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Horizons: Family Office & Investor Magazine

Family Office Anonymous: How to buy 700,000 Bitcoin

Monday, September 16, 2019

In Family Office Anonymous we speak with family office leaders and principals who want to share their thoughts, reflections and experiences with a greater audience while making sure their identity is protected.

Contact Matthias Knab using if you like to be part of future columns.

How to buy 700,000 Bitcoin

Matthias Knab: The largest quantity of Bitcoin ever in a transaction is reputed to be 500,000 BTC in April 2015. You have been involved in some pretty large BTC transactions as well, can you tell us what it is like to potentially do transactions that amount to a dollar value of over $1 billion USD?

A number of years ago a large investor and friend asked for my help in finding counterparties from which he could purchase very large amounts of Bitcoin (“BTC”) for his firm. I assume he asked me because he trusted me and knew that I have great friends and business associates around the world. He wanted to buy multi-billions of USD worth of BTC. I am used to trading billions of dollars of traditional financial instruments in milliseconds on exchanges.

I know many people who have and/or control many billions dollars, I go to Davos, and so on – I thought - how hard could this be I figured I’d send out a few texts, make a few phone calls and we would be on our way to completing the purchase in no time.

I am sure that anyone who knows the OTC BTC space and is reading this is laughing at how naive that was! Nonetheless, he was the first of a number of friends and significant investors who asked for similar assistance, either buying or selling, and over the years I developed real expertise and a team of experts as I assisted them in their objectives.

Bitcoin is touted as having the advantages of being capable of transferring around the world easily at lightning speed and not relying on a central trusted authority. It is therefore exceedingly ironic that transacting BTC in size that even begins to approximate “institutional quantities” turns out to be one of the slowest, most cumbersome financial processes ever engaged in by modern business.

My friend who first asked for my help had already experienced many of the pitfalls of trying to engage in large size BTC transactions. Between what he had learned through some transacting and a lot of frustrating experiences and my contributions we hoped to accomplish his goals with a minimum of additional frustration.

There were not any widely agreed procedures for moving toward a transaction or for transacting and the situation remains the same. Later I can describe some of the challenges the industry faces with developing widely agreeable procedures. But for now suffice to say that for someone used to doing business in a highly regulated environment with traditional assets where the parties involved are appropriately registered, well trained in compliance procedures and generally honest – what I experienced entering the OTC BTC space was quite a shock.

My friend who retained me as Mandate for his fund told me that essentially he was prepared to buy as much BTC as could possibly come onto the market. But we decided that the largest number we would quote when anyone asking the quantity that we wanted to buy would be 700,000 BTC. After months of contacting anyone I knew that might have a large amount of BTC or know someone who did have billions of dollars worth of BTC who was interested in selling, I got in touch with the CEO of one of the larger and more well known companies that had been funded for the purpose of engaging in large Cryptocurrency transactions. He indicated that their strategy was generally to buy from Miners and then re-sell to Institutional Buyers.

However, initially we experienced more frustration as each potential deal had one or more factors that were unacceptable to my buyer.

Then after months of potential deals that all turned out to be dry wells, I got a call from the CEO saying that they were teaming up with a seller from Canada to be able to sell 700,000 BTC to my friend’s Asian fund. They said that the Canadian seller and their representative would fly to Hong Kong, meet the various procedural requirements that my buyer had set and even give us an especially large discount on the price for buying such a large quantity. It seemed nearly perfect although we all understood that nothing is quite as easy as it might seem and nothing is a “done deal until the deal is actually done” in the world of OTC BTC trading.

The next step was a conference call with my friend the buyer, me, the Canadian seller and the CEO and CTO of the selling company based in Europe.

The call lasted almost 3 hours and went through many ups and downs. But by the end, it seemed that we had all of the key points agreed. The Canadian seller would get back to us to schedule the transaction after he figured out when he could fly into Hong Kong. Since I was Mandate to the buyer and direct to the seller – as well as the especially high discount increasing the amount of compensation for putting the deal together – my company would be paid approximately $70 million USD upon completion of the transaction...

Matthias Knab: So how does the story end?

Perhaps it is best to save that for later and fill in some other information along the way.

Matthias Knab: Fair enough. Who are the “players” that you tend to encounter in this space? What are some of the widely believed myths that are not true?

One of the reasons that I continue to be active in the Blockchain/Cryptocurrency space after getting involved at the request of friends who are large investors is that I find it very interesting. I have met very engaging people who are successful in a wide variety of professions from technology, law, of course, institutional investing, family offices, prop traders, entrepreneurs and even a physicist or two. It is also very interesting to observe the development of a quite primitive financial space after decades on the leading edge of the most advanced financial applications. I feel somewhat like a contemporary Archaeologist who is surprised to find the opportunity to actually observe the development of an ancient civilization in real time.

Within the OTC BTC space the “players” generally fall into two groups: The OTC Trading Desk category and the Natural Buyer/Seller segment (aka the non-Trading Desk or non-Desk segment).

