BTC Growth – Forex Volatility Focus

Registrations of interest for the BTC Growth – Forex Volatility Focus fund will be re-opened approximately every three months should new rounds of the fund be offered. Please visit our contact page for registration.

Executive Summary of BTC Growth – Forex Volatility Focus

Operating as a private hedge fund-style service, the BTC Growth – Forex Volatility Focus fund aims to achieve modest capital growth denominated in Bitcoin.

The fund’s primary focus will be the construction of moderately leveraged positions designed to profit from volatility in the value of Bitcoin versus fiat currencies or other cryptocurrencies. The fund may also provide capital to exchanges, and it may engage in limited lending directly to businesses or individuals active in the Bitcoin economy.

The fund is not securitized, it is not exchange traded, and individual stakes in the fund are not transferable. Participation in the fund is not available to the general public and will be administered on a strictly limited private basis directly with individuals who have registered an interest with the provider.

The fund is intended to operate for an initial period of 3 months, subsequent to which each participant’s capital will be returned to them unless 1) the fund provider elects to repeat the offering via a follow-up fund into which participants’ capital may be rolled over, and 2) that participant has specifically indicated at least two weeks prior to the fund’s liquidation that they would prefer their capital to be rolled over.

Being a manually administered private fund which is not traded on an exchange, the fund will be limited to 20 or 25 total participants; participation in the fund will be available from a minimum level of 5 BTC per participant.

The fund employs a once-only subscription fee of 0.1 BTC and the ‘two and twenty’ fee structure common to the hedge fund industry, subject to a high-water mark. From the subscription fee, 10% will be refunded as part of the fund’s security protocol.

This document should be read in conjunction with the fund’s Risk Factors and Terms and Conditions, provided separately:

This fund is unsuitable for potential participants for whom the full documentation is in any way ‘TL;DR’.

This documentation is not an offer to sell, nor a solicitation to buy, any security; nor is it an invitation to participate in this strictly limited, small private fund.

About the Fund Provider and Fund Manager

The fund will be provided by Mulhauser Consulting Ltd., a company incorporated in the United Kingdom in 2002 and which has been in continuous operation ever since.

The fund will be managed by Dr Greg Mulhauser, the company’s founder and Managing Director. In other areas of its business, the company works with a team including both volunteers and paid employees and consultants, but for the purposes of this service, fund management will be handled entirely by the Managing Director.

With educational background in mathematics, philosophy, and later in mental health, Dr Mulhauser has worked at the Pentagon, UK universities, and telecommunications giant BT. Originally employed at BT as a research scientist in cognition, complex systems and biologically inspired computation, he was also responsible for curiosities such as the Lattice of Extended Turing-Style Automata, which he designed as a novel computational architecture for implementation with FPGAs in a fashion similar to cellular automata. He later left the Complex Systems Laboratory for business strategy roles and advised on corporate venturing and on derivatives strategies associated with M&A projects. He contributed to the company’s Asian portfolio management, assessed flotation and alternative demerger options for its wireless operation, and developed strategy for its £500 million indirect channels business. In 2002, he left a strategic partnering role in security and mobile technology to found his own firm, securing consulting contracts ranging from ground-based air defence systems at Northrop Grumman and the UK Ministry of Defence to internal communication at the UK’s national Police IT Organisation (PITO). A British Marshall Scholar and Fellow of the Royal Society of Arts, Mulhauser lives in Devon, England with his wife and daughter.

Additional information about the fund manager specifically regarding his investment background is available from one of the newest sites in the company’s portfolio, Psychological Investor.

Potential participants can get something of a flavor of the fund manager’s general approach to investing from the same site, along with a small selection of his recent articles specifically about the Bitcoin economy.

For further background, the archive section of the Mulhauser Consulting site also includes work on business strategy development and even older research work on topics like algorithmic information theory, computability and recursion theory dating back to the 1990s. (Greg Chaitin, who as a teenager independently invented algorithmic information theory alongside Kolmogorov and Solomonoff, described the fund manager’s first book as “One of the first serious applications of algorithmic information theory; fun to read!”)

Posts by the fund manager on the Bitcointalk.org forum can be found here.

As with ordinary hedge funds, in which the General Partner typically invests alongside Limited Partners, the fund manager intends to participate in the fund, helping to ensure alignment between his interests and those of the fund. Note, however, that this strictly limited, small private fund is not structured on the General Partner/Limited Partnership model.

Investment Approach and Context

The BTC Growth – Forex Volatility Focus fund aims to achieve modest capital growth denominated in Bitcoin by way of moderately leveraged positions designed to profit from volatility in the value of Bitcoin versus fiat currencies or other cryptocurrencies. The fund may also provide capital to exchanges, and it may engage in limited lending directly to businesses or individuals active in the Bitcoin economy.

Unlike the original BTC Growth fund, this fund will not provide exposure to Bitcoin-denominated listed equities, individual equity options, or listed debt.

For leverage, the fund will rely primarily on forex derivatives and will not trade on margin unless at least one of the following two conditions is met: 1) margin borrowing is fully covered by the fund’s cash, or 2) margin borrowing is coupled with a guaranteed stop loss order limiting potential losses to an amount fully covered by the fund’s cash.

