The investments offered by BitFunds Pty Ltd are considered to be highly speculative. An investment in the Company is not risk free and the Directors strongly recommend potential investors to consider the risk factors described below, and to consult their professional advisers before deciding whether to apply for Shares.
There are specific risks which relate directly to the Company and the Manager. In addition, there are other general risks, many of which are largely beyond the control of the Company and the Directors. The risks identified in this section, or other risk factors, may have a material impact on the financial performance of the Company and the market price of the Shares.
The following is not intended to be an exhaustive list of the risk factors to which the Company is exposed.
Futures Exchange Liquidity
There is a risk that there may not be enough opposite interest in the futures exchange market at the right price to initiate a trade. Even if a trade is executed, there is a risk that it can become difficult or costly to exit from positions in illiquid contracts.
Limited Operating History
The Company has limited operating history on which an evaluation of its prospects can be made and the unproven potential of its proposed new business model makes any evaluation of the businesses or its prospects difficult. The prospects of the Company must be considered in light of the risks, expenses and difficulties frequently encountered by companies in their early stage of development, particularly in the cryptocurrency sector, which has a high level of inherent uncertainty.
Individual Investment Risk
Individual investments within the Portfolio may fall in value for many reasons such as changes in the entity’s internal operations, management or in its business environment. If this occurs the value of the net tangible assets of the Company will fall which is likely to have a negative affect on the Company’s Share price.
Interest Rate Risk
Changes in interest rates can have an impact directly or indirectly on investment valuations and returns on any cash deposits held.
Risks particular to the Company include that the Company may give different after-tax results than investing individually because of income or capital gains accrued in the Company.
The risk of loss associated with derivatives can be substantial due to the leverage associated with these financial instruments. Importantly, the Company will not use any form of derivative to leverage its net assets except as outlined in section 4.5 of the XBT Investments Limited Prospectus. Accordingly, the primary risks associated with the use of derivatives by the Company are that they may perform differently and be less liquid than the underlying securities.
The Company may invest in unlisted securities or in companies whose securities are thinly traded. Therefore, its ability to sell securities may well be restricted.
There are a number of industry risk factors that may affect the future operational performance of the Company. These factors are outside the control of the Company. Such factors include increased regulatory and compliance costs, unforeseen Government legislation, and collapse in equity markets.
The ability of the manager to continue to manage the Portfolio in accordance with the Corporations Act is dependent on the maintenance of the Manager’s Australian Financial Services Licence and its continued solvency. Maintenance of the Australian financial services licence depends, among other things, on the Manager continuing to comply with the ASIC imposed licence conditions and the Corporations Act.
Gearing and Derivatives
An investment may be geared through the use of derivatives or otherwise. It is important to consider the extent to which the Portfolio is geared. A higher rate of gearing has the capacity to expose the Portfolio to greater fluctuations in its returns. It is relevant to note that the Manager may incorporate derivatives into the Portfolio.
Financial Market Volatility
A fall in global or Australian equity markets, global or Australian bond markets or a rapid change in the value of the Australian dollar against other major currencies may discourage investors from moving money into or out of equity markets. This may have a negative effect on Share prices.
Performance of other Asset Classes
Good performance, or anticipated performance, of other asset classes can encourage individuals to divert money away from equity markets. This may have a negative impact on the value of the Portfolio.
Absolute Performance versus Relative Performance
It is the objective of the Company to show positive returns on its investment regardless of the underlying movement in value of the investment markets. With such an objective, the value of the Portfolio may not change in line with the overall movements in the market and its performance may differ significantly from funds that seek to measure performance against the broader share market.
Key Personnel Risk
The Company has instructed the Manager to put in place systems and processes to mitigate the risk of losing key personnel. However, the loss of key personnel both within the Company and the Manager could have a material adverse effect on the Company.
Investors may be diluted by future capital raisings by the Company. Shares may be issued to finance future acquisitions or pay down debt which may, under certain circumstances, dilute the value of Shareholders’ interests. The Company will only look to raise equity if it believes that the benefit to investors of acquiring the relevant assets or reducing gearing is greater than the impact caused by the dilution associated with a capital raising.
Risks Associated with the Regulatory Environment
The Manager intends to invest in cryptocurrency platforms. Accordingly, the Company’s results of operations, financial condition and prospects are significantly dependent on regulatory, economic and political developments in relation to these platforms.
Given the immature nature of cryptocurrencies, the Company has heightened exposure to regulator decision, including the definition and treatment of digital assets such as cryptocurrencies.
Additionally, although the cryptocurrency industry has experienced growth over the past few years, the Company cannot assure investors that the cryptocurrency economy will be steady and uniform, or that if there is a slowdown, such slowdown will not have a negative effect on the business of the Company.
Future regulatory and/or government actions could materially affect the Company’s investments. Similarly, the introduction of new laws around cryptocurrencies regulation, changes to existing laws and/or the interpretation or application thereof or the delays in obtaining approvals from the relevant authorities may have an adverse impact on the Company’s Portfolio.
Cryptocurrency Volatility and Price Risk
Historically, cryptocurrencies have high volatility compared to other investments. The Company is exposed to cryptocurrency markets through its Portfolio. There is no assurance that cryptocurrencies, such as Bitcoin, will maintain their value.
