Topic: [BTC-TC] BTC Growth: Capital Growth via Hedge Fund-Style Investing - page 7. (Read 251637 times)

I would prefer the first option:

Forced buyback at current NAV/U could harm investors more than necessary.

Personally I would like you to keep the fund running, either on BTCT if it gets sold, or on Havelock or Bitfunder.
I have a fair amount invested with you, and to see such a lose through no fault from you, then closing this asset seems to be quite unwise.

BTCT should return to normality once Burnside comes to an arrangement of some sort

Lol, you didn't see the writing on the wall when they paid $10k in legal bills and demanded an emergency exit address from users? Awesome "analysis" dude.

Closing now is pretty bad option as I expect prices get back to normal if things get handled properly or someone buys btctc.

Executive Summary

In light of the pending closure of the BTC-TC exchange, and the immediate and negative impact which Burnside's announcement has had on listed assets across the board, we are releasing an interim report on the current state of the fund and our options going forward.

Taking a snapshot of our current holdings across all platforms, and estimating values on BTC-TC using bid values current as of this writing, the fund's NAV has fallen to .0812 BTC per share, a decrease of 19.731%.

We are currently evaluating ways forward. As of this moment, closure of the fund -- with the option to re-open it in future on another exchange -- appears to be the leading candidate, but if another exchange should step in very quickly to provide a clear plan for picking up the pieces of BTC-TC, that assessment could change.

Exchange Closure, Options and Risks

I was just on my way to BTCT.co to post a notice that we'd be publishing our next report early, on 1 October, so as to bring our reporting in line with calendar months, when I saw Burnside's notice about shutting down the site. During the brief seconds I have been able to access the site reliably, before it failed again, it has been apparent that assets have been hammered across the board.

The shutdown does not appear to me to have been organised or planned particularly well from the standpoint of an orderly winding down of operations, and it is likely that when the dust has settled, the fund's NAV will take a significant hit.

It is too early to say for certain whether it will make sense for another exchange to step in and pick up the pieces again, but it appears we'll have three options, none of which is especially attractive:

• move the entire fund management infrastructure to another exchange
• close the fund entirely via the exchange's forced buyback procedure, with an option to re-open again on another exchange at a later time
• run the fund manually

The last option -- running the fund manually -- is not something I'm prepared to do for a fund of this size.

The first option -- moving the fund to another exchange -- would likely introduce significant delays and limitations on liquidity until such time as the new structure was up and running, but it would provide the benefit of keeping things running.

Closing the fund entirely and using the exchange's forced buyback procedure would provide participants with the greatest liquidity and flexibility, but at the risk of having to trust BTC-TC long enough to hold all our coins safely and execute the buyback reliably.

Of the three, I believe that as of this moment -- without having yet had any word from other exchanges about efforts to step in and pick up the pieces -- the option of closing the fund entirely for the time being would best serve the interests of participants. If we move forward with this option, I believe it should done relatively swiftly, to guard against the risk of the exchange's problems becoming any worse than they already are and compromising its ability to effect a buyback reliably.

If another exchange should step in very quickly to provide a clear plan to move forward, that assessment could change.

Fund Performance -- Abbreviated -- and NAV

Ukyo.Loan and Related Debt

IMPORTANT: This section ("Ukyo.Loan and Related Debt") was written yesterday in preparation for a report in one week's time, but I include it here in unmodified form because it still applies.

Many participants will have seen that since our last report, the Ukyo.Loan's notice about extra dividends connected with the success of the BitFunder site has been removed.

Nonetheless, it remains among the most credible of such loans. There is at least some indication not only of how the loan can be serviced (e.g., what source of BTC-denominated income is covering the interest) but also of significant assets to offset the loan liability (namely, the exchange itself). This stands in sharp contrast to some loan/debt opportunities offering little or no indication of how income is generated to service the loan or how/whether it will ultimately be repaid. The loan also continues to offer a 110% buyback provision, and in terms of effective interest rate, it is superior to all comparable listed debt except for Graet.Loan, which trades closer to face value and therefore has a higher effective interest rate (despite carrying the same base .05% daily rate).

