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

[DrGregMulhauser]

I have a slightly more academic question for you Greg:  Would the fund be breaking its fiduciary duty to a shareholder if the fund bought shares from said shareholder at prices SIGNIFICANTLY below NAV.  I can see the fund buying back shares at a little below NAV to offer said shareholder liquidity.  However I have some reservations about the fund using its knowledge of its own value to "take advantage" of a shareholder for the benefit of other shareholders.  Just wanted to know your thoughts on this Greg.

I think there are two separate questions here: one is about market price vs. NAV, and one is about insider knowledge.

Regarding the second, the listing documents specifically refer to aiming to "preclude any incentive for the issuer either to issue or to re-purchase on the basis of knowledge about the fund's NAV which has not yet been made public". Although doing so is widespread in Bitcoin-land, and although it provides a primary means by which many asset managers pad returns, I would prefer to avoid the practice.

Regarding the second, prices for the fund are set by the market, not by the fund, and the market does not always pay particularly good attention to NAV -- particularly during occasions when individual participants prize liquidity over underlying value. (To my mind, this is exactly analogous to those change-counting machines where you can dump in a bucket of coins and get out notes, with a steep commission applied, often on the order of 10% or more. Why would anyone trade money in one form -- coins -- for money in a different form -- notes -- when the commission is so high? Maybe it's the perceived liquidity of a note vs. a pile of coins, maybe it's entertainment value, who knows?) In any case, I have no wish to interfere in market dynamics -- either to prop up the price by buying back shares at above-market prices or to drive down the price by selling at below-market prices. The provision of additional liquidity by the fund is and always has been entirely optional, but on those occasions when it is in operation, it will not be operated with the intention of introducing these types of artificialities into the market.

[Peter Lambert]

I have a slightly more academic question for you Greg:  Would the fund be breaking its fiduciary duty to a shareholder if the fund bought shares from said shareholder at prices SIGNIFICANTLY below NAV.  I can see the fund buying back shares at a little below NAV to offer said shareholder liquidity.  However I have some reservations about the fund using its knowledge of its own value to "take advantage" of a shareholder for the benefit of other shareholders.  Just wanted to know your thoughts on this Greg.

I think there are two separate questions here: one is about market price vs. NAV, and one is about insider knowledge.

Regarding the second, the listing documents specifically refer to aiming to "preclude any incentive for the issuer either to issue or to re-purchase on the basis of knowledge about the fund's NAV which has not yet been made public". Although doing so is widespread in Bitcoin-land, and although it provides a primary means by which many asset managers pad returns, I would prefer to avoid the practice.

Regarding the second, prices for the fund are set by the market, not by the fund, and the market does not always pay particularly good attention to NAV -- particularly during occasions when individual participants prize liquidity over underlying value. (To my mind, this is exactly analogous to those change-counting machines where you can dump in a bucket of coins and get out notes, with a steep commission applied, often on the order of 10% or more. Why would anyone trade money in one form -- coins -- for money in a different form -- notes -- when the commission is so high? Maybe it's the perceived liquidity of a note vs. a pile of coins, maybe it's entertainment value, who knows?) In any case, I have no wish to interfere in market dynamics -- either to prop up the price by buying back shares at above-market prices or to drive down the price by selling at below-market prices. The provision of additional liquidity by the fund is and always has been entirely optional, but on those occasions when it is in operation, it will not be operated with the intention of introducing these types of artificialities into the market.

So... what you are saying is that after you publish the NAV you will buy back shares at however low people are selling them without feeling bad, but you won't buy back a bunch of shares just before reporting a higher NAV?

[DrGregMulhauser]

So... what you are saying is that after you publish the NAV you will buy back shares at however low people are selling them without feeling bad, but you won't buy back a bunch of shares just before reporting a higher NAV?

As before, the price set by the market and the fund's NAV are two different things; the fund does not control the former and can only report the latter. (You can lead a horse to water...) When the fund actually undertakes buying or selling, I would like that to be done on the basis of publicly available information about NAV.

[Nootnewbie]

I have a slightly more academic question for you Greg:  Would the fund be breaking its fiduciary duty to a shareholder if the fund bought shares from said shareholder at prices SIGNIFICANTLY below NAV.  I can see the fund buying back shares at a little below NAV to offer said shareholder liquidity.  However I have some reservations about the fund using its knowledge of its own value to "take advantage" of a shareholder for the benefit of other shareholders.  Just wanted to know your thoughts on this Greg.

I think there are two separate questions here: one is about market price vs. NAV, and one is about insider knowledge.

Regarding the second, the listing documents specifically refer to aiming to "preclude any incentive for the issuer either to issue or to re-purchase on the basis of knowledge about the fund's NAV which has not yet been made public". Although doing so is widespread in Bitcoin-land, and although it provides a primary means by which many asset managers pad returns, I would prefer to avoid the practice.

