[BTC-TC] BTC Growth: Capital Growth via Hedge Fund-Style Investing

[Deprived]

Subsequent to this report, the fund may make additional shares available for a time somewhat above NAV.

Aaaaand ponzi.

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?

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.

[junkonator]

[...] disingenous for you to argue [...]
OK, more than a teensy bit disingenous.
[...]

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.

[dddbtc]

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 

[DrGregMulhauser]

disingenuous?
...
hm
ok
just want to follow

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

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 

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.

[dddbtc]

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

[stripykitteh]

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 

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.

[Progressive]

What is your plan concerning closing BTCT, DrGreg?

IMPORTANT NOTICE TO ALL BTC TRADING CORP WEBSITE PARTICIPANTS

As a result of recent changes in the virtual currency regulatory environment, the btct.co and litecoinglobal.com virtual stock market websites will be closing down.  The following is our current schedule:

Approximately a week ago, both sites were closed to any new users and new asset creation was disabled.
 
Effective immediately, in conjunction with this release, trading will be halted, all order books cleared, and trading re-enabled.
 
October 7, 2013, all forms of secondary market trading will be halted on both sites.
 
Approximately October 31, 2013, both sites will be taken offline.  It is strongly suggested that participants take the following steps to protect all of their virtual assets:
 
All participants should take steps to transfer all of your BTC and LTC (and any other data you wish to keep, such as CSV trade histories) held on the sites to your personal computer or another trusted site.
 
All participants should make sure that their public BTC or LTC address is properly set in the Account page on the Settings tab whereby it can be shared with all issuers.
 
All “issuers” should have the contact information concerning their “investors”, and we ask that all “issuers” communicate with their “investors” as soon as possible as to how they will ensure that all are treated appropriately.

We regret this development. However, we want to do everything we can to minimize problems arising from this transition.  It is our goal to keep this shutdown orderly and calm.

Thank you for your participation, creativity, loyalty and sense of community over the past year.  Additional communications will follow as we work out the details.

Ethan Burnside
BTC Trading Corp.

[DrGregMulhauser]

Interim Report 23 September 2013

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.

[bobboooiie]

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

[Ytterbium]

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.

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.

[redmetal]

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

[Progressive]

I would prefer the first option:

move the entire fund management infrastructure to another exchange

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

[ft73]

I would prefer the first option:

move the entire fund management infrastructure to another exchange

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

Agree

[Rannasha]

I agree that a swift forced buyback is probably the worst option. Bids are slowly stabilizing and recovering on BTCT, at least for those assets that have operators that are considered trustworthy and that are generally expected to handle the situation properly (such as liquidation with minimal losses or transfer of shares to a different exchange).

I think it would be best for the fund to wait for the issuers of the assets that it has invested in to report their contingency plans.

[DrGregMulhauser]

As several folks have spoken up in favour of not closing the fund, I'd just like to clarify my thinking on currently ranking a fund closure at the top of the list of options.

First, note that I have specifically said that this thinking will change if another exchange steps up to the plate with a credible plan for supporting the continuing operation of assets skewered by BTC-TC. Participants should be asbolutely clear about this: depending on the underlying reasons for the closure of BTC-TC, it is entirely possible that no other exchange will be able to take over BTC-TC assets; nobody yet knows the answer to this question. If no other exchange offers a credible plan, it is not possible to continue with the fund anyway.

In terms of risk to capital, there are only two realistic scenarios to consider:

1) The BTC-TC closure is an isolated event, all listed assets on both BTC-TC and LitecoinGlobal find new homes, and asset values return to something approaching what they were before the closure.

2) The BTC-TC closure is not an isolated event, some listed assets on both BTC-TC and LitecoinGlobal do not find new homes, and asset values do not return to something approaching what they were before the closure.

My own assessment is that number 2 is more likely than number 1: I believe this will have significant knock-on effects across the Bitcoin asset market. To be sure, I don't think the Bitcoin asset market is going to dry up and blow away -- of course not -- but I do think it's going to take some time to digest this event, and in the interim there is significant risk of further capital loss associated with simply waiting it out.

Moreover, suppose for the sake of argument that the fund had already closed (as Deprived has already done with one of his assets, for example). If participants are returned control of their own capital, then they are free to choose exactly what to do with it: if participants would like to dive back into BTC-TC and scoop up some cut-rate assets while waiting for scenario number 1 to materialize, then they can do so. And if other participants do not wish to wait, and they believe that scenario number 2 is more likely, then they can handle their capital appropriately.

The upshot is that by prioritising the option of fund closure -- again, in the absence of a credible plan from another exchange to support the continued operation of BTC-TC assets -- I am aiming to return control to participants, and I am putting a floor on the capital loss which could actually become worse, depending on whether BTC-TC shows any improvement in terms of how it handles the closure. The exchange's handling of the closure so far has not exactly been a paragon of consideration for the interests of market participants.

