I've had an interest in investing for a long time and an interest in Bitcoin for an unfortunately longer time than I have been actively involved with it. (Why 'unfortunately'? Because when I first read about Bitcoin in 2011, I thought it was an ingenious idea that would ultimately prove to be utterly useless as an actual currency, and I didn't return to it for another two years. I suspect there are others out there who share that kick-myself-later experience.)

In addition to those two interests, the way Bitcoin is currently regarded by the UK government -- specifically, treating gains as irrelevant from a tax perspective until they are converted to fiat -- provides an opportunity to do things, such as providing a low-friction fund management service, which I otherwise could not do at all without creating a whole new corporate structure, with all the additional expense and administrative overhead that would require. In other words, this is a way for me to give that a try without all the additional accoutrements that would otherwise be required.


Success for the exchange -- wow, that's a big question! Personally, I'd like to see it 1) become legally bulletproof -- not legally avoidant, but legally bulletproof, compliant with whatever needs to be complied with, etc. -- and 2) introduce market making services for both listed securities and options, either by becoming the counterparty to all trades itself, or by retaining others to provide market making. In other words, to my mind, success for the exchange means providing the foundations that people need to make real Bitcoin investing much more efficient than it is now.


Almost none of my new business endeavours have ever been undertaken with a specific personal goal in mind; rather, they're undertaken to learn, explore, adapt, and attempt to grow into a niche -- but without any of that codified into specific goals. (When I'm trying to learn about something, for example, I rarely reach a point where I think "great, I've learned it -- now what?".) That doesn't mean I just go off in random directions, of course, without tactical targets or longer term strategies; I do have both. But what it means is that I have no more of an answer for your question about this in particular than I would have if you had asked it about any of my other business efforts.


The listing document mentions a minimum participation level and closing the fund as a matter of exiting positions gracefully and returning NAV to participants. I would not envision passing the fund on to another manager.

The exchange operators will need first to unlock the listing, in preparation for attention from the moderators who serve as gatekeepers between submissions and listings.

As indicated in the listing document, we are aiming to provide a service to the exchange. If there are other comments to be made from an exchange perspective regarding "the legal things", in addition to what burnside has already posted in the other thread you mentioned, I imagine he will make them there in that thread.

Many thanks for your support, damiano; next up we'll just need some attention from the exchange and the moderators who serve as gatekeepers between submissions and listings.

Depending on whether there are some special characters which you do actually want to preserve, or whether you'd like to knock everything down to a safe least common denominator, these kind of gremlins often succumb to judicious use of utf8_decode()/utf8_encode or if necessary iconv().

The draft of the fund document has been slightly updated and is now available in its entirety at the exchange:

https://btct.co/security/BTC-GROWTH

Please refer to the full document for all details, including risk factors and FAQ.

The skeleton site mentioned in the original post is BTCGrowth.com; the canonical listing documents will be available shortly on BTCT.co and the original post updated accordingly.

Many thanks for your support -- I appreciate it! 

Agreed; I stripped out quite a few provisos and qualifiers here (and also with the options example earlier), but the example was meant only to show that choosing from the three on the basis of 'growth' alone could give a result that might not match up with the choice you would make if you had more information available about risk.


Yes, it's clearly total returns that really matter.


Absolutely: all hedge fund-style investments, including those in the fiat world, face the problem of balancing their size with their strategy. I.e., at a certain point, bigger is no longer better, because they cannot efficiently put the capital to work.

As for this fund in particular, it's difficult to project into the future of an environment with such tremendous growth and uncertainty. Seeing as it's intended to be exchange traded, however, the fund would at least have some flexibility to adjust its size via the subscription/redemption facility.


I gave this quite a bit of thought before settling on the 3 month compromise. For a fund which simply raises capital, closes, and then begins investing, it makes sense for the high water mark either to be permanent or to be tallied over quite a long period. For a fund traded on an exchange, it's quite a bit different, because each participant in the fund may have a different entry point in terms of NAV per share. Since it's not practical to keep track of a high water mark for each individual participant in the fund, it makes sense for it to 'decay' in same fashion -- thus the trailing 3 month period which, again, is really a compromise for the context, rather than something which is clearly the 'right' way of handling it.


This rapidly gets complex, which is why the original document sweeps most of that complexity under the carpet and just refers to the BTC-denominated NPV of the resulting free revenue stream. By focusing on the NPV of the revenue stream, we're ignoring the sunk costs of hardware -- and there's good reason for doing that, given that the 'S' in 'ASIC' implies modern hardware ultimately has zero residual value for any other purpose -- and we're also ignoring any future fiat-denominated costs for hardware to be purchased by reinvesting the BTC-denominated revenue stream. (Making this simplification only works at all if you're looking to invest BTC in the first place, as distinct from looking to invest in mining using fiat.) As I say, this is all an imperfect simplification of something which I acknowledge is complex.

