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Author Topic: Bitcoin on the public markets?  (Read 1817 times)
Nova!
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May 28, 2013, 05:17:44 PM
 #1

I've been working on A LOT of bitcoin related ventures lately.  Some pan out, some don't.  That's the way life goes.
During all of this I have met and talked to numerous people from all walks of life and have of course been evangelizing bitcoin the whole time.

I made some interesting contacts one of whom is a decision maker for a largish financial institution.  
When I told him about bitcoin a year or so ago he was excited but very, very skeptical about it.  
He has been paying attention to everything that has happened lately and he contacted me today to bounce an idea off me that frankly I'm not sure how I feel about and thought I would share the idea here to see what people think.

Now understand that this is not rumor, or speculation.  
There is a very good chance that this won't occur and I'm not offering nor am I able to offer any sort of opportunity.  
This is not some sort of insider information and if the price of bitcoin takes a jump after this it will probably kill the idea off.  
This is not an announcement it is merely a hypothetical.  I am just asking the folks who would be most impacted by it, what they think of the idea.
Also you should be aware that I am not in a paid consulting position, he just views me as an SME and asked my honest opinion.  
I am having trouble forming one, so I'm asking you folks.
Should I say, "Yeah cool, good idea you should look into it." or "This is a bad idea and will only cause harm."

The underlaying concept is basically a basket of assets that are bundled into a holding structure of some sort and traded as a single stock on a stock exchange.
The core idea is to accumulate 210,000 BTC. (probably through a series of bulk purchase agreements with established operators).
(He originally said 10M but I tried to explain why that wasn't feasible, even 210,000 would be a bit of a stretch).
You then create an entity and assign it ownership over the BTC.
The entity will own this basket of currency and it represents a total 1% of the bitcoins that will ever be mined.  
(An alternative could be to purchase 1% of the currently available BTC and then try and keep up, but I think upfront is better).

It believe the goal would be simply to hold all of that BTC in perpetuity.
Then you just place the entity on a major exchange and let it trade freely.
Ideally this should cause the entity to trade at it's NAV, which is entirely comprised of BTC thus giving us a total market valuation of BTC.

In my mind this gives an instant way of calculating the value of BTC on the open market and allows people to hold BTC in their IRAs or 401Ks without unduly limiting the supply and creating a hoarding situation, or trading the BTC rapidly which lengthens the block chain needlessly.  When people are ready to cash out their holdings they can do so as easily as selling Ford or Coca Cola stock.  Major players could liquidate without crashing the price of BTC for the rest of us.

The disadvantage I see is that this locks up an awful lot of bitcoin into the hands of a single company.  Still that may not be a bad thing since the interests of the company are solely in keeping the price of BTC stable and gradually appreciating.

So my question is this.  If a major financial institution were to consider actually backing this thing properly , ensuring that it is fully registered, fully compliant, no different than any other publicly traded entity.
  
Would you consider it a good thing or a bad thing for bitcoin?  Why?
Would you buy?  Would you sell your bitcoins to buy once it reaches the market? Why or Why Not?
What would be the best way of accumulating this much BTC without driving the price through the roof? (legitimate question because I don't think there are 210,000 BTC liquid right now).

Thanks!

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May 28, 2013, 05:28:05 PM
 #2

I have made some edits, there were places in the original post where I used terms such as fund, company etc.  The proper term is entity since the actual structure of this thing was never described to me.  Just disclosing the fact here in the interests of openness.  I have no idea what sort of entity it would be other than a publicly traded holding entity with a goal of trading at NAV.

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May 28, 2013, 05:36:27 PM
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Protip: If you're thinking about buying 210k bitcoins in the near future don't tell everyone about it.

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May 28, 2013, 05:43:30 PM
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The only issue is one of scale.

