepreneurs and mainstream financial institutions. In a fintech space that has seen more than its share of blowups, meltdowns, flameouts and criminal charges – and in which serious differences of opinion persist as to whether bitcoin itself will succeed or whether the blockchain is the truly valuable concept – Silbert has been a calming, professional presence, avoiding even the hint of scandal.
“He definitely approaches it from a much more practical, pragmatic angle” than do the hard-line cryptolibertarians, said Alan Lane, the president and CEO of Silvergate Bank in La Jolla, Calif., which provides banking services to about a dozen bitcoin startups. “He has been a really good bridge for a lot of the younger techie idea folks – trying to figure out how to fit them into the mainstream without losing what they’re bringing.”
The arc of Silbert’s career – from a trader of distressed paper to a prolific investor in one of the most experimental corners of fintech – parallels a broader shift in the story of financial services. In the last few years, as the industry has recovered from the crisis, banks have turned their attention from cleaning up yesterday’s messes to fending off tomorrow’s challengers.
While working with banks and established investors is unavoidable, “the real innovation – the paradigm shift, the new way of doing things – is not going to be driven by the incumbents,” Silbert said. “It’s going to happen outside the existing financial system. And ultimately those ideas will be co-opted or bought by the incumbents, or [they] will completely displace the incumbents.”
Among the first to recognize the interest that bitcoin and its underlying technology would hold for Wall Street, Silbert has found himself testifying before the New York State Department of Financial Services and coaching asset managers who manage tens of billions of dollars. Last year his fund, the Bitcoin Investment Trust, grew until it held 140,000 bitcoins – about 1% of all bitcoins in existence – and then Silbert took it public on the OTCQX market, making it the first publicly traded fund of its kind.
Alongside this he built a profitable bitcoin trading desk to serve institutions and high-net-worth individuals. The final piece fell into place last October, when he split off these businesses as wholly owned subsidiaries of Digital Currency Group, a new conglomerate, and sold the rest of SecondMarket to Nasdaq. What were once Silbert’s personal stakes in dozens of digital-currency startups now belong to DCG’s portfolio of early-stage investments. He intends for DCG to function as an index on the entire market, becoming “the Berkshire Hathaway of bitcoin.”
To the chagrin of idealistic techie types, Silbert is not shy about appealing to the profit motive, and often touts the potential for bitcoin’s price to rise. Yet he is sincerely convinced that bitcoin is not merely a good investment but a good thing for the world.
“I haven’t seen Barry so passionate about something since he first started the company,” said his wife, Lori Silbert. “He thinks bitcoin, and even more so digital currency, could be life-changing for our daughter.”
BORN TO TRADE
After graduating in finance from Emory University in 1998, he moved to New York and began working as an analyst at Houlihan Lokey Howard & Zukin, a boutique investment bank. In his second year, he was adopted into the financial restructuring division – with the dot-com bubble just about to burst.
The years 2000 to 2003 were “the boom years of the bust,” fat years for the restructuring division of Houlihan Lokey, Silbert said. He was promoted from analyst to associate, and worked on some of the decade’s headlining bankruptcies, including Enron and WorldCom. But then the pool of clients began to dry up, even as competition for their business grew fiercer. And Silbert had become bored with the work. He wanted a change.
Striking out on his own, he opened Restricted Stock Partners – later to be renamed SecondMarket. The simple phone brokerage aimed to make a market for investors with assets they were having trouble unloading through traditional means. His first target was restricted stock in public companies, sales of which had to be kept private in accordance with Securities and Exchange Commission regulations. It was a huge opportunity. In 2004, the market in restricted securities was worth more than $1.2 trillion – greater than the GDP of Australia or Mexico.
Not long after leaving Houlihan Lokey, Silbert had run his business plan by Jeff Werbalowsky, the investment bank’s co-CEO. He asked whether the firm would like to invest in Restricted Stock Partners. Werbalowsky considered the business plan risky and passed, but was struck by the young former associate’s entrepreneurial zeal. “He took all of my thoughts and suggestions and critiques in stride, and answered them or said, ‘We’ll surmount them,’ ” Werbalowsky said.
Silbert financed the venture with $50,000 of his own money and $350,000 from angel investors. “It was five of us, five telephones and an Excel spreadsheet,” he said. “That was it. That was our marketplace.”
The business grew rapidly, surviving the death of Silbert’s business partner, Brad Monks, from cancer in 2007, and launching an electronic trading platform.
One of the early investors was Lawrence Lenihan, managing director of FirstMark Capital, who now sits on DCG’s board of directors and investment committee. His firm put $3.8 million into Silbert’s company, valuing it at more than $15 million. Lenihan’s first impression of Silbert was that “he looked like he was about 12 years old.” But Lenihan said he never doubted the younger man’s intelligence or ability.
‘THE REALLY TOXIC STUFF’
As the financial crisis deepened, SecondMarket expanded into new asset classes: auction-rate securities, bankruptcy claims, mortgage-backed securities, collateralized debt obligations – “the really toxic stuff,” as Silbert puts it. It was a tough time for the established players, but for SecondMarket it was a bonanza. Trillions of dollars of assets had turned illiquid during the meltdown.
SecondMarket brought buyers and sellers together and charged a straightforward commission, between 3% and 5%, on the value of what was being traded.
“The world was falling apart at that time,” said Jeremy Smith, who was SecondMarket’s head of strategy then. “All of these assets were freezing up, and we said, ‘Hey, we’re a marketplace for creating liquidity.’ So every time an asset froze up, we created a marketplace for it.”
Hearing what her husband intended to do for auction-rate securities, Lori Silbert asked, “Do you even know what they are?”
“Nope,” Silbert replied. “But I’m going to figure it out.”
By early May 2008, about $3.5 million of auction-rate securities were being traded over his company’s platform every day.
At the same time, SecondMarket had begun trading Facebook stock – nearly $50 million of it – on behalf of employees who didn’t want to wait for the IPO. That was how Silbert got into buying and selling stock in private companies, making a market for early investors and employee shareholders who wanted to liquidate their stake in hot startups. Facebook was a popular one, as was the video game maker Zynga. In the world of startups, early employees often take a deep pay cut in exchange for a stake in the company. There had never been an organized market for turning these shares into cash, but now, suddenly, there was.
“Barry has an unbelievable, almost uncanny ability to identify markets before they develop,” Lenihan said. Indeed, by early 2011, SecondMarket had brokered sales of private-company stock – including that of tech darlings like Twitter and LinkedIn – totaling more than $500 million. It was SecondMarket’s platform for these sales – known as liquidity events – that eventually attracted Nasdaq’s interest.
Before the year was out, SecondMarket was flush with $30 million of new capital from two fundraising rounds, the second of which valued the company at $200 million. It was now the world’s largest centralized exchange for a wide variety of illiquid assets.
But then SecondMarket went through a lean season. As the financial sector recovered from panic and the national economy began dragging itself slowly out of the doldrums of recession, secondary trading in many of the exotic financial products that had fueled SecondMarket’s success began drying up. Meanwhile, the mania for over-the-counter sales of private-company stock was temporarily dwindling. SecondMarket was forced to close its offices in Israel and Hong Kong and move its headquarters out of the financial district. The company’s New York workforce shrank by nearly two-thirds.
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Read the entire excerpt at Traders‘ sibling American Banker.
Brian Patrick Eha is a freelance writer in New York whose work has been published by The New Yorker, Entrepreneur and others. This article is adapted from his forthcoming book about bitcoin.