[Deprived]

Moreover, suppose for the sake of argument that the fund had already closed (as Deprived has already done with one of his assets, for example). If participants are returned control of their own capital, then they are free to choose exactly what to do with it: if participants would like to dive back into BTC-TC and scoop up some cut-rate assets while waiting for scenario number 1 to materialize, then they can do so. And if other participants do not wish to wait, and they believe that scenario number 2 is more likely, then they can handle their capital appropriately.

There's a few pretty big differences between my fund and yours - which made closure of mine a no-brainer decision:

1.  It was denominated in LTC.  Nowhere else runs a credible LTC-denominated security exchange.
2.  The fund had a lot of capital raised via bonds (approximately half of gross assets managed).  It was not palatable to consider continuing to pay interest on bonds during a move - with uncertainty of what would exist anyway.
3.  LTC-ATF was pretty much entirely a trading fund rather than investment with most of its value as cash at all times.
4.  It had run for a year making very significant profits.  With me owning over half the fund, the fund itself had enough cash to clear all bonds and pay everyone out at last NAV/U (other than myself).  With the profit I'd personally made I was fine with taking the loss on what actual non-cash assets there were.  I've personally made 1k-2K BTC from my own investment in LTC-ATF - counting in reinvestment of profits that I cashed out - so was fine taking a 25-100 BTC loss now to get it all closed out quickly with the minimum of hassle for myself.

So there's pretty significant reasons why the course I've taken with LTC-ATF isn't necessarily the best one for you.

There is a third option you could consider - somewhere in between the two you listed.  That's to dividend out now whatever you have in cash and continue with the other assets.  That gives flexibility to investors with what portion of their investment IS immediately realisable without significant loss - but keeps your options open with what to do with the rest.  Of course that has the disadvantage for you that you have to continue doing the work - but that's unavoidable to some extent anyway.

I (it was LTC-ATF - but now it's me personally) hold some of your shares (was trying to trade the spread) so I do actually have some interest in what happens here.

[DrGregMulhauser]

There's a few pretty big differences between my fund and yours - which made closure of mine a no-brainer decision:

Yes, of course they're very different beasts. My point was just that your participants now have their capital back, and they can exercise their own judgement as to how best to allocate it going forward. Participants in BTC-GROWTH do not have their capital back, and therefore they have no discretion over how to allocate their capital.

However, I think the point probably needs to be made again: continuing with the fund is only an option if there is an exchange ready with a plan to take over the management infrastructure hole left behind by BTC-TC. I am not going to run the fund manually, handling share transfers via email, friedcat-style.

The only real question, then, is how long to wait for clarity on the availability of another exchange platform. I don't like to speculate, but if I imagine myself in the shoes of Burnside, Ukyo, Lightbox, etc., I imagine that I would be putting something out within the next couple of days to indicate whether they will be coordinating to provide a path forward for those listed on BTC-TC. If that happens, it will be a very different landscape than if the only alternatives are to close or to run the fund manually.

(The third option you mentioned addresses the question of returning capital, but it leaves that underlying problem of management infrastructure still waiting for an answer.)

I (it was LTC-ATF - but now it's me personally) hold some of your shares (was trying to trade the spread) so I do actually have some interest in what happens here.

And vice versa. I really appreciate the certainty of seeing the capital sent out so quickly.

[Peter Lambert]

Valueing everything at bid price is a bad way to do things at the moment. Burnsides just wiped the order book, so naturally the bids are very sparse. Let things settle a little bit, move this to Havelock or BitFunder and carry on as normal. You went to great lengths saying the money was spread among various platforms, lets see if that strategy works as well you said it would.

[DrGregMulhauser]

Valueing everything at bid price is a bad way to do things at the moment.

It's exactly the right thing to do at the moment, because that -- and only that -- provides an indication of the fund's liquid net value. When some assets are likely to be wiped out entirely (BTC-TRADING-PT, for example), nobody cares what the 7-day moving average or 30-day moving average might be.

I took the time to release a special interim report immediately so that participants could have quantitative facts in front of them, right now, telling them exactly where we stand. Will things change over the next few hours and days? Of course they will, and hopefully for the better -- but that doesn't make it "a bad way to do things" to have given the specific, quantitative information as quickly as humanly possible.

...You went to great lengths saying the money was spread among various platforms, lets see if that strategy works as well you said it would.

There's no need to wait and see: of course it "worked" to the extent that the vast majority of the fund's capital is immune to BTC-TC's closure.

[drawingthesun]

Valueing everything at bid price is a bad way to do things at the moment.

It's exactly the right thing to do at the moment, because that -- and only that -- provides an indication of the fund's liquid net value. When some assets are likely to be wiped out entirely (BTC-TRADING-PT, for example), nobody cares what the 7-day moving average or 30-day moving average might be.

I took the time to release a special interim report immediately so that participants could have quantitative facts in front of them, right now, telling them exactly where we stand. Will things change over the next few hours and days? Of course they will, and hopefully for the better -- but that doesn't make it "a bad way to do things" to have given the specific, quantitative information as quickly as humanly possible.

...You went to great lengths saying the money was spread among various platforms, lets see if that strategy works as well you said it would.

There's no need to wait and see: of course it "worked" to the extent that the vast majority of the fund's capital is immune to BTC-TC's closure.

Dude. You are awesome.