Investing in Mircea Popescu's Options Emporium

[MPOE-PR]

Brendio,

There's nothing to keep bondholders from retaining any portion of their own earnings for the purpose of insuring their capital. They can do this either individually or even as part of a larger cooperative where they all pool a certain % of earnings and then distribute it to cover losses if and when they occur. There is really very little reason for MPOE to implement this forcibly however.

Bondholders in this context are a lot more like a bank dealing in spreads and default swaps than like a corner shop owner buying a 30 year Tbill. Not that there's anything wrong with either, but they're not the same.

[brendio]

I was talking more in accounting terms about MPOE's balance sheet. The NTA at the end of each month is always zero. What stock holders are buying is a right to future earning, but not backed by any hard assets apart from "goodwill".

Bond holders can do what they like, I agree. I am merely trying to understand the logic and functioning of the stocks and bonds with respect to the usual meaning and functioning of the terms. MPOE retaining no equity allows it to function as described and still leave bonds senior to stocks in respect of claims over capital of the company.

[MPOE-PR]

Stocks having no nominal value have correspondingly no claim on the capital of MPOE (not that MPOE actually has any capital to begin with).

The idea to retain capital would work in the direction of capital formation within MPOE, which in the traditional approach to companies is the way things go, but MPOE is established as a capital-free venture. It makes little sense to breach this absolute just in order to establish a sort of bond insurance pool, as this isn't the core mission or even close to it.

[brendio]

Stocks having no nominal value have correspondingly no claim on the capital of MPOE (not that MPOE actually has any capital to begin with).

The idea to retain capital would work in the direction of capital formation within MPOE, which in the traditional approach to companies is the way things go, but MPOE is established as a capital-free venture. It makes little sense to breach this absolute just in order to establish a sort of bond insurance pool, as this isn't the core mission or even close to it.

This.

This is what I have been saying, perhaps a little facetiously by couching it in terms of "bankruptcy" and "insolvency", terms which are not entirely accurate when MPOE does have agreements in place to meet any debt obligations that may arise.

[MPOE-PR]

Yeah, ok. The terminology will take a little to catch up with bitcoin transactions in general, I'm sure.
So basically the conclusion is, you have a valid point but it's not really as much related to MPOE itself, moreover it's something that investors (bondholders) will have to address either together or individually.

[brendio]

I think you may have misunderstood what I was meaning by retained earnings. It's an accounting term for a form of equity of an entity. I was not suggesting MPOE should retain equity. My threads have been to reconcile my previous comment:

Usually the stockholders take a loss in full before the bond holders make any loss.

with the structure of MPOE. If there is no equity in the entity, then there is nothing for the stock holders to lose, and so those next in line, in this case the bond holders, take a haircut should losses occur.

[MPOE-PR]

Gotcha.

The problem with capital in the bitcoin world is that...well... Let me explain by example. New mining company starts. Some cash is poured in. Some dividends are paid, 3, 5, 10% of the cash. Then the company disappears, two, six, twelve months down the road. While 3, 5, 10% returns are great for a year or less, 9x% losses on capital aren't so great.

It makes sense then to retain as little capital as possible. With mining it's not really possible. With financials apparently it is.

[copumpkin]

Thank you brendio and MPOE-PR for clarifying the terms of the contracts. Might it pay to update the original announcement to address brendio's questions/points explicitly for the benefit of future readers?

I only have two outstanding questions, really:

For equity investors, the IPO is effectively impossible to price and any investment in it is by nature almost pure, uninformed speculation. I'm not saying that's necessarily a bad thing, but it's hard to justify throwing $500 worth of coins at the IPO knowing that someone else might throw $50000 at it (unlikely, but in principle could happen), ensuring that I only get a minute percentage of the company. As an investor in the IPO, all I really know is that I won't be getting more than 0.1% and won't ever get exactly 0%. I can try to model my expectation of other investors' behavior in the IPO (the $50000 is unlikely given the terms and the fact that others will have the same concerns as I do) to determine what might get me a reasonable chunk of shares for my money, and then evaluate whether I consider the shares I expect to get to be worth the money I throw at them, but that's a lot of unknowns I realize that it's hard for Mircea to pick a suitable price for the initial offering of shares, too, and that's why he did things this way, but I'd urge for him to try to make an educated (realistic) guess rather than force us to undergo a complex modeling task to evaluate the IPO.

On the bond front, I'm mostly concerned about the "penalty" of frozen funds if you demand a high interest rate. Mircea justifies this by saying that it creates an incentive for bond-holders to offer "reasonable" interest rates up front, because otherwise their funds are frozen for a month, but again it boils down to predicting other people's behavior. An early adopter might have 100k coins lying around (he might be holding them for the long term) and be willing to lend them all out at the last minute for 0.1% interest. Any of the rest of us offering even a 0.5% monthly rate (which is very low compared to most credit issued in the bitcoin community) would have our funds frozen for a month, and then at the end of the month we'd probably withdraw them and not deal with MPOE bonds again. Then MPOE has a cheap loan and all is well, but it's fully dependent on the whims of the early adopter, who might decide to lend all those coins to pirateat40 a couple of months later.

