Tag: Business Models

Leverage does not get the Credit it Deserves

First of all: Yes, there is a pun in this title and it is intended. But as with most jokes, there is a truth to it. The use of the term leverage in daily conversation, will usually care a negative connotation. Leverage gets a bad rap, you could say. 

The cause of this, I guess, is because most people will associate leverage with debt. And although debt is definitely a form of debt, not all leverage is debt. In the world of engineering, the term leverage simply means the exertion of force by means of a lever. 

The Law of the Lever, which was proven by Archimedes using geometric reasoning, shows that if the distance a from a fulcrum to where the input force is applied is greater than the distance from the fulcrum to where the output force is applied, then the lever amplifies the input force. “Give me a place to stand on, and I will move the Earth”, Archimedes is famously quoted. 

Leverage and Investing

When we think about investing and business in general, leverage tends to mean financial leverage. But not all leverage is created equal. There are many types of leverage and those different types of leverage have different kinds of qualitative attributes.  

Many investors use leverage and there are probably more types and forms of leverage at your disposal than you can imagine. Savvy investors and entrepreneurs excel when it comes to creative use of leverage. 

Different Types of Leverage 

Once you start looking for leverage, you will start seeing it everywhere. Operating leverage, for example, is a generally under-appreciated form of leverage. Many of the most successful businesses in the world have been able to use operational leverage on favourable terms. Operational leverage is a necessary ingredient in any venture trying to scale fast. 

When we think of Financial Leverage, we tend to think about loans. But there are other forms of financial leverage, such as derivative instruments. 

Operational leverage

  • Other People’s Assets (think marketplaces and aggregators)
  • Other People’s Money (think asset management companies) 
  • Negative Working Capital (think insurance float) 
  • User-base leverage (think new products to your existing user base)

Financial Leverage

  • Debt
  • Unsecured Notes
  • Margin Loans
  • Options
  • Futures
  • Forwards
  • Warrants 

The Beauty of Non-Recourse Leverage

Determining whether leverage is recourse or non-recourse is crucial to any reward/reward assessment. The beauty of non-recourse leverage is that it is asymmetric. If you invest in a stock, the most you can lose is the money you put up. The upside, however, is infinite, theoretically speaking. If you start a limited liability company, your theoretical upside is infinite, but you can only lose the equity you put up (unless you are providing personal collateral). 

Non-recourse leverage often comes at a price. If you buy a call option, you have to pay for it. The further out-the-money it is, the cheaper the price. Unsecured loans are more expensive than secured loans. Etc, etc.

Finding a mispriced, perpetual, non-recourse option on something is the holy grail of fundamental investing. This is how the best investors and most savvy business people create wealth for themselves.

Read more on Leverage and Optionality

Longevity as an Investment Criteria

In the world of startups and new ventures, the central theme seems to gravitate towards growth and scaling. 

When it comes to growth and scaling, learning how to manage an organization that is constantly getting bigger becomes the biggest challenge. 

However, when you look at the oldest companies in the world, these are all small operations in industries that have hardly changed much throughout the lifetime of those companies. 

Build to Last

Two of the oldest companies in the world are a:

  • Japanese Ryokan 
  • German Brewery

When founders start new companies, most of the time their vision is to disrupt an industry. 

But what if the objective would be to create something that was built to last? If you want to build an impenetrable fortress, you don’t want it to be ever-expanding, would you?

So, here’s a question: What if you were asked to build a company and there would only be one constraint: The total size of the organization would not be allowed to exceed 8 people.

What would you build?

Longevity as an Investment Criteria

In the world of startups and new ventures, the central theme seems to gravitate towards growth and scaling. 

When it comes to growth and scaling, learning how to manage an organization that is constantly getting bigger becomes the biggest challenge. 

However, when you look at the oldest companies in the world, these are all small operations in industries that have hardly changed much throughout the lifetime of those companies. 

Build to Last

Two of the oldest companies in the world are a:

  • Japanese Ryokan 
  • German Brewery

When founders start new companies, most of the time their vision is to disrupt an industry. 

But what if the objective would be to create something that was built to last? If you want to build an impenetrable fortress, you don’t want it to be ever-expanding, would you?

So, here’s a question: What if you were asked to build a company and there would only be one constraint: The total size of the organization would not be allowed to exceed 8 people.

What would you build?

Mt. Gox | The Meteoric Rise and Fall of a Bitcoin Exchange

Although the history of the Mt. Gox Bitcoin Exchange is short, it is nothing short of amazing. Mt. Gox is a historic name in the world of cryptocurrencies, as it was one of the first Bitcoin exchanges to take off.