The OTC Trading Desks are the companies that would be familiar to many readers of Opalesque – the exchanges, trading platforms, proprietary trading firms and other liquidity providers. The natural buyers/sellers are typically miners or early adopters who bought large quantities at very low prices and held onto a significant percentage for years.

Family Offices and Ultra-high net worth individuals looking to diversify their portfolios and/or to protect their assets from government confiscation in unstable, untrustworthy political environments make up the majority of the natural buyers. The few, relatively small funds dedicated to investing in the Cryptocurrency can be found mostly at the trading desks but occasionally in the world of the natural buyers.

There are few participants that understand both of these groups well. Usually they specialize in one or the other. However, I have been able to capitalize and help others capitalize in a variety of ways by being knowledgeable in both segments.

It seems that many people who are otherwise sophisticated in financial matters but not experienced in Cryptocurrency believe that Bitcoin is primarily the realm of money launderers, tax evaders and all manner of hardcore criminals. In my experience, this is very far from the truth.

In all the transactions that I have been aware of, the Fiat currency always needs to go through a traditional financial institution – always a bank in my experience – and all parties have been keen on compliance with KYC-AML and all other applicable laws and regulations.

In many Asian jurisdictions the banks require that they review all of the contracts involved with the pending transaction. Overall, large OTC Bitcoin transactions are more highly scrutinized and leave a more thorough electronic trail than transactions of similar size done completely in fiat currency.

Another myth that seems to be widely believed is that large BTC trades can be transacted easily on well known exchanges and platforms. I am working with a group of strategic partners in order to provide liquidity in larger sizes combined with the sophisticated order entry methods that are common place in traditional assets for institutional traders and investors. However until we launch this solution in Fall 2019, even a few hundred BTC can often times destabilize the market.

If you request a bid-offer from another platform for 5000 BTC, the quote will likely come back at 2% wide or more – if they will make the market at all for that size. Of course, given all of the hacks and failures of Cryptocurrency platforms that have resulted in customer losses, many traders prefer to place only a minimal amount of value at such an entity and then only for the shortest time possible. It is for reasons such as these that the off-desk OTC BTC market of natural buyers and sellers continues to thrive.

BTC trades do happen relatively frequently there and all across the world. However it requires a competent guide with knowledge and experience in a variety of areas to actually complete a successful transaction of that size. Without such expertise the result will almost certainly at best be a huge waste of time with considerable frustration and perhaps much worse such as losing substantial assets to some type of scam.

Matthias Knab: You point out that there are substantial dangers and you also stated that the space is in a somewhat primitive stage. What do you suggest to make it safer, in addition to utilizing the services of experts for off-desk OTC transactions, and what do you foresee for the future of this space?

I think it is useful to see this topic with the 3 touchstones of Standardization, Curation and Consolidation in mind.

There are no longstanding, standardized and widely accepted set of procedures such as there are in traditional assets. So most participants make up their own procedures for transacting and often refuse to deviate when their proposed counterparty has their own procedures which are usually quite different.

With both buyer and seller holding tight to their respective procedures – which are often inconsistent with each other – a great deal of time and energy are often wasted before the parties finally acknowledge that the deal has failed.

While the medium to long term solution is a Standardization of Procedures that can facilitate safe and fast transactions such as occur in traditional assets; the short term solution that we employ is “Flexibility”. Specifically having the ability and willingness to facilitate and/or participate in transactions in a wide variety of ways so that as many potential counterparties as possible can be accommodated.

For example, in addition to maintaining the capability to transact in non-trading desk transactions in a variety of ways as I previously mentioned, we are engaging a number of experts and strategic partners in order to launch an offering that will provide greater liquidity for much larger trades that can be made with the sophisticated tools that family offices and other institutional investors/traders are accustomed to using. This includes everything from properly maintained data to algorithmic order entry to trading system development.

The second touchstone is “Curation”: Because there is such a wide variety of offerings – as innovation runs wild in the space and some of the offerings are excellent while many others are inferior at best and often financially dangerous – I have found that I can add substantial value by engaging in curation of the offerings. Myself and my team have helped less informed participants to find the better solutions and avoid the more risky offerings.

Many family offices and institutional investors are feeling a strong sense of enthusiasm for engaging in the space, mixed with a cocktail of risk factors and volatility. So it is easy to see why most participants in the space are a bit disoriented, and so my clear recommendation would be to seek specialized expertise. Just speaking for myself and my team,

we found it possible to create and engage in more secure, reliable and profitable processes in the Blockchain/Cryptocurrency universe. In addition to trading in Cryptocurrencies, we have also gained expertise in applying compliance procedures to the specifics of the Blockchain industry, security and utility tokens, evaluation and valuation of Blockchain companies, utilizing tokens to disintermediate established technology as well as to support charitable and impact investing organizations and a number of other related areas.

