[Fund] Exchange Rate Differences: Arbitrage Opportunites

[azaniet]

Your last paragraph is true.  But there's a problem with it - specifically this:

If you raise BTC from investors then you need MORE fiat to actually use those invested BTC withut exposing investors to fiat-risk.  If you had those extra fiat then you wouldn't need to be raising funds from investors in the first place.

Put simply: if you have enough fiat to be able to shield investors from fiat-exposure (i.e. keep their investment always denominated in BTC) then you don't need their investment at all.

That depends on whether I am willing to invest more fiat to increase the btc I hold, and thereby increasing the absolute return I could gain from the proposed scheme. If I would do this, I will increase my btc-risk. Therefore, I am more interested in profiting from the returns on a btc-denominated fund while using my fiat as a means to do so.

My view on investments like this is that if they want to be denominated primarily in one currency then they need fiat-denominated investment not BTC-denominated  - because you can minimise BTC exposure easily (due to it being liquid) but can't do the same with fiat exposure (due to a lack of ability to move it rapidly between exchanges).  Don't interpret my comments as me being opposed to fiat-exposure - I'm not, and maintain significant fiat-exposure with my BTC myself intentionally.  What I'm opposed to is attempts to sell 'BTC' investments where the investment can make a 'profit' but still end up worse than just holding BTC (which, incidentally, includes nearly all mining 'investments').

Something like this works nicely if (and ONLY if) investors WANT significant fiat exposure and are happy to accept that they'll do worse than holding BTC if BTC rises vs fiat.  Specifically they need to understand, accept and even WANT that if BTC rises fairly sharply vs fiat then they'll get back less BTC than they put in.  In return they do, of course, do a LOT better than just holding BTC if BTC falls even slightly vs fiat.

Here it also depends whether investors are shielded from fiat-risk or not, which they are if no btc is being converted to fiat (meaning that return on a BTC-denominated fund is not affected by price changes), which indeed means that more fiat is required to maximize the return. It is also possible to create a fiat-denominated fund in the same way, although I think there are more investors (like me) who only hold a (small) percentage of their money in btc and are in it for the long run, and are therefore more interested in returns on btc than fiat.

For those saying the main risk is MtGox - just no.  Historically the main risk in ANY security is the issuer.  Even when GLBSE closed, the exchange itself only stole a very small percentage of invested funds (under 10% of deposited cash and next to nothing from value tied up in securities) - which is nothing compared to what issuers steal.  That's not a comment about this particular (potential) issuer - I'm just pointing out that issuer counter-party risk can never be treated as something negligible.

I agree that this is an important point that should be carefully addressed if a potential fund would be set up.

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[nrd525]

Deprived is irrational.  You are putting too much emphasis on BTC value when most realistic people realize that what matters the most is the currency in which we have most of our income and expenses (USD or another one).

It is only someone who is crazy about bitcoin so much that they expect it to rise endlessly and irrationally that they would ignore the fact that they are spending 90-99% of their money in fiat and how much fiat they have has a greater impact on their ability to buy things (and survive/enjoy life) than bitcoins.

As a rational individual, I'd be happier owning a hundredth of a bitcoin with bitcoin at a thousand dollars dollars (eg $10 of value) than one bitcoin that was worth $9.99 as that is 0.1% more.

If you want to go short or long, buy options or use bitfinex.

[superbit]

I do this as well every now and then, but I do think there is a potential market for somekind of fund here.  I suggest using bitfinex instead of bitstamp though, simply for the fact that bitfinex allows you to use bitstamp or their internal exchange at the same time so you have the chance of getting cheaper BTC from bitfinex (which is usually the case)

[SebastianJu]

Wanted to add... all these games are limited to a point since the opportunities are limited. So i guess it might work for someone but as soon as you want to collect money through an IPO you will get fast to the point where the offers at mtgox or the offers at the other exchange arent big enough to make a considerable win. The orderbook only contains mostly no big amounts of bitcoins at good prices. At least it will lower the win.