At the peak of its height, Mt. Gox’s customer base represented about 80% of the global trading volume. The rise of Mt. Gox, came to an abrupt end in 2014 when it was discovered that the exchange had become the victim of a large scale hack. Being unable to locate over 850,000 bitcoins that the exchange had in its possession, Mt. Gox was forced to close trading and to subsequently file for bankruptcy. 

Who founded Mt. Gox?

Jed McCaleb founded the Mt. Gox and in 2007, he registered the Mtgox.com web domain with the aim of turning it into a trading site for the famous Magic: The Gathering game cards. He then turned the domain to a bitcoin exchange site. 

After sometimes McCaleb realized he was getting more than he bargained for and he sold the site to Mark Karpeles who is a programmer, foodie, and bitcoin enthusiast and he usually calls himself Magicaltux in numerous online forums. Karpeles then rewrote the back-end software of the site and eventually turned the site into the most popular bitcoin exchange in the world. 

Karpeles was born in France and he spent some time in Israel before settling down in Japan. He got married in Japan and in 2011, he acquired the Mt. Gox exchange from an American entrepreneur known as Jed McCaleb. 

When did Mt Gox open?

Mt Gox was among the first Bitcoin exchange on the web but it was not related to cryptocurrency when it was developed. The mtgox.com domain was bought by programmer Jed McCaleb in 2007 for an online trading platform for virtual cards that are used in the game Magic: The Gathering.

In 2010, McCaleb then saw the opportunity to build a place where people can exchange their fiat currency to and from Bitcoin. This was how mtgox.com was launched as a Bitcoin exchange on July 18, 2010. McCaleb then sold the platform to French-born developer Mark Karpeles after a year.

How did Mt Gox get hacked

Mt Gox was first hacked in 2011 and during the first of the two hacks, the attackers were able to infiltrate into the computer that belongs to an auditor of Mt. Gox. This gave them the chance to change the Bitcoin pricing to a single cent. Afterwards, they then obtained the private keys of Mt. Gox clients which had their precious crypto assets kept in hot wallets which are internet-connected. 

The hackers then went on and create selling orders on the accounts and then bought the Bitcoins at this artificially reduced price and they were able to buy 2000 BTC with this way. This hack was estimated to be about $30.000 theft in Bitcoin and this was then dwarfed by the hack that occurred in February 2014.

The second Mt Gox hack was infamously known as the first major cryptocurrency exchange hack when it happened. The hacked value was an enormous $460 million worth of Bitcoin at the time. Although this may not be the largest hack in terms of the value in fiat money, it is considered to be the largest amount of Bitcoin that was ever stolen. 

More than 850,000 Bitcoins were stolen which includes 750,000 Bitcoins that were owned by its customers. At its peak price, the value of the bitcoin stolen is $17 billion while at the current price this will be about $3 billion.

Although Mt Gox stopped all Bitcoin withdrawals on February 2014, the exchange has already been emptied of its Bitcoins long ago. It was reported that Bitcoins were stolen bit by bit since the beginning of 2011. The group that did this investigation then indicated that by May 2013, the firm no longer held its Bitcoins. Mt Gox then filed for bankruptcy not long after the hack because they were no longer able to continue with the operations.

Will Mt Gox be rehabilitated?

According to TechCrunch, In February of 2019, there is a movement referred to as GoxRising which is working to have an alternative to bankruptcy for Mt Gox. The main idea behind GoxRising is simple and it is that instead of using the bankruptcy courts to give the assets of Mt Gox to the owners of the company, it is making use of civil rehabilitation law so as to return most of the asset to the creditors of the company.

It appears that GoxRising will be successful in these efforts because Tokyo lawyer, Nobuaki Kobayashi has been appointed by the Japanese courts to work on the civil rehabilitation process. This is going to be a piece of good news to those that have lost their assets in the Mt Gox failure because they will likely gain from this deal due to the civil rehabilitation law.

Another potential way this court may end is that the embattled CEO of Mt Gox, Mark Karpeles will likely end up with lots of Mt Gox assets if the bankruptcy process is allowed to move forward. This is because he owned about 80% of the company and when it went bankrupt, it will place him in a great position to get this huge payout under the Japanese bankruptcy law. If this happens, Karpeles knows that his life is in danger as he would receive lots of civil suits from Mt Gox creditors that has lost everything to him. More insults will be added because Bitcoin prices are much higher today than it was in 2014.

With the civil rehabilitation process, it looks like a winning idea to everyone that is involved in this deal and it looks like a way forward. The civil rehabilitation process is expected to take 3-5 years based on the reports from the media. Although civil rehabilitation may be considered to be a time-consuming process, it is still a lot better than bankruptcy.

Read More on Finance and Crypto

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