The problem of the past

Thursday, 17 April, Year 6 d.Tr. | Author: Mircea Popescu

Let's wade together trough some complex shit.

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This is because pgp, and you should have been using it for longer than me. Otherwise, the second best time to plant a tree is today.

LIF, a Retrospective - by Peter Lambert
It started, as all good things do, on IRC.
I was asked by Mircea Popescu “what’s up with that fund you ran?”
So this is how I remember it:

Actually, he asked me why can't he have voice in -assets, to which I replied that while he does seem a reasonable and useful contributor in the general, I personally am not rating him because of his history, other people's reasons being probably their own. To which he said that he understands and I offered that he probably should try and clean things up, which may well start by publishing a narrative of what happened somewhere.

Back in June of 2011, just a few months after being introduced to bitcoins, I started the Lambert Investment Funds, or LIF for short. That was just after the Global Bitcoin Stock Exchange (GLBSE) was formed, and that was where the cool kids went to invest their bitcoins. Even though there were very few assets on the GLBSE at the time, I saw the potential of future growth in the bitcoin based investments area, and I wanted to get in on the ground floor.

Gotta love that ground floor.

Indeed, today the stocks denominated in bitcoins reach into the millions of bitcoins, billions of dollars range. I decided to create a mutual fund for the new bitcoin stocks, and so I made LIF. This despite having taken no accounting or finance classes in my life, how hard could it be?

For comparison's sake, bitmarket.eu :

Earlier this year, I had this “genius” idea which led me to making a fatal mistake. I thought I could provide a hedge fund service for Bitmarket users. There were other sites providing this service so I guesses that it could be successful.

The problem delineated in the earlier article about the risks unsupervised children face on the Internet applies largely to unsupervised adults, too.

If you are coming at this thing from a place where you're great and smart and have all these ideas and whatnot, wishy-washy bullshit you will be raped by the actual businessmen involved, and then you will find yourself writing this sort of explanatory narratives years later.

I can tell you from others' experience that it's a pretty difficult spot to write from, especially if you're not aiming for that "we're not laughing with you, we're laughing at you" clown spot.

Moving on,

Looking back, I was a bit naive, and overly ambitious. Rather than just making one fund, I decided to make a whole family of funds, to take full advantage of the GLBSE’s naming structures.

There's some fundamental brain rot at work here, and it's name is nominalism. If you have a garden, and in it you plant two kinds of plants because you have two plant labels, you're engaging in this braindamage. You may plant two kinds of plants because the soil warrants it, or because you want to eat two kinds of plants, or because that's the seed you got or for any actual cause. Don't be going around with this bullshit where you make three funds because the play exchange you're on allows you to, life isn't XML and XML is braindamage.

I called the parent LIF, and started with a couple child funds, LIF.A and LIF.B. LIF.A would try to be less risky while LIF.B tried to be more risky. The problem here was I had no way of measuring risks of assets, so whether A or B invested came down to a judgment call by me.

A dream call is not a judgement call. The difference between these two is readily understood by recalling to mind Usagi, the Ito calculus expert, or by remembering that dreams go backwards. Judgement calls proceed from facts and arrive at conclusions. Dream calls proceed from conclusions and imagine the facts.

I even made a website, LIFunds.com, to promote them and to publish the monthly reports. Yes, I was giving monthly reports, a standard which is being followed by the better bitcoin investments today. It would have been better if I had included more information in these reports, then people would have caught my mistakes earlier.

This is true, for what it's worth the guy did try harder than it was common at the time, and did go further than it was common at the time. Not nearly far enough, obviously (not in the sense it's obvious now, it'd have been obvious then).

The structure I set up had the parent fund, LIF, with a fixed number of shares. The child funds, A and B would have flexible amounts of shares as demanded by the market.

Financially, this makes absolutely no sense. Please explain, in great detail and with numeric (model) examples what this is supposed to be.

The child funds would pay 5% of profits as a fee to the parent fund

A fee for what ?

Accounting is, again, not dreaming. Accounting is accounting. A payment has to follow a delivery, or else it is antieconomical, and in most circumstances the payer can at the very least sue to have it stop, if not outright be repaid. What economic reality is this "fee" steming from ?

the rest of the profits would be paid as dividends to shareholders. My goal was to offer buys and sells for what the assets were currently worth.

If the profits are paid out as dividends, then the net value should remain perpetually equal to the nominal value. (Except, of course, if there's an equity loss, in which case the dividends should stop anyway, and perhaps cease until nominal recovery).

The spreads of those first bitcoin stocks were massive (a problem still seen in many bitcoin asset prices).

Relative lack of efficiency in the markets translates, perhaps, a lack of financial literacy in the Bitcoin public. It's a larger problem than simply wide spreads, because assets with narrow spreads show over short intervals that their supposed "market" price was pure nonsense. NEOBEE is a convenient recent example, but really, pretty much every major scam to date exhibits the behaviour.