Regarding the second, prices for the fund are set by the market, not by the fund, and the market does not always pay particularly good attention to NAV -- particularly during occasions when individual participants prize liquidity over underlying value. (To my mind, this is exactly analogous to those change-counting machines where you can dump in a bucket of coins and get out notes, with a steep commission applied, often on the order of 10% or more. Why would anyone trade money in one form -- coins -- for money in a different form -- notes -- when the commission is so high? Maybe it's the perceived liquidity of a note vs. a pile of coins, maybe it's entertainment value, who knows?) In any case, I have no wish to interfere in market dynamics -- either to prop up the price by buying back shares at above-market prices or to drive down the price by selling at below-market prices. The provision of additional liquidity by the fund is and always has been entirely optional, but on those occasions when it is in operation, it will not be operated with the intention of introducing these types of artificialities into the market.

Thanks for the quick response Greg.  For the record, I didn't think the fund was necessarily doing anything underhanded; I just wanted to see your thoughts on it.

[superbit]

If BTC-TC is now shutdown and this fund is closing how am I going to receive the dividend payout?

[Rannasha]

If BTC-TC is now shutdown and this fund is closing how am I going to receive the dividend payout?

From Greg on the BTCT asset page (posted while Bitcointalk was down):

We've reached the last business day before Monday's halt in BTC-TC trading. The alternative exchanges with which I've been in touch since BTC-TC's announcement have not yet been able to provide either a plan for moving assets or a timetable for when they expect to produce a plan. (Note that moving an asset entirely is a very different thing than merely transferring underlying shares from one passthrough operator to another or shifting ownership between accounts on two different exchanges both of which already list a given asset.)

In the absence of a credible platform for enabling participants to enter and exit the fund at will, I will plan to close the fund and return capital to participants. I would expect this process to be completed well before the closure of BTC-TC itself that was announced for the end of October.

Many participants have made strong arguments for continuing with the fund regardless of the availability of an exchange, and I greatly appreciate the support and the time which has gone into conveying this preference to keep the fund running. I remain open to the possibility of offering a similar fund privately or even of offering a new exchange-traded fund, when and if the exchanges provide clarity on their own plans.

For now, however, I am not prepared to keep participants' capital locked up, without liquidity, while continuing to wait for a still unknown period of time for a still unknown plan. The fund will move to cash and return capital to participants via the exchange's dividend mechanism; this will save on transaction costs that would otherwise be incurred via its buyback mechanism.

The process of unwinding positions has already been underway for a few days in anticipation of this eventuality, but it will still take some days to complete the task efficiently. Due to the way variation margin works, futures positions in particular cannot be unwound quickly without unnecessary loss of capital; in addition, it is likely we will lose a few percentage points on some of our positions in listed assets, as the fund's exit will, however gradual, likely be enough to move the market. As per our previous monthly report, I will personally take on the liability of a 7 BTC, 90-day loan made by the fund. Finally, as of this writing, the fund is still owed 26.43 BTC by the operator of another asset on BTC-TC; this operator has previously made good on 59.44 BTC owed to the fund, and at this time, I have no reason to believe the individual will default.

Thank you to all participants for the opportunity to operate this fund, even if only briefly. I am very grateful for that opportunity, and I appreciate your many messages of support.

Trading on BTCT will halt today, but dividends will still be possible. There are several assets that plan to continue operating and paying dividends during the coming month while waiting to be relisted or to shut down.

[radiumsoup]

any update on the future of the fund? Relist? Shutdown?

[Rannasha]

any update on the future of the fund? Relist? Shutdown?

See my post above yours with the quote from Greg from the BTCT asset-page: The plan is to close the fund and the process of unwinding of positions is underway.

[radiumsoup]

yeah, I saw that when it was posted on btct - I read it as ambiguous with the phrase "In the absence of a credible platform for enabling participants to enter and exit the fund at will, I will plan to close the fund...". I take this to mean that he would close the fund unless an alternative came up, and had already started the process (but had not finished.) I was asking if there was an identified alternative yet, or if that tack had been completely abandoned in favor of closing.

[DrGregMulhauser]

...I read it as ambiguous...I was asking if there was an identified alternative yet...

Sorry my text left you wondering. No, there is no credible alternative. The fund will be closed and net asset value returned to participants.

More details to come with our final report, hopefully within a couple of days.

[radiumsoup]

fair 'nuff, thanks for the clarification.

If you do open another fund, please post here with a link to the new thread (assuming you open a new fund and announce on a new thread) because I don't want to miss it

[DrGregMulhauser]

Our fund has now completed the process of exiting all positions, finishing with a NAV per share of 0.08838512, a change of -0.76% from our last monthly report. As previously announced, the full NAV of the fund will be distributed shortly in the form of a dividend.

Market participants may have noticed the steep decline in volume and order depth which began around the time of the Silk Road seizure and the Bitcointalk.org security breach, making this an inopportune time for anyone attempting to exit the Bitcoin asset market. The combination of poor liquidity, poorly performing debt, and the effects on market prices caused by the fund itself resulted in the negative impact on our final NAV.

Comparing our results with the performance of a basket of equities mentioned in our last report, however, and excluding those with newly impaired liquidity due to very small BTC-traded capitalization (BTC-TRADING-PT, with only 19 BTC of shares remaining on the exchange) or ridiculously large spreads (CIPHERMINE-PT, where asks were 150% higher than bids as of a short time before the trading halt), it is notable that this representation of the broader market fell by a further 10.5% from our last report to 6 October, the date on which our liquidations of those assets which were listed on BTC-TC or BitFunder concluded.