We are on the verge of the next stage of evolution of Blockchain as we see how the possibility of offerings of Blockchain based products such as Libra by large commercial entities as well as potential Digital Currencies/ Digital Fiat by Central Banks evolve. I believe this is the next battlefield for determining the future evolution of the space. Will truly decentralized currencies be allowed to flourish on a massive global scale? Will governments use the technology to merely increase efficiency or in some cases to increasingly assert government power over private interests? Will the Cryptocurrency solution be as easily accepted as Bitcoin if it is controlled by a centralized authority? This coming phase of evolution reminds me of “ancient” times when software companies faced the question of whether they should standardize on the Apple OS or the Microsoft platform when the outcome was unpredictable and they knew the decision would ikely lead to either great success or complete failure. In some ways the specific dynamics are quite different. However the magnitude and importance of the developments and choices made are quite similar.

Exactly which possibilities that regulators will accept for custody solutions that can lead to a variety of listed derivatives is an important related question. Clearly the expertise to effectively respond quickly to these changes as they emerge and maintain optionality until they emerge is the most important strategic variable in this highly complex equation of the future evolution of this highly dynamic technological advance.

Matthias Knab:You mentioned “Consolidation” as the third touchstone. The crypto currency space is massively decentralized with 200 or so marketplaces and the majority – it is said around 60% – of transactions are happening off exchange in an “OTC” format. Where do you see the marketplace or exchange landscape heading? Is consolidation ahead?

Although the Cryptocurrency space is greatly decentralized, as you state, ironically the ownership of Cryptocurrency is very concentrated. For example, Business Insider estimates that approximately 97% of Cryptocurrency is held in only about 4% of wallets. At the same time a prominent platform for institutional investors states that they consider a “large trade” to be one of only 20 BTC or more. This is currently about $200,000 USD in value (at $10,000 per BTC). This is another reason to expect that the off-desk marketplace of natural buyers and sellers could continue for to thrive some time.

It seems inevitable that this expansive frenzy of innovation, duplication and regulation will lead to a consolidation of the space that will likely be equally as powerful and rapid as the expansion – once the balance tips from expansion to contraction. Larger investors should make efforts to get excellent advice and assistance to help them navigate the treacherous waters of the consolidation phase in the most efficacious manner with processes such as M&A. Clear-sighted Industry Intelligence reports will prove exceedingly valuable in this phase of industry evolution that is inevitably coming – and probably coming sooner than most participants anticipate that it will.

Matthias Knab: Do you see family offices playing a role in crypto, and which one?

Having run my own family office for about a quarter century and having advised a great many family offices, I can say that Family Offices are already playing an important role and will continue to play a very central role as the Blockchain/Cryptocurrency space continues to evolve.

Family Offices have substantially greater capabilities than individual investors generally have and are able to act in a more flexible and nimble manner than most large, publicly funded institutions. So the current phase – after the early adopters and before the new technology is widely utilized – is the perfect time for Family Offices to be involved as investors, innovators, users of the technology and advisors.

Matthias Knab: And what about the 700,000 BTC transaction you were discussing earlier – how does that story end?

Well, as anyone who has become involved in the non-Trading Desk OTC BTC space has learned, the first step is that everyone involved signs a non-disclosure agreement. So let me just describe somewhat of a composite picture of how such a transaction might take place in Hong Kong or a similar jurisdiction. This is only one of many ways of

completing such a transaction. Of course, there are a number of less dramatic ways to transact, including utilizing: Escrow services, Attorney Escrows, Trading Platforms, various financial instruments or bank guarantees, etc.

However, since the Face to Face transaction at a bank is the most suspense filled and dramatic, I will give a brief description of it. After extensive negotiations, a Buy-Sell Agreement with all significant aspects of the transaction including the payments to the intermediaries/ representatives that have arranged the transaction would be completed.

Then the contract would be presented to the Private Banking Officer at the bank where the transaction will occur. On the day of the transaction, both buyer and seller would arrive at the bank with their own entourage – including a large professional security team, their lawyers and advisers.

They are escorted by the Private Banker to the bank’s meeting room and the process begins. The tranche sizes would have been agreed to in the contract along with the total amount to be transacted, the manner of establishing pricing, etc. Usually the Fiat currency is sent first since when BTC is sent there is no realistic recourse to the sender if the Fiat does not promptly follow. So the first Fiat payment is sent and everyone waits tensely until the Fiat transfer is confirmed. Then the first tranche of BTC is transferred

and once the transaction is confirmed and the BTC found acceptable according to the terms specified in the contract the process is repeated until the total amount of BTC agreed to be transacted is complete. After the first 2 or 3 tranches are completed the participants tend to relax a bit and settle in for what is likely a long day of repeating the same process many times. So much for the dream of transacting today friction free at lightning speed across the globe. But that day will surely arrive.

While Family Office Anonymous respects the confidentiality of our interview partners and contributors, the principal of this family office has signaled his openness to answer questions regarding Bitcoin and other cryptocurrency related transactions and inquiries.

Please email Matthias Knab using your email will then be confidentially forwarded.

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