Potential participants should be aware that the use of forex derivatives can create significant losses.

Capital Structure

The fund will operate on a strictly limited private basis as a Bitcoin management service provided by Mulhauser Consulting, Ltd.; no separate legal structure of the GP/LP form common to hedge funds will exist.

The fund will employ a notion of ‘units’ purely as a mathematical convenience to ease the calculation of participants’ interest in the net assets of the fund; units will have no legal standing whatsoever and carry no voting rights in any entity. Individual private participants in the fund will own a proportional interest in the assets of the fund itself, not in the fund provider. That proportional interest for any given participant may be calculated by dividing the number of units held by that participant by the number of units outstanding. The collective interest in the net assets of the fund represented by the total units outstanding shall always be 100%. The value represented by one unit at fund inception will be 0.1 BTC.

(To illustrate that ‘units’ are employed purely as a mathematical convenience, the notion of ‘units’ may be dispensed with entirely by calculating any given participant’s initial proportional interest in the fund’s net assets as that participant’s initial contribution to the fund, net of subscription fee and network transaction costs, divided by the fund’s initial net asset value. This proportional interest may be adjusted upward should some other participant redeem early, prior to the fund’s conclusion, by re-calculating relative to the fund’s initial value net of the initial contribution of the participant who is redeeming early.)

Private Offering Arrangements, Limitations, Rollover and Closure

Following an initial private offering of units in the fund at 0.1 BTC per unit, and following a period of manual fund administration tasks expected to take no more than 1 week, the fund will begin deploying capital as described in this document. If the initial level of participation in the fund is lower than indicated by prior registrations of interest in the fund, the fund provider may choose to cancel the fund without deploying capital and promptly return the fund’s net asset value to participants. The fund provider may likewise opt to close the fund at any time and for any reason, its only obligation to participants being to distribute the fund’s current net asset value to them.

The fund will be limited to 20 participants in total. Should demand for the fund be unusually high, the provider may exercise an over-allotment option to extend this to a maximum of 25 participants.

Minimum Requirements for Participation

Participation in the fund will be available for a minimum of 5 BTC (50 units) per participant.

An initial subscription fee of 0.1 BTC will be deducted from each participant’s interest in the fund. Of this fee, 10% will be refunded as part of the fund’s security protocol (see below). This fee is otherwise non-refundable unless the fund should close within 1 month of inception, in which case all initial subscription fees will be refunded.

All participants must agree to the fund’s Terms and Conditions, provided separately. (Please see “BTC Growth – Forex Funds – Terms and Conditions”.) UK participants must agree to a Statement for Self-Certified Sophisticated Investors or a Statement for Certified High Net Worth Individuals for the purposes of the Financial Services and Markets Act (Financial Promotion) Order 2005:

US participants must self-certify their status as an Accredited Investor for the purposes of the Securities Exchange Act 1933 and the Non-admitted and Reinsurance Reform Act 2010.

Registering Interest in the Fund

Registrations of interest for the first iteration of the fund were available until 5 December 2013 and have now closed. Should the fund be offered again, registrations will be opened once more approximately three months later.

Limited Redemption Facility During Fund Operation

The fund is only intended to operate for one 3-month period at a time, during which time participant capital is expected to be deployed and unavailable for redemption. This fund is unsuitable for potential participants for whom what is effectively a 3-month lock-up period is unacceptable.

Should a participant request it, the fund provider may, at the sole discretion of the fund manager, and subject to the limits imposed by the fund’s capital deployment at the time, provide a limited redemption facility prior to the scheduled closure of the fund. If the fund does provide early redemption, this will be offered at 90% of the fund’s net asset value per unit. If the fund provides early redemption, this will be only for full redemption of the participant’s entire proportional interest in the fund.

Periodic Public Reporting on NAV

The fund provider will publish periodic public reports of the fund’s net asset value, at least monthly or more frequently at the fund manager’s discretion, and taking into account the level of interest from participants and any other interested third parties.

As a general rule, hedge funds and hedge fund-style services do not disclose full trading histories, and they disclose snapshots of specific holdings only weeks or even months in arrears, if at all, so as to minimise the adverse impact on returns caused by publicizing their ongoing investment strategies. Funds operating in a hedge fund style are unsuitable for potential participants who rely on portfolio snapshots to infer underlying investment strategies, or who otherwise require detailed updates on portfolio changes.

Management and Performance Fees

In line with common hedge fund practice designed to incentivize performance, this fund employs the well known ‘two and twenty’ structure, whereby the fund provider will receive an annual management fee of approximately 2% of assets under management (applied in this fund’s case as 0.17% per month) and participants share 20% of fund profits with the provider as a performance fee. Fees will be applied monthly.

For illustrative purposes, the two and twenty structure means that if the per unit NAV of the fund were to increase by 30%, participants would share 6% in absolute terms (20% of 30% in relative terms) with the fund provider, while retaining 24% in absolute terms (80% of 30% in relative terms) for themselves. This performance fee is constrained by a high-water mark, such that no performance fee will be paid should the fund’s NAV before management fees fail to attain at least its previous highest level. The high-water mechanism is intended to ensure that the fund provider does not profit from simply losing value and then regaining that value.