The CipherMine.B1 bond is not directly comparable, as its effective interest rate fluctuates due to an unhedged peg to fiat; notably, it is also 'secured' on a wasting asset (mining hardware), and unanswered questions remain about the issuer's understanding of the seniority of debt relative to equity and its willingness to honour that seniority. It may ultimately prove to offer great total returns, but it is not directly comparable.

Finally, Just-Dice is among the most talked about opportunities available in the Bitcoin space. Much has been said about the mathematics of the 1% house edge, but generally speaking many market participants still appear to focus most attention on expected return -- with less attention to variance -- and continue to treat Just-Dice as if it were the perfect example of a transparent, low risk, high yield investment. As of 22 September, the site had managed to lose all of its entire profit that had been generated since its inception in June, and it went into the red. That does not necessarily make lending to the bankroll a poor investment, but it does demonstrate the power of variance over expected return, and the potentially overpowering influence of a comparatively few 'whales' in the mix. The fund has lost significant capital due to lending to the Just-Dice bankroll, but we are in that position with eyes wide open and an awareness of inherent weaknesses of the model; we are not at all counting on it to be some sort of fairy godmother of 'safe' returns.

BTC Trading/LTC Global Passthrough

Yes, seriously -- our report next week was going to include a whole section about the fundamentals and risks of the company, together with the bizarre trading dynamics of the passthrough. I've deleted all that.

BTC-TC Assets

As of this writing, our assets held on BTC-TC appear to have been hammered. Going by the current bid values, the BTC-TRADING-PT is now effectively worthless, and our fortunately tiny holdings of the CipherMine.B1 bond are also very close to worthless. (The fund traded profitably in this bond earlier in its history, but our holdings are currently just 111 shares.)

Other assets have taken a hit ranging from a few percentage points to a little over 40%.

Net Asset Value

Taking a snapshot of our current holdings across all platforms, and estimating values on BTC-TC using, again, bid values current as of this writing, the fund's NAV has fallen to .0812 BTC per share, a decrease of 19.731%.

Note that this figure is liable to change, perhaps significantly, as the fallout from the exchange's closure becomes more clear. I am putting a specific number on it right now so that participants in the fund know exactly where they stand in terms of the underlying assets of the fund.

This figure includes at face value 7 BTC of debt which is due to be repaid over a 90-day term. If the fund is closed via buyback prior to that time, I will personally take over this debt from the fund at face value.

What is your plan concerning closing BTCT, DrGreg?

One of the 'plague of idiots' here. I can't speak for anyone else but I do understand the difference between a fund that pays dividends and one that doesn't. That wasn't my reason for selling. I sold some of my BTC-GROWTH at a small loss to take advantage of buying another security that I believed was very cheap. As BTC-GROWTH isn't very liquid on the bid side it's not easy to move out of, but because of the margin I had in what I bought it was still worth it.

I suspect that others have been liquidating BTC-GROWTH to day-trade LABCOIN over the last few days (I'm not one of them; that game is too rich for my blood). I suspect when that drama resolves itself one way or the other people will start moving back into BTC-GROWTH.

If all goes well and BTC-GROWTH books consistent profits I expect it will trade well North of its NAV/U. But you'll always lose something trying to move out of an asset that is not all that liquid.

Not asking for investment advice or an opinion.  But here is an asset for your consideration.

https://btct.co/security/TAT.NEOBEE
http://lmb-holdings.com/LMB_Holdings_Prospectus.pdf

Whoops! Corrected now in the original. My 'u' key apparently doesn't like to be uused twice in the same word.


It does seem peculiar... Hopefully over time, however, as participants in the fund come and go, the shareholder base will come to be populated primarily with participants whose expectations and whose attitudes toward risk match up with the strategy of the fund. Participants won't be looking to the fund to provide "the next big thing" but will instead look to it as a way of gaining hedged exposure to promising growth stories while avoiding at least some of the risks of going "all in" on a single asset that could wipe them out in one fell swoop.

Nice work Greg, I always like reading your business strategies/explanations on things; very informing and entertaining.  And I mean that in the best way possible!