Again, I see why Mircea used this approach, to incentivize use to offer him reasonable rates, but I think the penalty for mis-priced interest is too high. MPOE might achieve similar incentives with fewer drawbacks by imposing a penalty fee for withdrawing unused bond money early.

Anyway, I'm interested to see how this develops. I would definitely like to get involved, but right now there are too many unknowns for me.

P.S: are there any plans to allow customers to write options, possibly with daily settlement or a similar arrangement? or is the site intended only as a market for Mircea's own options?

[MPOE-PR]

Might it pay to update the original announcement to address brendio's questions/points explicitly for the benefit of future readers?

Doesn't seem anything has changed or would need updating, but maybe a reference by link might be useful. I'll bring it up with Mr. P.

but it's hard to justify throwing $500 worth of coins at the IPO knowing that someone else might throw $50000 at it

Depends what assumptions you are working on. If you assume everyone else is an idiot then it makes no sense to invest anything at all. If you assume the other people are clever, well informed individuals then investing 500 into something that sees a hundred times that investment from someone else seems a good bet. Being the top dog in the round might be dubious, but being one of the people who put money in seems hardly a bad idea.

Obviously, it's high risk so not a good place to put your house (and I think Mr. Popescu has already indicated he believes this first round to be oversubscribed already) but it has over bonds the advantage that you only risk once. Think of it as little turtles coming out of their eggs: they rush to the sea. Some make it. Those that made it get to lay eggs someday.

I realize that it's hard for Mircea to pick a suitable price for the initial offering of shares, too

More than hard, it would be plain impossible. How do you value an entity with no tangible capital that you own? You don't, only the market can and only the market should. Anything else is practically speaking fraud.

An early adopter might have 100k coins lying around (he might be holding them for the long term) and be willing to lend them all out at the last minute for 0.1% interest.

Two points of importance here: first, that you can see what money flows in and when by looking at the exchange bitcoin address (1JPvucRfu3ZzEvfBUQTJwsxMrZjeTqD6zR) on any of the blockchain explorers, so you can make educated guesses about what's going on. Second, that if in fact someone is willing to offer 100k BTC for 0.1% then in fact that's what the interest rates are, and you've lost at most 0.1% over your capital. In the end nothing prevents you from also offering your capital for 0.1% which has no practical downside (if the needs fill at say 1.7% then everyone gets 1.7% anyway), except of course in the case everyone ends up doing this. But then again, if everyone ends up doing this that's the fair price and so on.

Then MPOE has a cheap loan and all is well, but it's fully dependent on the whims of the early adopter, who might decide to lend all those coins to pirateat40 a couple of months later.

The thing here is that MPOE has been operating and will continue to operate for the foreseeable future with or without investment in the form of bonds from third parties. Thus the only incentive it offers for investing is a purely financial one, there's no social relations being built in this sense you seem to be thinking of. It's a financial, not an emotional venture. If people find the benefits sufficiently attractive they invest, if they find them insufficient they divest. If they get upset on the fork for being too long or too short... well really, that's not a problem the fork can address, a shrink is in order.

MPOE might achieve similar incentives with fewer drawbacks by imposing a penalty fee for withdrawing unused bond money early.

There's no practical way to fairly price that fee.

Anyway, I'm interested to see how this develops. I would definitely like to get involved, but right now there are too many unknowns for me.

I think that's the situation for most people. Luckily MPOE isn't going anywhere, and so all these unknowns can work themselves out in time I imagine.

P.S: are there any plans to allow customers to write options, possibly with daily settlement or a similar arrangement? or is the site intended only as a market for Mircea's own options?

There have been plans for this since the beginning, from what I understand. The problem is that it's quite unclear yet how would one go about allowing anonymous underwriting. It sounds like a contradiction in terms, doesn't it? What do you write in that underspot?

Basically it comes down to a clash between anonymity and completeness and so far the former seems to be winning out. This may change, but it's not at all clear how exactly, or when.

Short story: We'd love to, we don't know how.

[brendio]

I realize that it's hard for Mircea to pick a suitable price for the initial offering of shares, too

More than hard, it would be plain impossible. How do you value an entity with no tangible capital that you own? You don't, only the market can and only the market should. Anything else is practically speaking fraud.

Fraud? Really? Where did that come in?

I think there are different mechanisms for better allowing the market to price an entity with no tangible capital. It's not fraud for MP to say I'm selling the stocks for x BTC each. This has the problem that if the market thinks x is too high, it won't buy and if x is lower than its perception of value, it will buy. It's a blunt mechanism, but not fraud. Also, presumably, MP wants to ensure that all 0.1 % of stocks sell in each round. The problem with the current mechanism is that if I, as part of the market, somehow plug some assumptions in a model and come up with a valuation for MPOE—say, I think one share is worth 0.73 BTC. I'm willing to buy 80 shares for 0.73 BTC; if it's more than that, I'm not interested—there is no pricing mechanism to ensure that I buy shares if the price is less than 0.73 BTC and don't if it is more than that.