And if I'm correctly understanding the meaning behind your question -- namely, not so much what we call it, but how to analyze the outcome with respect to an original investment denominated in Bitcoin or in fiat -- then this simplification alone isn't enough, and we need to know more about how the underlying business works. I take it that a business which is riding their existing hardware investment until the return hits zero is a different beast than one which is investing a load of fiat to create a new chip to begin mining at some point in the future. The former makes it much easier to apply the simplification than the latter.


All share investments would be treated equally, and as far as I'm aware the exchanges keep the information up to date which they display about shares outstanding.


There would be no advantage -- and, as you've pointed out, plenty of disadvantages -- to investing in another fund whose exposure could simply be replicated directly. It's not quite as straightforward as simply never investing in another fund, however, since in some cases that exposure might not be so easy to replicate directly. For example, if someone were to float a private equity fund, the fact that it was another fund wouldn't by itself be a compelling reason not to invest -- since the private equity exposure of the fund could be difficult or impossible to replicate.

Did I mention that my treatments for repetitive stress injury will be charged to the fund?

It feels slightly odd replying to your post, given that it is mostly the same as what you've already posted in a different thread a couple of hours earlier, to a different person, concerning a different fund altogether... But to address this specific question in particular, all companies in the United Kingdom are legally bound to keep appropriate records and to submit appropriate accounts to the government each year.


As you'll hopefully have seen in the original post, there's quite a long list of risk factors -- and management of those risks goes quite a bit beyond deciding how many different eggs to put in your basket. Ignoring for the moment the other 10 or so risk factors in the list, and looking only at one single underlying security for the sake of argument, you could gain exposure to that security in any of several different ways, each with slightly different risk profiles: you could buy it outright, you could buy it outright and write a call against it, you could write a put against it rather than buying it, and so on. While the latter two have an equivalent profit graph at expiry, they normally differ in terms of collateral commitment (not so in the Bitcoin world, where exchanges haven't yet moved to treating put writes as they are treated in the fiat world), and each can also be made to look different in terms of risk/reward by altering the strike price.


The fund cannot make any guarantees -- or offer any "expectations" -- about performance, either absolute or relative.


Having an index or two around would be great; I'm quite surprised that the exchanges themselves haven't yet done this themselves, since it seems like doing so would fall naturally in their court, offering both a useful service and a great way of promoting themselves.

However, your suggestion that a market cap "adjusted" (?) holding of all Bitcoin securities would be the "true performance standard" for judging the performance of other funds or securities seems incorrect to me -- for three reasons.

First, not all funds invest solely in a set of securities covered by a candidate index of Bitcoin securities. Imagine a fund whose job it was to invest solely in debt. Why would you want to benchmark a bond fund against an equity index or a hybrid bond/equity index?

Second, the set of all Bitcoin securities is currently far too small and yields far too concentrated a model portfolio to be a good performance benchmark. The reason an index like the S&P 500 is used as a performance benchmark is not merely because it's a handy index that someone decided to put together. It is used because it is sufficiently large and diverse that its statistical properties are attractive. For example, we care about variance relative to the S&P because historically that variance is considered low relative to its returns; to put it a different way, it's hard to generate S&P 500-style returns without adding more variance and taking on more risk.

Third, and most importantly, headline growth numbers obscure underlying risk. As the original post indicates, that's why an entire cottage industry has put analysts to work evaluating skewness, kurtosis, Sharpe ratios and other measures to distinguish good investment management from bad. Three extremely different portfolios might all generate the same returns over a given period of time, but they might do so with entirely different risk profiles. Would you rather have 10% per annum while risking a 50% chance of a 50% loss per annum, or 8% per annum with the same level of risk of a 20% loss; how about 12% per annum with the same level of risk of an 80% loss? If you're merely 'benchmarking' you would probably go for the 12% and be happy; for my part, I'd take the 8% without a second thought.

[Edit: Fixxed my speelling.]

Many thanks, felente.

In my general, my philosophy is to ask questions first, invest later -- not the other way around. 

Many thanks, TradeFortress; I'm looking forward to seeing how it all progresses.

As mentioned in the section on approach and context, I think the space is fairly limited right now, but I'm optimistic that there's still enough here to make things interesting. A few discussions with businesses not yet on the public menu offer some hope it could become more so in the coming months.


Many thanks for your support. We're still moving in baby steps at the moment, though, with the next step being to get things set up on the exchange end.

As I mention in the FAQ, there is no statutory definition of a hedge fund, and nothing at all rides on whether this is called a hedge fund. While it does not employ the GP/LP structure, it will be permitted to use of leverage; it will be permitted to actively hedge investments; and it will be permitted to take positions in a range of equity, debt, and currency; all of which are characteristics common to some (but not all) hedge funds.