Security Protocol

No server operated by the fund provider will run bitcoind software; nor will Bitcoin currency be stored on any such server in any other way; nor will private keys for any Bitcoin address be stored on any such server. No personal details of any fund participant, over and above basic information required to register interest in the fund, will be stored on any such server.

Subscribing, redeeming, and all similar administrative tasks associated with the fund will be handled manually by the fund provider and will not take place on a server.

When registering interest in the fund, potential participants will be asked to supply a valid Bitcoin signing and receiving address, one which can be used to sign messages to the fund manager as well as to receive BTC. As part of the initial private offering process, this address will be used to return 10% of the participant’s subscription fee, so as to provide a record of successful transaction to that address. Once specified, this Bitcoin signing and receiving address may not be changed except via manual intervention by the fund manager upon receipt of a request signed by the original address and the payment of a 0.5 BTC fee. Therefore, participants must ensure that they do not lose the private key for the signing and receiving address they specify when registering interest in the fund.

Opinion Statement: The Realities of Bitcoin-Denominated Yield

The rash of defaults by high profile debtors in the Bitcoin economy which has unfolded in the second half of 2013, not to mention the case of the operator of a high yield deposit scheme claiming to have been a victim of “hackers” who stole thousands of BTC belonging to creditors, has left many in the Bitcoin economy wondering whether it really is reasonable to expect “safe” assets to deliver annual yields of 15%, 18%, or even 24% or more.

The reality is that such exceptionally high yields represent the risk premium for what is known in the fiat world as junk debt — i.e., the additional return demanded by creditors to compensate them for the risk that the debtor will default, leaving them with potentially much lower realized yield. Unsurprisingly, making unsecured loans to anonymous entities with no accountability brings with it a high level of risk, and interest rates for such loans should be high.

For other (non-junk debt) investments, however, any sense that 15% to 24% is somehow “normal” is entirely mistaken. For comparison, Bitcoin-denominated margin lending rates on high volume exchanges are currently around 2% and rarely exceed double digits, while reputable borrowers on niche lending platforms such as BTCJam frequently pay low single digits. When borrowers pay higher yields, they are not doing it out of the goodness of their hearts, they are doing it because that is what they have to do in order to attract capital in the first place.

The upshot is that the Bitcoin financial markets, such as they are, now appear to be undergoing a readjustment period in which expectations for yield are being reined in. The realization is spreading that high yields and high risk go hand in hand; there is nothing magical or special about denominating assets in Bitcoin that means they should yield higher rates for a fixed level of risk than they would if denominated in another currency.

The fund manager has written about this topic separately in the article Junk Bond Indigestion in the Bitcoin Economy.

This fund is unsuitable for potential participants who believe that Bitcoin assets ought to yield at least 15% to 24% per annum.

Opinion Statement: The Realities of Growth via Forex Derivatives

It is not easy to generate growth consistently via forex trading, with or without the use of derivatives, and achieving outsized gains typically requires taking on inordinate levels of risk.

Many will have encountered forex traders who brag about turning a 100% profit in a single week. No doubt many have generated 100% returns in a single week: after all, anybody can achieve such a feat with a straightforward leveraged long position in a currency pair that is rising or a leveraged short in one that is falling. But the reality is that expected returns from forex trading are typically far, far lower, with such exceptional gains counterbalanced by perhaps week after week of steadily accumulating losses. By analogy, anybody can win $1 million in a lottery, too, but doing so may require buying many, many, many losing lottery tickets first, such that the expected return from the activity turns out to be significantly more modest than a $1 million lottery win might at first suggest.

Potential participants in this fund should be under no illusions: this fund is not designed to generate these types of outlandish returns. This fund’s use of forex derivatives may result in significant losses. This fund is unsuitable for potential participants who wish to risk a large proportion of their available capital in hopes of scoring an enormous win.

Data Protection Act

The fund provider is registered as a data controller under the UK Data Protection Act. The fund provider will not sell, lend, or otherwise disclose personal details of individual participants to any third party without the consent of the participant concerned, except where it is required to do so by law.

Disclaimer of Guarantees

The fund provider makes no guarantee, either explicit or implied, as to the suitability or fitness for purpose of this fund for any investment goal or for the needs of any specific participant. No individual should consider participating in this fund if they require such a guarantee, or if they are in any doubt whatsoever as to the meaning of any word, phrase or concept employed in this document or in an external resource referenced by this document. Potential participants should not participate in this fund if their own personal risk tolerance does not accommodate the general picture of risks described separately on the BTC Growth website. Potential participants should seek independent financial advice if they have any questions about the suitability of this fund for their needs.

Compliance and Modifications

The fund provider may update this document from time to time as needed for administrative or other reasons, including to ensure compliance with applicable laws and regulations. Except where required to do so by law, the fund provider will not make any modifications to this document which could reasonably be foreseen to cause a materially negative impact on participants’ interest in the fund without a minimum of 7 days of prior notice and a waving of all fees associated with early redemption.

Risk Factors and Terms and Conditions