Was hoping to sell a few shares after the first report, but since the fund has no dividends and is fairly new there's a plague of idiots on BTCTC that want to sell out at a slight loss below IPO price 

disingenuous?
...
hm
ok
just want to follow

This was probably the first (it's highly unlikely for me to spot a mistake) and last time (I won't do it again. I promise!) to correct an eloquent native English speaker.

Yeah - no fund can realistically sell/redeem actually AT NAV.  There's transaction costs and time involved plus also all new capital is by definition cash that isn't deployed and isn't earning.  Without some small markup on new sales, existing investors suffer a penalty whenever there's new investments due to the proportion of their own investment which is in play reducing.  The margin also needs to be sufficient to protect against active traders exploiting moves in underlying investments that take the NAV/U outside the range of the fund's own orders (as an example, DMS has some funds in Just-Dice.  If my spread on PURCHASE were too low then people could buy/sell it as appropriate when J-D's house profits moved a relatively small amount - taking money away from those actually using the security how it was intended.)

The million-dollar question is whether a fund is selling (and redeeming) at a level of premium to NAV/U which is commensurate to the costs/risks of sales/redemptions or at levels which are effectively a tax on sales/redemptions and/or a major source of profit.

Sale of new units is not, of itself, either an indicator of being a Ponzi or an indicator of NOT being a Ponzi - as both Ponzis and legitimate investments do it.

This is a common and expected practice. Look at BTC-INVEST, BTC-EQTY, LTC.ATF, DMS.PURCHASE or other funds.
Would you suggest selling additional shares below NAV/U instead?

Aaaaand ponzi.

Yes, breaking it down by security type could be another useful approach -- where debt issuance, for example, might incur a lower fee than equity. What I was envisioning in the back of my mind was more along the lines of lower fees associated with assets somehow associated with the same entity -- for example, different debt series, or different PTs.

In your case, for example, I've had the sense that you might be considering moving into an underwriting type of role; if that were to happen, then I could imagine an exchange offering you a reduced-cost way of bringing new listings to market, some of which might otherwise not have happened at all.


In some cases, this type of 'grandfathering' in based upon past performance could have unintended and negative side effects on quality as the effects of past accidents dissipate into mediocrity and reversion to the mean.

For a real world example, one of my own decently performing investments in the fiat world has delivered around 14,000%, and just a single quarterly dividend payment is now nearly enough to return the whole initial cost. But such numbers are entirely irrelevant to the question of whether that investment is still a good investment, right now or whether it's now just going to muddle along. What really matters is what is happening with the current value of that investment over relevant timescales -- and not merely whether some past event led it to grow in a way which has not been repeated. Were my portfolio made entirely of investments which have done well in the past, its current performance would be substantially worse than it is now.

My point is just that incentivising issuance on the basis of performance over a single window of time might not necessarily be in the interests of the exchanges.


I imagine this will cut out a huge swath of the types of not yet profitable startup businesses which might be of greatest interest to market participants attracted to Bitcoin-denominated exchanges in the first place, not to mention those at a stage of development where they're most likely to want to tap the capital markets in the first place. But it's a start!

BTC-TC has already done this.  If a business has traded profitably for 6 months+ (note to all the vapourware companies - trading profitably isn't same thing as pumping your market price) then they can make additional listings for free.  As my fund has traded for a nearly year and paid back 300% of initial price in dividends (and has a NAV/U that's 600%+ of initial price) I no longer have to pay for new listings (if they're owned by the fund - for ones where I'm personally the issuer, such as DMS, full listing price has to be paid).

That solves my issue #1 going forward - the solution to my issue #2 (allowing rollovers without anyone stumping up cash temporarily) is solvable with the automated transfer bot I use and a little bit of planning (it could be done manually but that's a prohibitive amount of work).

On the listing without fees on BTC-TC the waiver of fee also applies to businesses that have traded profitably for 6 months without being listed anywhere - they just need to prove they've been making a profit (which is maybe not as easy as it sounds, in fairness).  What's not clear is whether a BTC-denominated business that made a profit in USD but not in BTC is considered profitable (which is where the better mining companies fall).  I (and I'd expect you) would say no - if it's listed as BTC-denominated then it has to make a BTC-denominated profit to be considered profitable.

I've suggested special fee structures for different types of securities to Havelock. They seem somewhat open to the logic of it, but some convincing may still be required...

