I am writing this article to address recurring questions regarding calculating the investment returns from the daily dividends paid by the Bitcoin Capital (BC) Funds. The BC Funds are made available to professional investors on the BnkToTheFuture (BF) platform created by Simon Dixon and Max Keiser. A detailed explanation would make for an exceptionally long forum post, so the plan is to simply post a link to this document for BF investors to reference. Hopefully, this will be fairly easy and fun to read while remaining accurate in its analysis. Comments and criticism are welcome. Email me at pdq.jones(at)gmail.com.
Why me? Of course, the BF platform is for sophisticated and accredited
investors, but not everyone is steeped in the minutia of finance and bitcoin. I am an active investor at BnkToTheFuture with background and experience in finance, business, startup management, and engineering. In addition, I am a Certified Bitcoin Professional, and this Spring I will complete an M.Sc. degree in Digital Currency from the University of Nicosia, the first graduate program in this field. OK! Enough about me—here’s how to view the daily dividends from a few different angles.
Bitcoin Capital Tranches
First of all, I just want to thank Simon Dixon and Max Keiser for creating
the Bitcoin Capital Funds, and leveraging the capability of Bitcoin to pay DAILY dividends. (Someday soon I hope to write an article about the BC Funds from the perspective of financial innovation…but that’s another story.) BC1, the first tranche, began paying daily dividends in July 2015. BC2 started paying dividends in October 2015, and BC3 paid its first dividend in January 2016. Because of the longer history, I will be using data from BC1 to estimate the returns to date. I have noticed some confusion on the BC forums regarding how to calculate the “returns” of these funds. This will be my attempt to explain how to think about your daily dividends and how to estimate your returns. (This will be a necessary evil when filing taxes in any case, but please check with your CPA or tax accountant for definitive guidance. Also, as you will see later in this essay, we probably don’t have an issue for the 2015 tax season!)
The BC funds pay out a “daily dividend” in bitcoin. One major point, many investors miss, is that all BC tranches are divided into roughly three equal parts:
1. bitcoin (or other digital currency)
2. start-up equity in a number of ventures
3. bitcoin mining capacity
Therefore, for every $1000 invested in a BC Fund, only about $333 is put into mining rigs which return the daily dividends. This means that the basis to calculate the returns is $333 for every $1000 invested in a BC tranche. The remaining $667 is divided between cryptocurrency and startup equity, both being held for the long-term. These potential returns are not included in the daily dividends.
I keep track of my BC1 daily dividends in a spreadsheet and also note the approximate US dollar price at the time of receipt. The calculations that follow are based on this record. Your returns will vary somewhat depending on how, and when exactly, you invested in BC1.
For every $1000 invested in BC1, I have received as of today (Jan 13, 2016) 0.35688 bitcoin. I made this investment on April 21, 2015, and it cost me 4.45338 bitcoins at the time based on the exchange rate that day. One-third of those bitcoins (1.48446 BTC) were invested in mining and started returning dividends on July 3, 2015. In terms of bitcoin, the percentage returned to me so far is about 24.0%, which is found by dividing 0.35888 by 1.48446. However, since the price of bitcoin has risen considerably since last April, and I have retained my dividends in bitcoin, my return is potentially even better. At today’s approximate exchange rate of $430 per bitcoin, the 0.35688 bitcoin amounts to about $153. Now remember that only $333 of the original $1000 invested is involved in mining. Therefore, the return to date in dollar terms is 45.9%, which is obtained by dividing 153 by 333.As you can see, there is quite a range of potential returns, even in my own case. And, the daily fluctuations in the bitcoin/dollar exchange rate add another variable. But there is more to the story. The plot thickens.
What Does ROI Mean?
Investors often use a metric known as ROI, or Return On Investment, to
evaluate and compare the performance of various investments. Basically, you just divide the net gains from your investment by the cost. For example, if I invest $1000 in some gold and later sell it for $1200, then I’ve gained $200 from an initial $1000 investment. In other words my ROI is 20%. But there’s a bit of a hidden issue here. What if I did the same with a stock? Which would be the better investment? Well, it depends. Let’s suppose I made the 20% in gold in exactly one year, but it took 10 years for my stock to gain 20%. Clearly, the gold would be
the superior investment in this case. For this reason, investors often compare annualized ROIs. In the example above, the gold returned 20% annualized while the stock returned 2%. (Note that we are assuming the stock did not pay any dividends.)
Now if we look at the daily dividend returns above, i.e., 24% in bitcoin
terms and 45.9% in dollar terms, we’ll note that these numbers were achieved in well under a year. Annualizing these returns increases them significantly, and varies quite a bit depending on your effective start date. In fact, in the best case, it nearly doubles the annualized returns. Or does it?
As explained in the section above, ROI is a well-established established
metric for investments. It is best to annualize ROIs for comparison purposes.
So…did you catch the error I made in calculating ROI for the daily bitcoin
dividends? Let’s say we invested $1000 in BC1, or $333 in the mining portion of BC1. How much profit have we actually made on this investment? Well, we would have received about $153 so far, but if BC1 closed tomorrow (don’t worry, it won’t), how much have we gained from the $333 invested? Oops, with $153 in pocket from the dividends, we’re still $180 short of the original investment. A loss of money cannot be a positive ROI. The mistake I made is to assume that the entire $153 received to date is profit. It may well turn out that way. The reality is,we really don’t know how much money we’ll make, and a lot depends on the future price of bitcoin.
So mea culpa, I’ve been guilty of conflating ROI with “Return
Of Investment”. The groundbreaking and innovative part of the Bitcoin Capital Funds is the fact that almost immediately, investors begin to get a portion of their investment returned to them in daily dividends. (Perhaps “daily returns” would be a better phrase?) This has never really been done before, and is only possible because of the frictionless properties of bitcoin. Investing in startups is a long-term commitment and funds are generally tied up for five years or more before a
liquidity event allows one the possibility of earning a return. At that point, an accurate annualized ROI can be calculated. In the meantime, BC tranches give investors a unique opportunity to participate in the digital currency revolution that continues to rapidly evolve around bitcoin. In the not-too-distant future, I hope to create a model that will project the expected ROI for the mining portion of the Bitcoin Capital Funds. The ROI will be a function of the future bitcoin price and other factors. In the meantime, enjoy the fact we are making history by participating in BC1—a portion of our investment is being returned every day. Stay tuned!