To get a new company/entity on the pinksheets costs about $200K to $500K (yes you can do reverse mergers but that can be financial nightmares) and can take months.  To get an entity (say an ETF or simply a BTC holding company) on a major exchange is going to cost (on the order of) $10M and can take years.  Plus the entity is going to have operating overhead (managers, auditors, accountants, etc) so expect $500K or so a year (minimal) which means the NAV will decline (in BTC terms) over time.    

So given these large and relatively fixed costs structures the entity would need to be very large.  Even 210K BTC is likely insufficient to be efficient on a major exchange.  Still if you know people with $25M to $250M in capital, the expertise to get a public offering on a major exchange, the connections to smooth things over with SEC (yes SEC approval will be required) and the time commitment there is nothing that prevents it from happening.

An ETF structure makes the most sense as the ETF can be structured similar to PM ETF where the adminstrator acquires blocks of BTC and issues new shares and also allows redemption of blocks of shares for delivery of "physical" BTC.  This allows the ETF to adjust to market demand.
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May 28, 2013, 05:43:40 PM
 #5

Protip: If you're thinking about buying 210k bitcoins in the near future don't tell everyone about it.

I'm not, so no worries there.  Like I said before, you should treat this purely as a hypothetical.  If the price of Bitcoins rockets in the near future it kills the idea off anyways.
Also I'm not positive but I honestly don't think anyone could lock up 1% of the BTC without doing serious harm to the price.  The currency isn't that liquid and I'm pretty sure most of it is missing.

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May 28, 2013, 05:48:58 PM
 #6

Quoted for reference. To me it sounds like some paper gold scammer extending into new markets, especially if there is no way to redeem the shares directly 1:1 into bitcoins proper. Like:  I am selling my 100btc perpetual position. You just send me 100btc, and I'll send you nice certificate that you can then trade further.  And I won't exchange it 1:1 back to real bitcoins because it is perpetual Wink

I've been working on A LOT of bitcoin related ventures lately.  Some pan out, some don't.  That's the way life goes.
During all of this I have met and talked to numerous people from all walks of life and have of course been evangelizing bitcoin the whole time.

I made some interesting contacts one of whom is a decision maker for a largish financial institution.  
When I told him about bitcoin a year or so ago he was excited but very, very skeptical about it.  
He has been paying attention to everything that has happened lately and he contacted me today to bounce an idea off me that frankly I'm not sure how I feel about and thought I would share the idea here to see what people think.

Now understand that this is not rumor, or speculation.  
There is a very good chance that this won't occur and I'm not offering nor am I able to offer any sort of opportunity.  
This is not some sort of insider information and if the price of bitcoin takes a jump after this it will probably kill the idea off.  
This is not an announcement it is merely a hypothetical.  I am just asking the folks who would be most impacted by it, what they think of the idea.
Also you should be aware that I am not in a paid consulting position, he just views me as an SME and asked my honest opinion.  
I am having trouble forming one, so I'm asking you folks.
Should I say, "Yeah cool, good idea you should look into it." or "This is a bad idea and will only cause harm."

The underlaying concept is basically a basket of assets that are bundled into a holding structure of some sort and traded as a single stock on a stock exchange.
The core idea is to accumulate 210,000 BTC. (probably through a series of bulk purchase agreements with established operators).
(He originally said 10M but I tried to explain why that wasn't feasible, even 210,000 would be a bit of a stretch).
You then create an entity and assign it ownership over the BTC.
The entity will own this basket of currency and it represents a total 1% of the bitcoins that will ever be mined.  
(An alternative could be to purchase 1% of the currently available BTC and then try and keep up, but I think upfront is better).

It believe the goal would be simply to hold all of that BTC in perpetuity.
Then you just place the entity on a major exchange and let it trade freely.
Ideally this should cause the entity to trade at it's NAV, which is entirely comprised of BTC thus giving us a total market valuation of BTC.

In my mind this gives an instant way of calculating the value of BTC on the open market and allows people to hold BTC in their IRAs or 401Ks without unduly limiting the supply and creating a hoarding situation, or trading the BTC rapidly which lengthens the block chain needlessly.  When people are ready to cash out their holdings they can do so as easily as selling Ford or Coca Cola stock.  Major players could liquidate without crashing the price of BTC for the rest of us.