As the document indicates, my understanding of the current position of HMRC is that gains are taxable when converted to fiat. To the extent that the aim of the fund is to achieve capital growth in Bitcoin, that understanding, if correct, would imply that the fund would not owe the UK government capital gains tax. As indicated under 'Risk Factors', however, we have no idea whether the UK government may in the future change its stance on this matter. I am not qualified to comment on any individual tax liabilities which might arise for investors redeeming shares, or on any extraterritorial claims of jurisdiction which might in the future be made by the US or other governments. With regard to AML/KYC, the fundamental structure of the exchange itself (quite apart from the mechanics of Bitcoin) currently precludes any kind of individual verification or validation by issuers. This is not unlike the structure of normal exchanges and brokerage houses: responsibility for verification or validation lies not with issuers of listed securities, but with the operators who provide the mechanisms whereby those securities are traded. (For example, if you buy shares in IBM, you won't find someone from IBM phoning you up or asking for a copy of your passport to verify that it's really you.)


Management fees, when converted to fiat, become part of the issuer's normal taxable revenue stream, to be reported just like any other revenue. From the perspective of investment, however, it is my understanding that it is the realization of gains in fiat which creates a tax liability under current HMRC guidance; therefore no, I do not envision the fund incurring obligations or liabilities due to currency conversion. The aim of the fund is, after all, to achieve capital growth in Bitcoin, not to achieve Bitcoin gains and convert them to fiat, and not to achieve fiat gains and then convert them back to Bitcoin.


As in all areas of our business, we make every effort to operate within the law, consulting with our accounting firm -- which has a statutory duty both to understand and to report violations of relevant law -- on any occasion that guidance provided by HMRC or other UK government agencies proves to be confusing or unclear. In this particular case, the issuer is offering a service to the exchange, a service intended to manage Bitcoin-denominated assets, and the guidance which has been provided by HMRC so far does not indicate that this service would in any way merit additional attention. As in the FAQ, however, we have no idea whether the UK regulatory landscape may change in the future, and should that happen, we will take whatever steps necessary to ensure our compliance with any changes, including closing the fund gracefully, should that prove necessary. With regard to who pays for what, my company pays its own expenses; charges to the fund are outlined in the original document.

Many thanks for your thoughts and input -- these kinds of questions may help us fine-tune the final version of the document.

This is essentially the document which will eventually be in place on BTCT.co. In an ideal world, I would have simply included a brief summary here, and a link to the BTCT.co document. Unfortunately, part of the BTCT.co listing procedure is to provide a link to a discussion on Bitcointalk.org. So, I've offered the full details here in advance of setting up the listing materials on BTCT.co.


Absolutely -- fire away! 

There could be more than one basic question; one might be what sort of description would be most useful? For some people, equal weighted would probably be more useful, while for others some type of fundamental weighting might also be useful. For some ETFs, for example, it's earnings weightings that count.


I'm not sure I follow. Any index can behave like a portfolio of securities; there's more than one way to build a portfolio, and more than one way to have an index behave like a portfolio.


Why would that be ideal?


Caps like that, although arbitrary, seem like at least one good way of helping an index provide more of a glimpse into something other than just its largest one or two constituents. If you're coming at it from the standpoint of how an index should behave, and you believe it should be market weighted, then a cap like that would be all wrong, but on the other hand it could make it more useful.

(Side note: Laspeyres -- not Laspayres -- method. Also, most major indices are market cap weighted, but the Dow is price weighted.)

Since the disadvantages of market cap weighted indexes are well known, have you considered an equal weighted index? Just a-wundrin'...

13 August 2013

The full document held by the exchange has been updated with the addition of the following section headed "Compliance and Modifications" immediately prior to the section headed "Initial Offering, Minimum Participation Level, and Fund Closure":

"The fund issuer may update this document from time to time as needed for administrative or other reasons, including to ensure compliance with applicable laws and regulations. Except where required to do so by law, the fund issuer will not make any modifications to this document which could reasonably be foreseen to cause a materially negative impact on participants' interest in the fund without a minimum of 30 days of prior notice."

8 August 2013

The full document held by the exchange has been updated with the addition of the following sentence to the section headed "Initial Offering, Minimum Participation Level, and Fund Closure":

"Closure may be effected via a buyback of all outstanding shares using the mechanism provided by the exchange for this purpose."