There's no reason why stocks cannot be priced in the same way as the bond interest is. I put in my bid of 80 at 0.73 BTC each. Mr C.O. Pumpkin is willing to pay only 0.3 BTC but has more to spend and puts in an order for 1500 at 0.3 BTC. This process continues and after closing, MP lists the orders in descending order of offer price and then rules a line under or through the lower offer price that completely sells out the offer.

[MPOE-PR]

Fraud? Really? Where did that come in?

"Here's this thing with no tangible assets that I own and believe you me that it's worth X dollars." What would you call something of that kind?

This for one edge of the problem. Now, on the softer approach, "I sell this, and will not take less than Y", the Y is arbitrary and thus almost certainly mistaken. How would you go about establishing it?

there is no pricing mechanism to ensure that I buy shares if the price is less than 0.73 BTC and don't if it is more than that.

The thing is, if you want to go that way about it you're probably best served trying to get ahold of someone who bought on IPO and buy from them. In other words, you're a 2ndary market buyer, not an underwriter. Nothing wrong with that, but just because you're B rather than A doesn't really make a good case for A not existing.

The alternative process you describe would also work, for sure. It'd be a lot more like a traditional bookbuilding exercise. It'd also carry slightly higher administration costs. Between something like you describe with a minimum of 50-100 BTC buy-in + no guarantee of block fulfillment versus the system actually in place with a 0.1 BTC minimum buy-in + guaranteed block fulfillment MP preferred in the end the latter. Obviously everything is a trade-off, with strong and weak points.

[copumpkin]

"Here's this thing with no tangible assets that I own and believe you me that it's worth X dollars." What would you call something of that kind?

Tangible assets aren't everything. You have IP and you have "brand recognition" within a relevant community, both of which are worth something

[MPOE-PR]

You have IP and you have "brand recognition" within a relevant community, both of which are worth something

Indisputably it's worth something. In fact that's exactly what we're trying to find out: how much?

IP would be tangible, but since it's proprietary and like in all finance, a secret closer guarded than the king's crown it might as well be intangible (in fact, ideally it is intangible hehe). Brand recognition is outright an imponderable.

Overall, the discussion could be summarized something like this:
Step 1 : it's unfair that bonds are inferior to stocks in that they take risks when the stocks take no risks.
Step 2 : it's unfair that bonds are valued on a per-btc value whereas stocks are valued on a total pooled investment basis, so a bitcoin of bonds is a bitcoin of bonds but a bitcoin of stocks could be ten or ten million so there's a huge risk associated with stocks.

Well... which is it? Cause both can't be argued at the same time.

[brendio]

I don't know if anyone is saying it's unfair. The terms are set out up front. Buyers can take them or leave. I'm leaving them for now for some of the above stated reasons. That doesn't mean it's unfair, because MP doesn't have to sell anything to me or sell on my preferred terms. When parties fail to agree on terms, they walk away. It doesn't follow that one of the parties was necessarily unfair.

Unfair would be if one party were forced into a deal or if the terms were changed after purchase, which I don't think is going to happen, since MP seems like a trustworthy guy.

If anyone wants to sell their stocks to me for an agreed price, PM me.

[brendio]

What could be unfair with the IPO, and where it is open to abuse is if MP or an associate were to participate in the IPO themselves. The proceeds of sale of IPO shares go to MP, so MP could send a large sum to the purchase address, knowing that those funds are going to him anyway, and it would push the per share price up and mean that third-party buyer receive fewer shares each.

[MPOE-PR]

The results of the first round are out.

[MPOE-PR]

What could be unfair with the IPO,

This is true, at least in principle it could be done. Onefixt and others have pointed this out privately, as a theoretical possibility.

Mircea Popescu isn't buying his own stock however sadly there's no practical way to prove or verify this. Also as a theoretical possibility the owner could tomorrow grant himself another billion shares, or decide on a 50% retainment of funds (which would in effect dilute the shares, at least on the basis of dividend outflow) and so on and so forth. The fact that none of these are happening or will happen is in the end a matter of trust.

Ideally as the price of the stock stabilizes the point will lose its relevance. It seems in a sense a self-limiting problem, and possibly the reason why such a small fraction of MPOE opened the stock sales.

[finway]

This is great.

[MPOE-PR]

Maybe I should also point out that we've been hacked a total of zero times since August 5, 2011.

[copumpkin]

Maybe I should also point out that we've been hacked a total of zero times since August 5, 2011.

In other news, I've been hit by a car zero times, since 1984

But I don't doubt that MPOE security is good, since it involves manual confirmation of transactions and no wallets hosted on hosted boxes.