The disadvantage I see is that this locks up an awful lot of bitcoin into the hands of a single company.  Still that may not be a bad thing since the interests of the company are solely in keeping the price of BTC stable and gradually appreciating.

So my question is this.  If a major financial institution were to consider actually backing this thing properly , ensuring that it is fully registered, fully compliant, no different than any other publicly traded entity.
  
Would you consider it a good thing or a bad thing for bitcoin?  Why?
Would you buy?  Would you sell your bitcoins to buy once it reaches the market? Why or Why Not?
What would be the best way of accumulating this much BTC without driving the price through the roof? (legitimate question because I don't think there are 210,000 BTC liquid right now).

Thanks!

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May 28, 2013, 05:52:09 PM
 #7

The only issue is one of scale.

To get a new company/entity on the pinksheets costs about $200K to $500K (yes you can do reverse mergers but that can be financial nightmares).  To get an entity (say an ETF or simply a BTC holding company) on a major exchange is going to cost $10M.  Plus there is going to be operating overhead expect $500K or so a year (minimal).    So given these large and relatively fixed costs structures the entity would need to be very large.  210K BTC might make sense for some pinksheet listing but on a major exchange unless you want the overhead to be 30%+ you are more like looking at 2M BTC.

Still if you know people with $25M to $250M, the expertise to get a public offering on a major exchange, and the time commitment to see it done (expect 6 months for a pinksheet and 2-3 years for major exchange) there is nothing that prevents it from happening.

I am going to abstain from further comment on this thread, because I don't want to drive it one way or the other.  But it is safe to assume that the company asking me for information has experience and knows their costs.  Also I'm the one who said 210,000.  The amount I was talked to about was quite a bit more and more inline with what you are saying and now I can see why he quoted that figure.

Ok I'm going to crawl into a corner and watch this thread.  Please make the assumption that the backer knows their stuff and has the resources to pull it off without endangering themselves financially.  Think of it more like a bull in a china shop situation.

Topic is, is this a good idea for bitcoin if it were to happen yes or no?

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May 28, 2013, 05:56:58 PM
 #8

Quoted for reference. To me it sounds like some paper gold scammer extending into new markets, especially if there is no way to redeem the shares directly 1:1 into bitcoins proper. Like:  I am selling my 100btc perpetual position (that I won't exchange 1:1 to real bitcoins because it is perpetual). You just send me 100btc, and I'll send you nice certificate that you can then trade further... Wink

Understood but missing the point.
I'm not backing this idea.  I'm asking an opinion on the idea.  i.e. If someone steps up to the plate with this as an offering would it do more harm than good to the bitcoin economy?

Also this would be traded on a major exchange just like any large company or fiund and thus subject to all the same regulations, the difference is it that it is only a holding entity for bitcoins.  I'm not sure if it would be an ETF, or how it would be structured, that would sort of be irrelevant to the question at hand I think.
As far as being paper BTC, it should be pretty easy to verify if they are still holding those bitcoins and I'm sure most folks would know immediately if & when they sell them, but I'm not certain if selling is an option, my understanding would be a buy and hold but that is subject to change.

If a major player steps in and tries to but BTC on a primary market (likely through acquiring BTC and holding it in an entity), would this be a bad thing or a good thing.  Yes or No and Why?