Maybe in time.

This runs into a problem coded into the GLBSE: the book on each asset was mostly meaningless. The GLBSE would let people put up orders for which they did not have sufficient funds. So while the book said there were asks at such and such a price, if you tried to sell a share of the asset those bids would just disappear as you place your order. The effect was that share prices were highly manipulated and valuing an asset based on what you thought you could sell it for would lead to misvalued assets.

MPOE-PR screamed about this until she was blue in the face, but hey, the muppets financiers of the forum knew better. At least they didn't ban her.

Anyway, I put these assets up on GLBSE, and people started investing. Nobody had met me, nobody knew who I was, but I had a good reputation on the bitcointalk forum and so people put some trust in me and my funds.

In mid 2011, people had a good reputation on those forums for reasons that boggle the mind. Take necrodearia/miserydearia, a complete nutcase on the most superficial examination of his communications. That dude had a good reputation. Take Wagner, the guy had a good reputation after filming an entire "show" with the camera in demo mode. Take Shtylman, some stupid hat carried through the world by a well reputed if otherwise hollow pumpkin. I have no idea what one'd have had to do in order to have a poor reputation on the forum in 2011, because McCarthy managing to get detained and then deported back to China for being a peniless bum didn't do it, and Taaki's breaking of random fat girls' Segways and then running away didn't manage to do it, and in general... I defy anyone to come up with something that'd have ruined a forum reputation cca 2011.

As time went on, I wanted to expand my fund offerings. I saw the volatile BTC/USD market as a potential target, making money off the swings up and down. so I started the currency exchange fund, LIF.CX. I exchanged some of the invested bitcoins for USD, the market at the time was crashing, and so the first month had a healthy profit, making everybody happy. Then the market stopped dropping, and the profits stopped.

If I had a Bitcoin for every time I heard this story... o wait. I do. Nevermind then.

I also expanded my funds by creating the LIF.M mining fund. I had no tech knowledge of how to run a miner

You see ?

I never got into mining. People occasionally ask me how come. This is how come : I have no tech knowledge. It's not that I couldn't power on a box as well as any other guy, sure, I can do that, I bought a fridge and a juicer and even a vacuum cleaner, they work just fine.

But I'm not going around trying to earn my living with my fridge. There's such a thing as comparative advantages, and as far as running computing hardware goes, I ain't got it, and so I'm not going into an economic competition on this topic. Other people will have to do it, it's just not my strong suit. This matters.

but there was conveniently a guy named Shakaru who was offering to sell mining power. He had a weird way of selling his contracts, you had to buy shares from GLBSE and then you could trade 1000 shares for one year of mining. I had grabbed some of these shares for under original price using funds from LIF.B, and so I decided to trade them for mining. He gave me a way to check the mining proceeds, and he started hashing away. This went fine for a week or so, but then the mining stopped. He kept saying he was having problems, things were about to get better, the mining would start back up again soon, but it never happened.

Guy turned out one of the more banal scammers out there. He had, you see, a good reputation on the forum. As a result he borrowed from everyone. Bugsy stylei.

I managed to make some profits trading the spreads and the volatility of the GLBSE assets, but the profits were more than offset by total losses in most of the assets when they went belly up.

If I had a ...

At some point I realized that most of the things listed on the GLBSE were scams. I decided that I was not equipped to run this sort of fund, and so I determined to shut it down. I started to sell off the assets which still held some value, but Nefario, the manager of the GLBSE, froze my account. Although he claimed on the forum to be trying to get in contact with me to resolve the situation, I never heard anything from him. I was frustrated, so I stopped using the forum and GLBSE and bitcoins.

If this is true, and it is probably going to remain permanently unverifiableii, the correct reaction would have been to post this story THEN. Equally signed, equally clear, dear shareholders, here's what happened, here's what the problem is, here's why I'm giving up on this business I proposed to you.

Keeping your stakeholders correctly and timely informed is what the game is all about. Never mind that the wanna-be Bitcoin businesses still fail to live by this : you do better than them, you'll live longer than them.

A while later, I realized I had made a mess of the whole situation, and I wanted to fix things. But in the meantime Nefario had suddenly shut down the GLBSE and I had no way to contact him, and no way to identify who had invested in these funds.

This is but one of the many reasons why things are to be done a certain way : if you create undefensible dependencies, you will sooner or later run into this sort of problem. It doesn't work to excuse you from anything, it does however work to make your efforts meaningless.

That variety speak is not mere conceit. It's not there to be aesthetically pleasing. It's a way of life, born out of particular hardships. It knows, even if oftimes you don't.

On the bitcointalk forum where this all began, I asked people to self identify as investors, and to provide addresses. I paid a small amount of bitcoins back to those people who responded. But I had no way of verifying that any of these claimants were actual investors.

