For several years, Bitcoin has been touted as a hot investment – and while this has been somewhat true, ironically,  the best returns could come from a Bitcoin related blow up…

As we reported several times last year, hedge funds are increasingly looking to illiquid assets to provide alpha in a challenging market environment.

Last year, the flavor of the year for illiquid investment seeking hedge funds was distressed oil and gas debt. And for those not interested in this sector, Andrew Lawrence Rosebrook Capital Partners said out to buy illiquid stakes in other hedge funds directly.

As part of hedge funds’ continual quest to find the opportunities that offer the most alpha, the Financial Times reports that the sector is now chasing creditor claims with the failed bitcoin exchange Mt Gox.

Also, see:

Hedge Funds Find Value In Bitcoin Mt Gox Wreckage

The paper cites people with knowledge of the matter who believe that at least for hedge funds have begun buying or offering to buy claims from the many thousands of former Mt Gox account holders who were left high and dry when the then world’s biggest bitcoin exchange collapsed in February 2014.

Bitcoin
Photo by zcopley

It seems these funds are speculating that the final payout will be much greater than initial projections are claiming. When the initial creditor claims were lodged in 2014, trustees calculated the value of bitcoins at $450 each. At the time of writing the virtual currency is worth $1,012. The final payout figure will, of course, depend on how much creditors manage to reclaim from the wreckage of the failed exchange. However, according to the paper, none of the 2,400 claimants are expected to get back more than a quarter of their lost bitcoins. Any payout will be distributed from the pool of 202,000 bitcoins recovered by the Japanese authorities.

A simple back of the envelope calculation suggests this trade may not be as risky as it first appears. Mount Gox collapsed with a virtual vault of 850,000 coins, of which 90% belonged to customers. At the time of the collapse of this haul was worth $473 million. At today’s prices, the 202,000 bitcoins recovered are worth just over $200 million, 43% of the value at collapse. So, it seems customers will receive at least some of their deposits back. According to the Financial Times, hedge funds are offering claimants 15% of the yen value of each claim in cash today, which may prove to be an offer that’s too hard to pass up for those private investors who are unwilling for the bankruptcy case to unfold. If initial estimates are correct, and former customers of Mt Gox receive $0.25 on the dollar when the case is finally closed, there’s a potential upside here of nearly 70% for hedge funds buying at $0.15.

It may be several years before funds can realize a gain on their initial investment, but it would appear that the returns on offer may be worth the wait even? if it takes as long as Lehman Brothers.

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