I've mentioned previously that my Bitcoin trading strategy is to buy when price looks to have bottomed and begun an uptrend. I generally advise people against shorting Bitcoin; the long term trend is still clearly bullish so the odds favour the upside for any timeframe beyond a few days. That said, I'd happily short a number of companies and startups in the Bitcoin space if it was possible... Shorting Mt. Gox or Neo & Bee may have been as profitable as mining back when the only competition was Satoshi.
Until now, there hasn't been a way to short Bitcoin companies, which is a detriment to the individual investor and the market as a whole. There is solid evidence that being able to bet against securities improves price discovery and market information. This is the aim of F.DERP, a short-only hedge fund coming soon on MPEx.
When I first heard of F.DERP, I figured it would apply to such "amazing companies" as frequently criticised in #bitcoin-assets: dodgy enterprises often long on buzzwords but short on business plans. Such ventures often attract a surprising amount of capital. A good example would be Klyemax Studios, which raised 25 BTC in an IPO for the production of webcam porn. Basic due diligence would have shown the creator to be a gambling addict... I don't want to pick on Kyle though, as he's at least pledged to pay his investors back - a lot more than can be said for countless other failed startups in the crypto space.
F.DERP isn't hunting such small game however, instead the two initial companies in the F.DERP are multi-sig wallet specialists, BitGo, and industry heavyweight, BitPay. To inquire about the reasoning behind these selections and for further details, I spoke to the fund's creator, Mircea Popescu.
The log of the original discussion can be found here. I've edited it slightly for readability and clarity. I've included related comments from other channel participants.
Gordon Hall: Mircea Popescu, from your original post ['Introducing F.DERP'], I presume the reasoning behind shorting BitPay and BitGo is that they're overvalued?
Mircea Popescu: Well, more properly put, the reasoning is that they will never make in the course of their business enough money to pay back that round of investment. [referencing the original post,
"[BitPay] acquired 50,000 BTC investment ($30 mn) at an implied valuation of 266`666 BTC ($160 mn). [BitGo acquired] 20,000 BTC investment ($12 mn) at a total valuation of 58,333 BTC."]
So someone with 30mn looking to invest in Bitcoin would have been better served by buying bitcoin than participating in the Series A. [initial round of venture capital funding.]
This, of course, is a very old story; with the exception of MPEx listed corps, it is universally true of any other exchange or broad group, be it GLBSE or US-based venture capital investments.
Gordon Hall: I don't know much about BitGo honestly, but it seems the success of BitPay is very closely linked with Bitcoin's success. Doesn't that make F.DERP something of a bet against Bitcoin's continued merchant adoption?
Mircea Popescu: The success of BitPay has exactly zero to do with the success of Bitcoin, is the problem. They're trying to leech it, which only works for so long. What's worse, their burn rate is killing them.
Gordon Hall: Could you explain what you mean by burn rate?
Mircea Popescu: Burn rate is a common concept in start-ups: the rate at which they spend money.
BingoBoingo: Bitpay is sponsoring a [flipping] Superbowl game. They probably spent ~10% of their last round on a notoriously poor form of advertising.
asciilifeform: BitPay is to BTC use as Wine (Winblows emulation gizmo) is to the use of Linux.
ThickAsThieves: BitPay also has to worry about someone like PayPal coming in: "thanks for warming our seat!"
Mircea Popescu: ThickAsThieves precisely; no barrier to entry. Coinbase is already moving into that, with no difficulty. Of course, Coinbase is a piece of [poop] but there's no requirement that next competitor is also a piece of [poop].
ThickAsThieves: BitPay / Coinbase's only chance is landing exclusive contracts with poor terms for the merchant (still a leech job). This is why they brag and compete over new notable merchants, it's all they have - those contract terms.
Gordon Hall: And BitGo, what's the reasoning behind including them?
Mircea Popescu: That they announced a 10mn round. From the article, Introducing the D Series:
For every Series A / seed funding announced by the circlejerk that is either in excess of 1 million USD or for a company valued through such funding over 100 million USD, I will create a synthetic asset on MPEx.
Gordon Hall: So it's decided purely on their funding... Any plans to add further companies?
Mircea Popescu: Yes, as mentioned in the article. Any corps that make bold claims in the future will go in there.
Gordon Hall: It seems many startups are raking in a king's ransom simply because there's so much enthusiasm around Bitcoin... So by shorting, aren't you exposing yourself to the major risks of a new Wall Street bubble developing for all things Bitcoin?
Mircea Popescu: Yes. Can you name people that got rich in the dot com bubble? Name a dozen, then see what % did it by shorting it.
Gordon Hall: Hmm, many got rich then poor in quick succession. Few were wise enough to sell or short at the top.
Mircea Popescu: I don't mean "were briefly rich during the bubble." I mean "are rich today and were not before that."
Gordon Hall: I think mostly the guys who sold their companies during the mania made out like bandits.
Mircea Popescu: So the guys who... shorted it. If you sell your corp in the bubble and walk away, you shorted the bubble.
ThickAsThieves: I don't think the BTC startup bubble will be nearly as bad [as dot com]. I think the need to buy bitcoin in addition to any VC investment related to a Bitcoin co. is obvious. And thus they'll all do it... And save some skin. [I believe ThickAsThieves' assumption here is that crypto-capitalism will be the next financial system, or at least that Bitcoin will be worth far more in future.]
Mircea Popescu: ThickAsThieves, stuff like F.DERP is making it obvious but no, it's not obvious. Never underestimate just how lemming-like finance types are, that's the one profession that most selects for lemming qualities. More so than the military even.
Gordon Hall: Mirceau Popescu, any similar products to F.DERP which you're aware of?
Mircea Popescu: Not really. I don't think the world has spawned yet such an asshole so as to be able to match with me.
Gordon Hall: Heh well, some people probably won't appreciate this fund... But it expands an investor's options so I don't see the downside.
Mircea Popescu: The downside is that it sinks the hype, which is a very major problem. The entire VC circuit lives off hype. So from their perspective, this is a tragedy of the commons sort of situation: a bunch of people work to inflate bubbles, all it takes to ruin their effort is one guy with a pin.
Gordon Hall: OK, so why not just create futures or some other instruments over these companies, which could be traded long or short?
Mircea Popescu: Too much hassle with future chains. if you want them short you buy F.DERP, if you want them long you just get to select D.whatever. This is because logically nobody who wants them short cares which, whereas people wanting them long prolly want to stock pick.
Gordon Hall: And you say these are synthetic instruments... this means you don't own or have borrowed any shares in these companies?
Mircea Popescu: Not directly.
There you have it. As mentioned in the announcement, this is a high risk, speculative fund with an associated performance fee.
Featured image by Shutterstock.