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May 28, 2013, 06:29:32 PM
 #9

Quoted for reference. To me it sounds like some paper gold scammer extending into new markets, especially if there is no way to redeem the shares directly 1:1 into bitcoins proper. Like:  I am selling my 100btc perpetual position (that I won't exchange 1:1 to real bitcoins because it is perpetual). You just send me 100btc, and I'll send you nice certificate that you can then trade further... Wink
Understood but missing the point.
I'm not backing this idea.  I'm asking an opinion on the idea.  i.e. If someone steps up to the plate with this as an offering would it do more harm than good to the bitcoin economy?
If it is feasible, then just do it, don't ask. Even experts are often wrong in their assessment about something being "good" or "bad" for economy. Why do you expect btctalk crowd to fare better?
Also this would be traded on a major exchange just like any large company or fiund and thus subject to all the same regulations, the difference is it that it is only a holding entity for bitcoins.  I'm not sure if it would be an ETF, or how it would be structured, that would sort of be irrelevant to the question at hand I think.
As far as being paper BTC, it should be pretty easy to verify if they are still holding those bitcoins and I'm sure most folks would know immediately if & when they sell them, but I'm not certain if selling is an option, my understanding would be a buy and hold but that is subject to change.

If a major player steps in and tries to but BTC on a primary market (likely through acquiring BTC and holding it in an entity), would this be a bad thing or a good thing.  Yes or No and Why?
Again I assert "good/bad" judgments are useless here. Decide on some real advantage. Gold certificates have advantage by being easier to handle that physical gold, this is not the case with bitcoins. Only advantage this seems to have is some bureaucratical/401k/IRS stuff and maybe some recognition. Bitcoins were designed with "everyone being a holding entity on their own" mindset and you need some real reason to replace this assumption for whole thing to work.

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May 28, 2013, 06:37:25 PM
 #10

This has been discussed before a few times.

The problem always boils down to: holding bitcoin does not provide any income, so there would be no way to make money with this. Potentially the fund could be actively trading bitcoins, but you would not need to have so many to make money doing that, and you have to worry about whether your active manager is actually better than the market.

I would say, if you have the connections to actually set up a financial instrument for holding bitcoins, go ahead and do it because there are plenty of people who would want to invest.

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May 28, 2013, 07:22:54 PM
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This has been discussed before a few times.

The problem always boils down to: holding bitcoin does not provide any income, so there would be no way to make money with this. Potentially the fund could be actively trading bitcoins, but you would not need to have so many to make money doing that, and you have to worry about whether your active manager is actually better than the market.

The is a very valid point.  Holding a currency does not in an of itself provide an income.  There is a limit to the number of shares that could be issued so I am curious as to how the actual execution would take place. i.e. Where is the profit in this?

It's a question I hadn't thought of, but should probably ask because it has significant repercussions depending on the answer.

New question... Is there enough liquidity in bitcoin at this time to make a proper market on a regulated currency exchange?

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May 28, 2013, 07:25:57 PM
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The is a very valid point.  Holding a currency does not in an of itself provide an income.  There is a limit to the number of shares that could be issued so I am curious as to how the actual execution would take place. i.e. Where is the profit in this?

Charge a storage/management fee.
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May 28, 2013, 07:56:22 PM
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This has been discussed before a few times.

The problem always boils down to: holding bitcoin does not provide any income, so there would be no way to make money with this. Potentially the fund could be actively trading bitcoins, but you would not need to have so many to make money doing that, and you have to worry about whether your active manager is actually better than the market.

I would say, if you have the connections to actually set up a financial instrument for holding bitcoins, go ahead and do it because there are plenty of people who would want to invest.

Gold doesn't provide an income either however physical gold (which allow bulk redemption for deliverable gold) ETF exist.  The fund simply charges a management fee.  Now if that management fee is cost effective enough is up to the market to decide.  The largest stumbling block is the sheer size needed to have a mangement fee of <1%.   A few million USD of BTC would be woefully insufficient.  Tens of millions likely doesn't even get you to the scale necessary, however hundreds of millions or (someday) billions of USD worth of BTC. 