Bitcoins and other digital currencies are volatile and fluctuations in their price will have an impact on the Company’s Portfolio Value. In addition, there is no assurance that cryptocurrencies will maintain their long-term value in terms of purchasing power in the future or that the acceptance of digital currency payments by mainstream retail merchants and commercial businesses will grow. In the event that the price of cryptocurrencies declines, this would likely adversely impact the value of the Portfolio.
The further development and acceptance of the Bitcoin network and other digital currencies, which represent a new and rapidly changing industry, are subject to a variety of factors that are difficult to evaluate. The slowing or stopping of the development or acceptance of the Bitcoin network may adversely affect the Company.
Cryptocurrency Exchanges Risks
Cryptocurrency exchanges are electronic marketplaces where exchange participants may trade, buy and sell cryptocurrencies based on bid-ask trading. The largest cryptocurrency exchanges are online and typically trade on a 24-hour basis, publishing transaction price and volume data.
There is a risk of cryptocurrency exchanges experiencing technical difficulties, being hacked or shut down, with the consequence of clients of such exchanges (including, if permitted by ASX, the investment entities proposed to be managed by the Company) losing their cryptocurrencies.
The cryptocurrency exchanges on which the cryptocurrencies trade are new and largely unregulated.
Many Bitcoin exchanges have been closed due to fraud, failure or security breaches. In many of these instances, the customers of such Bitcoin exchanges were not compensated or paid for the partial or complete losses of their account balances of Bitcoins in such Bitcoin exchanges. While smaller Bitcoin exchanges are less likely to have the infrastructure and capitalisation that make larger Bitcoin exchanges more stable, larger Bitcoin exchanges are more likely to be appealing targets for hackers and “malware” (i.e., software used or programmed by attackers to disrupt computer operation, gather sensitive information or gain access to private computer systems).
The Company intends to insure its operations in accordance with industry practice. However, in certain circumstances the Company’s insurance may not be of a nature or level to provide adequate insurance cover. The occurrence of an event that is not covered or fully covered by insurance could have a material adverse effect on the business, financial condition and results of the Company.
Insurance of all risks associated with the Company’s business may not always available and where available the costs may be prohibitive.
Financial Market Regulation
Changes in market regulations may limit the Company’s capacity to trade and adjust its Portfolio. Additionally, increased disclosure and compliance costs may decrease returns.
Investing through the Company may result in higher after-tax returns than investing independently in the same stocks held by the Company. Furthermore, the acquisition and disposal of Shares will have tax consequences specific to the investor. All potential investors in the Company are urged to obtain independent financial advice about the consequences of acquiring Shares from a taxation viewpoint and generally.
To the maximum extent permitted by law, the Company, its officers and each of their respective advisors accept no liability and responsibility with respect to the taxation consequences of investing in shares offered by BitFunds.
General economic conditions, introduction of tax reform, new legislation, movements in interest and inflation rates and currency exchange rates may have an adverse effect on the Company’s investment activities, as well as on its ability to fund those activities.
Share market conditions may affect the value of the Company’s quoted securities regardless of the Company’s operating performance. Share market conditions are affected by many factors such as:
(i) general economic outlook;
(ii) introduction of tax reform or other new legislation;
(iii) interest rates and inflation rates;
(iv) changes in investor sentiment toward particular market sectors;
(v) the demand for, and supply of, capital; and
(vi) terrorism or other hostilities.
The market price of securities can fall as well as rise and may be subject to varied and unpredictable influences on the market for equities in general and industrial stocks in particular. Neither the Company nor the Directors warrant the future performance of the Company or any return on an investment in the Company.
Any future determination as to the payment of dividends by the Company will be at the discretion of the Directors and will depend on the financial condition of the Company, future capital requirements and general business and other factors considered relevant by the Directors. Importantly, dividends may only be paid out of profits. No assurance in relation to the payment of dividends or franking credits attaching to dividends can be given by the Company.
The Company has a dividend policy whereby it intends to pay a consistent dividend stream to investors. These dividends will be based on net profits after tax, retained earnings and the availability of franking credits.
Additional Requirements for Capital
The Company’s capital requirements depend on numerous factors. Depending on the Company’s ability to generate income from its Portfolio, the Company may require further financing in addition to amounts raised under the capital raising. Any additional equity financing will dilute shareholdings, and debt financing, if available, may involve restrictions on financing and operating activities. If the Company is unable to obtain additional financing as needed, it may be required to reduce the scope of its operations and scale back its Portfolio investments as the case may be. There is however no guarantee that the Company will be able to secure any additional funding or be able to secure funding on terms favourable to the Company.
The above list of risk factors ought not to be taken as exhaustive of the risks faced by the Company or by investors in the Company. The above factors, and others not specifically referred to above, may in the future materially affect the financial performance of the Company and the value of the Shares offered by BitFunds.
Therefore, the Shares offered by BitFunds carry no guarantee with respect to the payment of dividends, returns of capital or the market value of those Shares.
Potential investors should consider that the investments provided by the Company are highly speculative and should consult their professional advisers before deciding whether to apply for Shares offered by the Company.