Yep, I hear you -- in this particular context it makes much more sense than in some other contexts, where the rationale which you've set out doesn't fly quite so well.


Yep, I hear you there too; I wonder whether any or all of the exchanges have considered lower listing fees for this sort of thing? That could benefit everyone by enabling new listings from established issuers to appear (along with trading volume) that would otherwise not be cost effective and which would thus not generate listing fees anyway.


A great recipe for implosion...


I'm still getting a sense of how the market behaves, and experience from observing one listed asset doesn't seem to yield much of anything that can be applied to others. Some have ludicrous spreads, some are quite tight; and in at least one case I observed directly, individuals have been so keen to take new positions that they'd rather buy at market than buy a mispriced call and immediately exercise it for a lower total cost -- go figure. I wouldn't have expected this fund to trade at a 7% premium immediately after launch, but nor would I expect it currently to be trading at a 1% discount to NAV. Hopefully as things settle down, as participants have a moment to digest things, and as participants' expectations converge with what can be realistically achieved for a reasonable level of risk, we can get a better sense of when it makes sense to soak up excess shares or provide new ones.

I'm one of those offering something meeting your description - where there's no apparent intent or deadline for repayment.  I can't speak for others offering similar things but in my case the issue was more a practical thing than related to my intent.

I'd FAR prefer to have the bonds issued with fixed maturity dates - as that would allow me to reduce as well as increase debt (and, more usefully, reduce the rate paid).  But I ended up issuing perpetual paper because of a combination of the following:

1.  There was no way provided on the exchanges to do a partial buyback (rightly so) so to avoid having to buyback everything at once I'd need to issue a bunch of different bonds with different maturity dates.  The listing fee (5 BTC per listing) compared to the total amount of debt issued makes this unfeasible.
2.  There was no simple way for participants to rollover from one issue to another (assuming I was renewing a batch of debt) without either them having to temporarily tie up double the capital they intend to OR me having to refund all even when I know the new issue will be fully subscribed.

In fact, for future debt (if/when I look to take on more) I intend to move to a more traditional bond structure with fixed maturity dates as I believe those likely to deliver better value for me and more transparency/clearer valuations for investors.  But the solution I've arrived at wasn't available to me back when I initially issued bonds (or even when I more recently sold LTC-ATF.B2) but does solve the especially problematic point 2 above (avoiding either party having to needlessly make liquid and briefly tie up cash where both parties intend to renew the debt).

As an issuer I disliked 'perpetual' bonds - not because I don't have to buyback, but because I can't (at face value) when I want to.

Getting back to your report I'd like to comment on this:


I'm quoting it not because I disagree with it but because I believe it bears repeating.  A fund such as this (where there's no practical limit on units issued) should absolutely trade very close to NAV/U.  About the only practice worse than redemption at a lot below NAV/U (and selling at a lot above it) is the opposite which some funds have in the past indulged in - placing bids on their own units at ABOVE NAV/U to try to force the market up and/or selling below NAV/U to increase capital (some funds have managed to do both).

It's refreshing to see someone trying to grow NAV/U by trading/investment rather than by gouging new/departing investors.

Do you actually have specific percentages (relative to NAV/U) at which you intend to buy/sell (after publication of reports)?

Um...yes... We're saying the same thing, except that you're suggesting I'm assuming something I am not, and you're suggesting I am seeing an opposition where I am not. (Why would I think, let alone assume, that those interested in redemption are interested in chasing yield? Why would I think being safety-minded is in any way opposed to wanting easy redemption? I'm not following...) Compare:


In other words, I'm suggesting the primary shareholder base of Ukyo.Loan is disinclined to chase yield (i.e., not ones for "taking on massive risk in return for speculative profits" in your words); those safety-minded participants are more concerned about redemption at face value (i.e., "have a strong interest in having access to redemption" in your words).

So again, there's no "assumption" here, and there's no being "opposed to one another" rather than being "actually complementary". On the contrary, you've nicely restated my own words...


Just so. Moreover, many are presented, either explicitly or implicitly, as perpetual loans, as if the intention is only to service the debt but never actually to repay it. Folks can get all hung up on interest rates without paying nearly as much attention to the eventual return of principal.