It is already a "solved" problem.  As a starting point just read the operating agreement of a physical gold ETF and in your mind replace gold with Bitcoin. 
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May 28, 2013, 08:00:38 PM
 #14

Quoted for reference. To me it sounds like some paper gold scammer extending into new markets, especially if there is no way to redeem the shares directly 1:1 into bitcoins proper. Like:  I am selling my 100btc perpetual position. You just send me 100btc, and I'll send you nice certificate that you can then trade further.  And I won't exchange it 1:1 back to real bitcoins because it is perpetual Wink

Perpetutal is likely the wrong word and no ETF or other entity would ever claim to be perpetual.  No exchange would ever allow the issuing of an asset which claims to be perpetual.  The reason is no entity can ever know if the underlying asset will remain available.   The ETF would simply exist as long as none of the "wind-down" provisions have been activated.  Similar to a physical gold ETF it is pretty trivial to arrange for the issuance of new shares in "blocks" which the ETF then uses to purchase more BTC and the redemption of existing shares in blocks for delivery of "physical" Bitcoins.  



As I said above (sorry if sound like a broken record) all of this is doable today the barrier is simply the massive scale necessary to make any such operation efficient.   To put it into perspective GLD ETF has $70B (yes billion) worth of Bullion held by the trust.

http://www.spdrgoldshares.com/media/GLD/file/SPDRGoldTrustProspectus2012.pdf

When you have $70B and charge a 0.3% annual management fee it is pretty easy to see how the ~$200M or so in operating revenue is more than enough to pay for the regulatory, startup, auditing, compliance, and management costs.  Trying to do it on  $7M not so much.  I have no doubt that if Bitcoin is around in 2020 and has a money supply valued in the tens of billions that there will be a Bitcoin ETF.
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May 29, 2013, 06:05:06 AM
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   I think the question, from the standpoint of the bitcoin community is a valid one, and the question is not if such a fund would be viable. If one such fund is established and profitable, more will follow. The question then, is what exposing bitcoin to the whims of the mass market will do to bitcoin as a political and philosophical project.
     As a newcomer to the bitcoin community, I got very excited about the idea and immediately wanted to invest. The first thing I did was see if any of the venture capital firms investing in bitcoin startups trade on the NYSE. There is no dedicated bitcoin investment fund, probably because the market is simply still too small to cover the cost of trading on such an exchange, as Death and Taxes pointed out.
     From my standpoint as a believer in bitcoin, I think the more mainstream exposure the better. I am confident that the developer community will find ways to keep bitcoin one step ahead of regulators, even if the libertarian faction eventually becomes a drop in the bucket. I mean to say, I don't think mainstream exposure will ultimately have consequences in terms of the freedom that bitcoin brings to monetary transactions, and increasing the user base will probably increase bitcoin's vitality.
 I am no expert in the financial industry, but I believe hedge funds keep a small percentage of their portfolios open to invest in high risk endeavors. I think that a wall street bitcoin IPO of some kind is inevitable, and I think when it happens it will be huge. It seems to me there is a great deal of capital that is eager to get into bitcoin, and once standard channels are opened for that capital to flow into bitcoin, things will get very interesting.
    It might seem that a value increase on the scale that allowing capital to flow unimpeded into bitcoin might generate would put the deflationary counter argument to bitcoin to the test. I think that at that point bitcoin might be held as a store of value and simply transferred into litecoin or other alternate currencies that are easier to use for day to day purchases, because the use value of bitcoin is not going to go away even if people try to hoard them. Hoarding will eventually lead to a collapse in prices and a subsequent sell off and buyback. Furthermore, Krugman's argument comparing bitcoi to a D.C. babysitting cooperative ignores the fact that a babysitting cooperative doesn't have the potential to revolutionize global trade and render economic sanctions as a policy instrument all but obsolete.
     So from my limited experience and now having a significant vested interest in bitcoin on both economic and ideological grounds, I would say bring it on.
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May 29, 2013, 03:41:08 PM
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"Topic is, is this a good idea for bitcoin if it were to happen yes or no?"