6 August 2013

The original draft of the fund document has been removed in favour of just the 'Executive Summary' and 'About the Fund Issuer and Fund Manager' sections. The full document, at around 8500 words, is now available directly from the exchange:

https://btct.co/security/BTC-GROWTH

The principal difference between the 6 August version and the original draft is clarified wording throughout which is intended to emphasize that the fund is being provided as a service to the exchange; individual shareholders in the fund are referred to as 'participants' in the fund rather than as 'investors'.

2 August 2013

The original draft of around 8500 words was posted for discussion.

UPDATED VERSION, 6 August 2013:

My company has applied to list BTC Growth, a hedge fund-style service, on BTC-TC. The canonical version of the document, at around 8500 words, is now available directly from the exchange:

https://btct.co/security/BTC-GROWTH

In the interest of compactness, I have included here just the 'Executive Summary' and 'About the Fund Issuer and Fund Manager' sections. Please refer to the full version of the document for additional details, including risk factors and FAQ.

Any updates to this document will be summarized in the post following this one.

Executive Summary

Operating as a hedge fund-style service to the exchange, the BTC Growth fund aims to achieve capital growth denominated in Bitcoin.

The fund may invest in securities listed on Bitcoin-denominated exchanges, or in unlisted short-term debt of listed or unlisted businesses with demonstrable cashflow. It may construct strategies using derivatives intended to hedge risks associated with these investments or to generate returns in their own right. In exceptional circumstances, the fund may invest privately in unlisted businesses. The fund may provide capital to exchanges, and it may construct positions designed to extract value from volatility in the value of Bitcoin versus other currencies.

The fund's portfolio will be marked to market and its Net Asset Value published approximately once per month. Being exchange traded, no redemption notice is required, and the fund may provide additional redemption and subscription liquidity by placing bids or asks (respectively) at a level between NAV and open market prices.

The fund employs a 'two and twenty' fee structure common to the hedge fund industry, together with a rolling high-water mark tallied on a trailing three-month basis.

Potential participants for whom the full document is in any way 'TL;DR' should not participate in this fund.

About the Fund Issuer and Fund Manager

The fund will be provided as a service to the exchange by Mulhauser Consulting Ltd., a company incorporated in the United Kingdom eleven years ago and which has been in continuous operation ever since.

The fund will be managed by Dr Greg Mulhauser, the company's founder and Managing Director. In other areas of its business, the company works with a team including both volunteers and paid employees and consultants, but for the purposes of this service, fund management will be handled entirely by the Managing Director.

With educational background in mathematics, philosophy, and later in mental health, Dr Mulhauser has worked at the Pentagon, UK universities, and telecommunications giant BT. Originally employed at BT as a research scientist in cognition, complex systems and biologically inspired computation, he was also responsible for curiosities such as the Lattice of Extended Turing-Style Automata, which he designed as a novel computational architecture for implementation with FPGAs in a fashion similar to cellular automata. He later left the Complex Systems Laboratory for business strategy roles and advised on corporate venturing and on derivatives strategies associated with M&A projects. He contributed to the company's Asian portfolio management, assessed flotation and alternative demerger options for its wireless operation, and developed strategy for its £500 million indirect channels business. In 2002, he left a strategic partnering role in security and mobile technology to found his own firm, securing consulting contracts ranging from ground-based air defence systems at Northrop Grumman and the UK Ministry of Defence to internal communication at the UK's national Police IT Organisation (PITO). A British Marshall Scholar and Fellow of the Royal Society of Arts, Mulhauser lives in Devon, England with his wife and daughter.

Additional information about the fund manager specifically regarding his investment background is available from one of the newest sites in the company's portfolio, Psychological Investor:

http://psychologicalinvestor.com/lib/about-founder/

Potential participants can get something of a flavor of the fund manager's general approach to investing from the same site, and a small selection of his recent articles specifically about the Bitcoin economy can be found here:

http://psychologicalinvestor.com/lib/tag/bitcoin/

For further background, the archive section of the Mulhauser Consulting site also includes work on business strategy development and even older research work on topics like algorithmic information theory, computability and recursion theory dating back to the 1990s. (Greg Chaitin, who as a teenager independently invented algorithmic information theory alongside Kolmogorov and Solomonoff, described the fund manager's first book as "One of the first serious applications of algorithmic information theory; fun to read!")

http://mulhauser.net

Posts by the fund manager on the Bitcointalk.org forum can be found here:

https://bitcointalk.org/index.php?action=profile;u=132160;sa=showPosts

As with ordinary hedge funds, in which the General Partner typically invests alongside Limited Partners, the fund manager intends to participate in the fund, helping to ensure alignment between his interests and those of the fund. Note, however, that the General Partner/Limited Partnership model itself is neither desirable nor practical for a fund intended to trade freely on a Bitcoin-denominated exchange.

Note: This document is copyright 2013 by Mulhauser Consulting Ltd., with all rights reserved, and may not be repurposed without written consent.