blockworks.co
Recovering from a rocky 2022, when crypto markets roiled, value-oriented Off The Chain Capital has stabilized, booking a performance recovery — and the firm is now primed for a likely sizable pending payout.
Before it came into crypto investor fashion, Off The Chain had been snapping up Mt. Gox bankruptcy claims. Brian Estes, the hedge fund firm’s chief executive and chief investment officer, told Blockworks he began buying claims in 2019.
Off The Chain, which now has $140 million of assets under management, is poised to recoup those claims in September. According to Estes, this will happen as Mt. Gox’s bankruptcy estate returns long-frozen bitcoin and cash deposits stemming from the then-bitcoin exchange’s insolvency last decade.
Estes said that for the firm’s flagship fund, Off The Chain LP, the Mt. Gox claims now account for about 25% of the vehicle’s portfolio. Investigations into the case have continued to unfurl.
The fund, which takes a long-only approach to investing in a mix of cryptocurrencies and privately traded equities, fell 75.1% in 2022, according to a marketing document obtained by Blockworks. The steep downturn included a 33% loss in November, when FTX imploded and digital assets of all stripes tanked.
“When our [limited partners] came in, I had personal conversations with each one of them, and I told them that ‘even though we’re evergreen — you can get out with a six-month notification — we’re a liquid fund,’” Estes said. “There’s going to be a period where we’re going to drop 70 to 80%. We’ve had people say, ‘Thank you, I appreciate that, and I’m not investing.’ But so many of our investors have stuck around.”
By December 2022, the fund had to “mark the portfolio down so much that we didn’t want new [investors] to come into the fund, which would dilute the performance,” Estes said. Off The Chain as a result closed its fund to new capital, and it remains closed — except when an investor redeems, triggering a new slot to open up for another potential limited partner to take their place.
The firm, based in Orlando, Florida, has long invested in equity securities on the secondary market. It has typically preferred to purchase distressed stakes on the cheap from holders who need additional liquidity.
But Off The Chain’s flagship fund has recovered significantly so far this year, parlaying a 19.5% pop in January to a 23.7% year-to-date performance showing through the end of June. The firm’s $140 million of assets under management remained significantly below Off The Chain’s $500 million peak.
Off The Chain bullish on Binance
If all goes according to plan with recouping the Mt. Gox payouts, that initial haul ought to rise.
The asset manager is a registered investment adviser (RIA) with the SEC. When it started to purchase the claims linked in the bankrupt bitcoin exchange — which was a massive player in bitcoin liquidity before its hack in 2014 — they were priced around $500 to $700 per claim.
Industry participants have highlighted two reasons for the discount on stolen bitcoin recovery from exchanges: general uncertainties in bankruptcy cases, and the unique challenges involved in recovering stolen bitcoin. There’s also the fact that, for years, it was unclear when the Mount Gox case would be resolved. This led to a moving target on when those payouts would happen, with investor cash constrained in the meantime.
The claims purchased by Off the Chain, many in that $500 to $700 range, entitle the holder to a payout of .1785 bitcoin (BTC) and .18 bitcoin cash (BCH), as well as $700 outright.
In total, Mt. Gox is set to distribute nearly 142,000 BTC to creditors ($4.3 billion), alongside a similar amount of BCH worth $40.3 million.
Off The Chain, Estes said, is also bullish portfolio-wise on the future prospects of Binance, which has been recently sued by the SEC. Binance’s native token, BNB, accounts for 10% of the firm’s portfolio, he said.
BNB has tanked to around $230 from a three-month high of $347, though the token has traded in a considerably narrower range for the last 30 days.
“I’m a huge believer in Binance,” Estes said. “The SEC and the powers that be have been trying to take down Binance over the last year, and they don’t realize you can’t take down a company [which] has no debt and is generating $2 billion in cash flow. They think it’s like FTX leveraged up.”