I think it would broaden the availability of Bitcoin which is good, but the necessary fees to keep up such a venture, as has been mentioned already, would make it a prohibitive investment.  Unless you could freely exchange it for the underlying, it's a synthetic Bitcoin instrument.  You could theoretically create an ETF that tracks the price of Bitcoin, without having to accumulate the underlying and have it trade in fiat.
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May 29, 2013, 11:28:42 PM
 #17

What would be the best way of accumulating this much BTC without driving the price through the roof?

You can't. A purchase of this size would at least double or triple the price.

Although I do think that something like this would be good for bitcoin. The price has to rise eventually or bitcoin will never succeed as a currency.
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May 29, 2013, 11:53:11 PM
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a) its a good idea, its hardly original, this simply hasn't been done yet due to FUD about the legal/compliance overhead costs

b) the overhead costs are not as great as people would have you think, and even though someone mentioned it, there ain't nothing wrong with a reverse merger, you need to make some phone calls to Vancouver.

c) purchasing that many bitcoins is entirely possibly, but the acquisition would have to be negotiated with several large market participants over the counter instead of on the order books. you can also hold futures contracts to maturity, or negotiate them.

d) the entity structure of your operation is sound. holdings companies aren't that complicated

e) launching this for the public solely comes down to capital: if you have the capital to do this then you can get that market (and I would love to be part of your venture)
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May 30, 2013, 12:04:18 AM
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  I think the question, from the standpoint of the bitcoin community is a valid one, and the question is not if such a fund would be viable. If one such fund is established and profitable, more will follow. The question then, is what exposing bitcoin to the whims of the mass market will do to bitcoin as a political and philosophical project.
     As a newcomer to the bitcoin community, I got very excited about the idea and immediately wanted to invest. The first thing I did was see if any of the venture capital firms investing in bitcoin startups trade on the NYSE. There is no dedicated bitcoin investment fund, probably because the market is simply still too small to cover the cost of trading on such an exchange, as Death and Taxes pointed out.
     From my standpoint as a believer in bitcoin, I think the more mainstream exposure the better. I am confident that the developer community will find ways to keep bitcoin one step ahead of regulators, even if the libertarian faction eventually becomes a drop in the bucket. I mean to say, I don't think mainstream exposure will ultimately have consequences in terms of the freedom that bitcoin brings to monetary transactions, and increasing the user base will probably increase bitcoin's vitality.
 I am no expert in the financial industry, but I believe hedge funds keep a small percentage of their portfolios open to invest in high risk endeavors. I think that a wall street bitcoin IPO of some kind is inevitable, and I think when it happens it will be huge. It seems to me there is a great deal of capital that is eager to get into bitcoin, and once standard channels are opened for that capital to flow into bitcoin, things will get very interesting.
    It might seem that a value increase on the scale that allowing capital to flow unimpeded into bitcoin might generate would put the deflationary counter argument to bitcoin to the test. I think that at that point bitcoin might be held as a store of value and simply transferred into litecoin or other alternate currencies that are easier to use for day to day purchases, because the use value of bitcoin is not going to go away even if people try to hoard them. Hoarding will eventually lead to a collapse in prices and a subsequent sell off and buyback. Furthermore, Krugman's argument comparing bitcoi to a D.C. babysitting cooperative ignores the fact that a babysitting cooperative doesn't have the potential to revolutionize global trade and render economic sanctions as a policy instrument all but obsolete.
     So from my limited experience and now having a significant vested interest in bitcoin on both economic and ideological grounds, I would say bring it on.

Regarding a dedicated VC fund,

Just posted this to the press section:
https://bitcointalk.org/index.php?topic=219553.0

exit: You said investment fund, thought you were speaking about a vc fund, still though, one more small step for bitcoin.

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May 30, 2013, 08:51:18 AM
 #20

   I'd heard about this, but it all seems to be open to investors who are throwing down amounts in the six figure range... I would like to invest in bitcoin companies too, but on a more modest scale. I think if a dedicated virtual currency fund could make an ipo it would take off and get bitcoin a lot of good press.
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