[azaniet]

Wanted to add... all these games are limited to a point since the opportunities are limited. So i guess it might work for someone but as soon as you want to collect money through an IPO you will get fast to the point where the offers at mtgox or the offers at the other exchange arent big enough to make a considerable win. The orderbook only contains mostly no big amounts of bitcoins at good prices. At least it will lower the win.

Yes that is true. Thanks for your comment.

I am currently just orientating, i.e. if a public fund would make sense. If it does, I will try to determine how it would be best set-up. I have the help of my brother in law (who is a respected hedge fund manager) and the current investors (who are mainly friends and relatives with an interest in bitcoin). I will post here if or when we come up with a plan.

[azaniet]

Hi all,


I have built a website with information on the fund that I am operating. I will also open an 'official' thread (seems convenient).

It’s named BITOBS: www.bitobs.net


http://bitobs.net/img/logo.png


The fund is now public, so everyone can invest.

I have tried to be as clear as possible about how the Fund is operated.
If you are interested, please have a look and let me know when anything is unclear or should be further explained.

Currently, the Fund will only accept the issuance and redemption of shares directly.

Regarding a possible IPO please let me know whether you would be interested in this. Of course, it would make shares freely tradable between investors. However, the unreliability of the Bitcoin securities exchanges is a problem (e.g. withdrawals from BitFunder are currently stuck). Cryptostocks is an option, but involves costs. Maybe a forum trading method with escrow would be a more viable option. Your opinion is appreciated.

What is BITOBS?
BITOBS is an open-ended investment fund with a variable capital. The objective of the Fund is to obtain a positive return while preserving a sufficient risk spreading. The aim is to realize an average annual total return of at least 25%, after deduction of all expenses.

Investment strategy (short version):
     1. Anticipating the Bitcoin exchange rate.
     2. Investing in arbitrage opportunities that may arise.

Investment restrictions (short version):

• At all times, a minimum of 25% of the Fund’s NAV must be held in fiat or Bitcoin.
• Investments in Bitcoin (mining) assets are not permitted.
• A maximum of 50% of the Fund’s size can be used for any investment opportunity.
• Stock lending is permitted.
• Borrowing is permitted for up to 25% of the Fund's NAV.

Other notes:

• Current NAV/share is BTC0.012583
• Minimum investment is 100 shares.

Monthly Report - October:
Result: the NAV/share decreased by 1.52%.

Due to a significant increase in the Bitcoin exchange rate, the Fund struggled to retain its value. Although, we were able to gain sporadic returns which minimized the Fund's depreciation, this month's return is -1.52%.

Generally, a part of our strategy involves selling part of the Fund's Bitcoins whenever there is a reason to do so, i.e. an indication of an imminent decrease in the Bitcoin exchange rate. While there were almost none of these indications, we have held 75% of the Fund's value in Bitcoin, most of the time. The other 25% of Fund's NAV (held in fiat) decreased by almost 37% (BTC-denominated).

The Silk Road raid of October 2nd; we were able to profit from the price drop by selling part of the Fund's Bitcoins before the exchange rate decreased any further. Additional active trading resulted in a decent return of 9% for that day.

Market inefficiencies were exploited wherever possible, however the opportunities were limited. Any schemes that would involve selling Bitcoins and withdrawing fiat through Mt.Gox have been avoided due to the (increasingly) long 'cycle times' associated with Mt.Gox withdrawals.

Finally, we were able to 'bet' on the Bitcoin price going up, by borrowing fiat money (an equivalent of 10% of the Fund's NAV). After deduction of interest payments, these funds gained a 19.67% return.

Overall, it has been a month in which the Fund struggled due to the decreasing value of the fiat held by the Fund, but the overall result of -1.52% is tolerable.


I will do my best to continue creating value for my investors. Feedback is always welcome!

[SebastianJu]

25% USD annual or BTC?

[azaniet]

25% USD annual or BTC?

Annual return of 25% BTC. All the performance results are btc-denominated as well.

I am also considering accepting fiat for issuing shares, however this would require additional legal counsil and cost. So, for the time being I am accepting btc only.

[azaniet]

Made a new thread:

https://bitcointalk.org/index.php?topic=341826.msg3661431#msg3661431