Let's take a look at how crypto-currency endowments work.
Most of us don't realize how important endowments are in the operations of, say, their favorite private university. An endowment is just a donation made to an organization where the gift is locked up and can't be touched, but the earnings from the gift are used to help fund the organization's expenses - forever!
A well-endowed university can afford to grow and expand or offer scholarships and reduced tuition to its students.
A "Bitcoin Endowment" is just a donation that is held in Bitcoin or any mix of other crypto-currencies which benefits from the growth of the assets it holds. Over the past 5 years, any well-chosen basket of crypto currencies would have enjoyed growth by several factors of ten and the industry is just getting started. While no investment is guaranteed, there is every reason to believe that funds based on quality crypto-currencies will do very well in the coming decade as the industry surges into the mainstream. This is especially true for actively managed endowments where the mix is adjusted as industry growth leaders come and go.
BitShares Powered Endowments
The problem with ordinary crypto-currency holding funds is that there is no good way to extract profits without touching the principle. You have to sell off some of the coins as they grow to produce a revenue stream. This certainly works, but there is a better way!
BitShares allows you to lock up the principle in escrow and borrow against it to fund operations while the principal remains untouched and continues to grow.
- Buy a million dollars worth of BitShares.
- Using your BitShares wallet, dial yourself a loan from the BitShares network. You borrow up to a half-million worth of any of BitShares' Smartcoins (e.g. bitUSD, bitEUR, bitCNY, bitGold, bitSilver, bitBTC, the HERO, etc.)
- Sell the resulting smart coins or use them to pay for current expenses.
That's it. No humans involved. It is just a smart contract between you and the BitShares network of honest robots. This is no different, really, than taking out a home equity loan, except the collateral is a fist full of BitShares instead of your home.
You can borrow up to 50% of the value of whatever BitShares you lock up in your account.
As the value of BitShares increases, with the growth of the network and the crypto currency industry in general, the amount you can borrow increases as the value of the collateral you have backing it grows.
If the fund managers ever decide to liquidate the endowment, they simply buy the same kind of Smartcoin that they borrowed (at hopefully much cheaper prices in terms of BTS) and use them to pay off the loan. This frees up the collateral which can then be liquidated.
The Fund Manager's Job
Borrowing against a volatile, high-growth potential asset like BitShares is a job best left for professional fund managers. It has risks that need to be properly hedged.
One good hedge is to hold half of the fund in Bitcoin and the other half in BitShares. The Bitcoin half will probably double at least once during the life of the endowment offsetting the possibility that the higher risk / higher payoff BitShares component might go to zero. This means that only half the endowment is exposed to the upside of the BitShares growth curve, but that might make a pretty acceptable compromise overall.
There are no guarantees with any investment, but the upside that BitShares could grow by 10x, 100x, 1000x or more makes the combination of the two very interesting! Check out The Million to Billion Club.
I like the 50/50 Bitcoin/BitShares Endowment as a way to leverage the expected growth of the Bitcoin industry.
to build a billion dollar prize to fund 12 public-selected Good Causes,
About the Author -- Stan Larimer