MPEx was providing signed receipts in 2011. People knew better, and didn't ask for them. Then GLBSE closed, and this shit.

MPEx was providing signed receipts in 2012, too. People also knew better in 2012, too, and didn't ask for them. Then BTCTC and BF closed, and this shit again.

MPEx is still providing signed receipts. People still know better. Invincible stupidity, it is called. It will endure, even if its carriers get mowed down one by one.

Looking back now, there are many things I would do different. First, I would take more time getting things set up properly. I would have thoroughly studied accounting and finance and laws before starting this sort of thing, rather than afterward. I would have developed relationships with people, learning peoples true identity and actually meeting them before investing, rather than just relying on a forum account. I would have poured more effort into validating identities of those people I was investing in. I would have a more focused investment strategy, rather than having a bunch of funds I would have just one fund, managed by the company wholly owned by myself. I would have been more demanding about having other people provide more information before I invested. I would have included more information in my reports. And I would have stayed away from all the miner bonds, the few that did not turn out to be outright scams were doomed from the sheer mathematics of hash rate growth. I would have relied less on the likes of exchanges such as the GLBSE.

It is in general a good idea to learn by reading rather than by burning money, especially should it be other people's money. That aside, in mid 2011 there didn't exist a wealth of material that'd inform and instruct, and perhaps the penalty on the cluelessness of then shouldn't be as heavy as the penalty on the cluelessness of now.

I'd really like to hear what people have to say on the topic.

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  1. The original Las Vegas casino was built by Siegel through selling something like 450% shares out of the thing, plus taking piles of secured and unsecured loans. Then he got shot, over Lansky's protests. []
  2. Not least because I wouldn't trust anything McCarthy says, as far as that goes. []
Category: Bitcoin
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9 Responses

  1. Key situation must be explained.

  2. Peter Lambert`s avatar
    2
    Peter Lambert 
    Thursday, 17 April 2014

    "The structure I set up had the parent fund, LIF, with a fixed number of shares. The child funds, A and B would have flexible amounts of shares as demanded by the market.

    Financially, this makes absolutely no sense. Please explain, in great detail and with numeric (model) examples what this is supposed to be.

    The child funds would pay 5% of profits as a fee to the parent fund

    A fee for what ?"

    LIF was the company, so there was a set amount of shares, each worth 1/1000 of the company LIF. LIF.A was an open-ended fund, managed by the company LIF. So LIF took a fee for managing the assets of the Fund.

    If somebody invested 100 btc into the fund at 0.1 btc per share, they would get 1000 shares. I would then invest those bitcoins into other assets. If there was a profit of 1 btc, 1% for the month, then 0.05 btc would be paid to LIF and 0.95 would be paid to the shareholders of LIF.A, and the shares of LIF.A would indeed remain where they started, at 0.1 btc.

  3. "Otherwise, the second best time to plant a tree is today."

    goes very well with

    "A little bit everyday"

  4. Mircea Popescu`s avatar
    4
    Mircea Popescu 
    Friday, 18 April 2014

    @Peter Lambert So an investor buying LIF shares is signaling his intent to obtain future revenue commensurate with the quality of LIFs management, whereas an investor buying LIF.A shares is signaling his intent to obtain future revenue commensurate with... the quality of LIFs management ? Moreover, the capital raised by LIF.A goes for buying assets held by LIF.A, whereas capital raised by LIF goes to ?

    @ A little nookie erryday!

  5. A little flogging is cleansing for the soul.

  6. I don't dare to ask for bitcoins "for investment" anymore. Even after I set clear rules and dates while running X.IDIFF futures, still ended up "investing" into sinkholes like BitcoinBourse and having to cover. Fortunately I used MPEx assets and litecoin stash as cover, otherwise that would be nasty default.

  7. fluffypony`s avatar
    7
    fluffypony 
    Friday, 18 April 2014

    The forum has become such a cesspool that having a "good reputation" in 2014 is pointless. The trust model is fundamentally broken. I see that (laughably) the new forum "spec" document calls for a "WoT-like" trust model...instead of calling for direct WoT integration.

    It does make me wonder if (back in the days) the WoT could have been used to prevent the majority of GLBSE scams, instead of "reputation" on the forum?

  8. Mircea Popescu`s avatar
    8
    Mircea Popescu 
    Friday, 18 April 2014

    @Jurov There is a prize reserved for those trying out new things.

    It depends on their outlook. If they're trying out new things expecting them to work...

    @fluffypony The WoT does not work by itself. Absent the people able and willing to make it work, the WoT is exactly as useful as the US Constitution. For its quality of intellectual life, the forum implementation is probably too advanced, as broken as it is.

  9. Peter Lambert`s avatar
    9
    Peter Lambert 
    Saturday, 19 April 2014

    @Mircea Popescu: Well, LIF.A was specifically limited to investing on the GLBSE. LIF would presumably have continued to build investments in other areas.

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