The broader market took a further hit in the wake of BitFunder's 8 October announcement that it was closing its doors to US entities.

Regarding the impact of that announcement on Ukyo.Loan, my assessment of the probability that an announcement of this type would be forthcoming had already increased significantly before liquidating the fund. Despite my prior enthusiasm for Ukyo.Loan, I therefore increased my estimate of counterparty risk associated with the loan and decreased my estimate of both the viability of assets backing the loan and the likelihood of prompt repayment at face value. At the time, I was also not alone in finding that Ukyo stopped responding altogether for many days prior to the announcement, precluding any possibility of face value redemption.

In my judgement, it was therefore preferable to liquidate all of our position on the open market rather than to continue waiting for an unknown period of time in the hope that not only would Ukyo eventually respond, but also be in a position to redeem the loan at face value in a timely fashion. We exited our position at prices ranging from a 4.3% premium to face value to a 3.5% discount to face value.

Subsequent to the closure announcement, the loan changed hands at up to a 39% discount to face value; as of this writing, it is still at an 8% discount. Ukyo posted a message earlier today apparently confirming that adequate liquid capital reserves are not available to cover redemption requests.

Further to the topic of capital reserves and redemption delays, this final return of capital would have occurred sooner, had I not relied on CoinLenders to park a portion of the fund's capital as it became freed up from other positions during the final days of liquidation. I had believed that CoinLenders would maintain sufficient liquid capital reserves to cover immediate withdrawals of a few hundred BTC. However, my attempt to withdraw from CoinLenders on 10 October, with the intention of processing the final dividend on that date, failed silently -- with no error message and with no transfer credited to Inputs.io. I wrote to the site's support address, and some hours later I was told that the site's hot wallet was empty and I should expect to receive the coins in the next two days; the funds were received approximately 39 hours after the original silent failure.

Payment of the final dividend brings NAV to zero and officially marks the end of the BTC-GROWTH fund. Thank you again for the opportunity to operate the fund, even if only for a brief time.

[Progressive]

Thanks, you handled it very well! I have lost less then 5% (I bought more in the BTCT panic) which is great compared to market, other funds or with the rest of my btc-securities.

Now I must agree that closing the fund was probably the best option, btc-securities markets seems pretty dead now.

[stripykitteh]

Thanks Greg. I've lost a bit with this security overall but did buy back in near the end at a discount to NAV and made a small profit on that. I'll keep an eye out for future investments you offer.

[bobboooiie]

You handled it pretty ok given the facts. Thanks and I hope you bring something similar in the future!

[ujka]

Well handled, considering current state of that market. Was prepared for worst outcome, but at the end it's 2.5% loss for me. I also hope you'll bring something similar in the future.

[bobdude17]

Lost money.


Would invest again. 

[DrGregMulhauser]

Now that the original exchange-traded BTC Growth fund is no more, I've been pondering some other ways of managing membership structure that could enable a fund to be independent of the vagaries of an exchange, reduce the overheads associated with KYC/AML compliance, and also avoid turning it all into an admin-by-email nightmare.

I know that PayPal is almost universally hated across all of Bitcoin-land, but if something involving PayPal isn't just an immediate deal-breaker, I'd be grateful for any thoughts people might have on the following...

What would folks think of a system which required a small PayPal payment as a precondition for participating in a fund? This could offload the whole KYC/AML aspect of dealing with individual participants onto PayPal: to the extent that PayPal can be counted on to have established the identity of their customers, and to be adhering strictly to any and all KYC/AML requirements in every jurisdiction in which they operate, a fund provider could simply point to the PayPal transaction as having established the identity of the participant. My thinking is that this would obviate the need to handle any type of identity documents by saying, in effect, "if your details are good enough for PayPal, they're good enough for us".

The second benefit of a PayPal-based setup is that I already operate some sites which use a membership management system that integrates with PayPal: people pay a fee to become members of a site, and their details are then organised by a membership management system which I know to be fairly usable. By leveraging this same type of membership system, I could reduce at least some of the hassles associated with managing direct participation in a fund.

(None of this would do a thing for liquidity, of course: it would only be suitable for a fund with a fixed initial period of commitment, as distinct from a fund where people could just trade in and out at will.)

Would trying to involve PayPal in something like this just be a silly idea? Is it something people would consider trying?

[junkonator]

isn't just an immediate deal-breaker

Immediate deal-breaker.

If it's just about "who-owns-what" and speed of an exchange doesn't matter, why don't you wait for colored coins?

[drawingthesun]

isn't just an immediate deal-breaker

Immediate deal-breaker.

If it's just about "who-owns-what" and speed of an exchange doesn't matter, why don't you wait for colored coins?

No no no, you did not read what Greg wrote.

Greg wants to use paypal so that all the identities of the investors are known for compliance purposes so that he can operate the fund without having to do compliance himself. The paypal is just for identification.