Risk Factors – Funds Which Involve Debt or Providing Short-Term Working Capital

The following risk factors describe a sample of risks inherent to any private fund we may offer that involves debt positions. This list is not intended to be exhaustive, and it should be considered in conjunction with the broader document on general risk factors inherent to any private fund we may offer.

Additional Information

Risks inherent to debt denominated in Bitcoins are a superset of those inherent to debt denominated in fiat currencies. Prospective participants in Bitcoin-denominated debt activities, whether listed or private, should therefore ensure they are fully aware of all relevant risks inherent to fiat-denominated activities in these areas.

Anonymity, Lack of Transparency and the Irrelevance of Forum and WOT ‘Trust’

Exposure to debt of individuals or companies in the Bitcoin economy may bring with it an unusually high degree of uncertainty with regard to credit risk, especially when those individuals or companies conduct business anonymously, and neither Bitcointalk.org forum ‘trust’ nor Bitcoin-OTC web of trust (WOT) ‘trust’ do much to mitigate the risks associated with this uncertainty.

Recent history has demonstrated this all too clearly. During the latter part of 2013, several individuals prominent in the Bitcoin economy defaulted on large debt obligations, while some claimed to have been the victim of ‘hackers’ who stole creditors’ money; still others appear to have simply vanished entirely.

In many cases, these individuals had amassed copious levels of ‘trust’ recorded by the Bitcointalk.org forum software and/or numerous positive reports on the Bitcoin-OTC web of trust (WOT). However, in addition to the obvious distinction between creditworthiness and trustworthiness, there is also a clear difference between genuine trustworthiness and simply not having cheated anyone yet. The pseudonymity of the Bitcoin world lulls some participants in the Bitcoin economy into conflating the latter with the former, perhaps because individuals are routinely deprived of the kinds of additional corroborating information that would enable them to evaluate genuine trustworthiness and to distinguish it from its murkier proxy. The ‘trust’ of the WOT or the forum software rarely offers anything other than a glimpse at occasions an individual has elected not to cheat someone and says little about genuine trustworthiness. As such, while negative ratings may convey useful information about credit risk or general trustworthiness, positive ratings are essentially useless for the task of risk management in general and the evaluation of credit risk in particular.

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