What is more profitable? Venture capital funds or playing dice? We’ve done some serious research and you’ll be surprised by the results.
What is Venture Capital?
Venture Capital is a form of financing provided to small, usually early-stage, emerging firms, that seem to have a good business idea for sustained long-term financial growth. Venture capitalists invest in those kinds of companies in hopes to get a nice return, usually a 3x one.
How does it work?
An investor can directly choose into which companies to invest or can choose a venture capital fund. Let’s imagine you would like to invest into a venture capital firm, hoping their expertise shall bring you a nice return of your hard-earned profits. They invest into some brilliant companies and after taking usually 2% on committed capital per year (that is 2 million, per year, if you invest about 100mln) as commission and 20% of the profits earned.
Why do people invest in venture capital funds?
There is a belief that, although being a riskier type of investment, venture capital funds bring more profit than investing into, for example, public stocks, which in turn can bring you in average an 8% return per year. In real life, the profitability rates are lower because 75% of companies venture capital fund invests into simply do not deliver any significant profits and 40% of them simply go bust. If one would consider a 12% annual return to be a profit then 95% of VC companies in US are a failure, according to Shikhar Ghosh, similar percentages are given by Tomer Dean, the CEO of Bilush. Also we need to take consideration, that venture capital rate of returns are also dependent on the economies of the countries and because of that, the annual return rates are quite volatile according to Cambridge associates with American venture capital returns often turning out to be below 0% during the recession.
What are the calculable risks?
According to Shikhar Gosh 75% of venture capital-backed companies do not return investors’ capital, with 30% to 40% of the companies getting their assets liquidated, meaning the investors lose all their cash. Meaning your Risk of Ruin as a direct Venture Capital investor is 30%-40%, with a further 35% to 45% chance of getting financial losses, 10% to 15% chance of getting a small, less than 12%, annual profit and only a 5% chance of making an annual return of 12% per year. Above mentioned risks are related to direct investments into new start-ups. Venture capital firms sometimes do manage to get a 10% return but are associated with 2% annual fees (regardless of the return of investment) and they do bill you for 20% of the profits if they have it. Quite a plenty of them also makes close to 0% in profits. A smaller number of those companies report losses on capital investments.
Possible Future Risks
One could say that now we do have a stable economy, but there are strong signs that the main global venture capital players like the US, Germany and China are heading towards a fall in income. With a global recession in sight, financial wars between US, China, Russia and the EU there are very little odds, that venture capital is going to bring more profit. For direct investors into start-ups, the odds seem to be even lower, as the risk for a company to go bust during early stages is over 40% as well and that is during a financial boom. There are also possibilities to invest into the property market, but we all know how it turned out in 2008 for Europe and the US during the big Housing Crash with the property prices going down (if you’ve paid $8mln for the house it could’ve gone to $6ml, meaning you losing 25% of the value instantly) and another Housing crash might be heading for the US and Europe as well, it already hit Dubai and Singapore. Because of the recession most IPO’s shall also bring negative return values. There is also an option to go into the ICO market, but the risks there are even greater with 80% (!) of the whole ICO launches turning out to be a scam, according to the New York-based Satis Group LLC and with a lot of hacking involved ICOs have now become a landmine full territory. The above-mentioned investments also include a lot of market research and bureaucracy hassle for the potential investor.
Other investment methods for consideration
Because of the current volatile situation with a negative trend, other investment methods should be taken into consideration, the ones with a risk that can be calculated in a mathematical way. For example – the martingale, which is used in gambling e.a. sports betting, roulette and dice. The main idea behind it is to double your bet every time you lose, winning back the amount you’ve lost in any loss chain and returning to the initial bet amount, so you could make a small but constant profit from every winning bet. Let’s take the game of dice as an example because it utilizes high betting speeds without you needing to wait for another sporting event to happen, or the roulette wheel to stop spinning, with the game of dice you can wager up to 8 times per second and you can also use different multipliers as well. Key elements of the game can be found here. Why is it a profitable strategy and how to use it with minimum risks?
Like all forms of investment, it does have a certain risk, but it is manageable, unlike the economies.
For example – you have 8400 dollars, and you wager 1 cent per bet. If you lose 0,01 of a dollars you bet 0,02 dollars, and you win 0,04$ for the game, meaning that you would still win 0,01$ if you’ve lost once. To lose 8400$ with a house edge of 1% you have to lose 23 times in a row, that means the odds of it are 0,008254%. If you gamble at 8 times per second you get 28800 wagers per hour, meaning the chances that you’ll go bust are around 10% per day , but you shall make a 4,07% of a return of investment, which shall put you around what Harvard earns from their venture capital investments per year, and if you consider the inflation in US to be at 1.7%, that means that you can earn 4,07%/2,4% or 1,67x return of what investing into Harvard venture capital fund . The annual rate of such a martingale strategy shall be around 4,07% by 365, that would be around 1487,72%, but the chances of getting more than 23 wager losses are as high as 3,11 times per month. Because of that let’s treat it as an investment and lower the risks a notch.
How to lower your risks in martingale
To lower your risks you have to use bet values that could lead to better risk/profit ratio. If you bet less than 0,01 it should work the trick.
To do so it is recommended to use cryptocurrencies. Not only they have different hard cash prices, meaning more flexibility for your bankroll value, but cryptocurrencies can also be split up to a value of 0,00000001, called a satoshi (1 coin = 100 000 000 satoshi). The smaller your bet amount is compared to your bankroll, the smaller the risk becomes. Using different valued crypto tokens you can play the game with the same bankroll, but valued at different prices, for example, a bankroll of 8400 DOGE coins (a type of cryptocurrency) is equal to 23.50$, but the same number of bitcoins equals to 840000$.
An important factor you should keep in mind, that having a correct bankroll/bet proportion can significantly lower your risks. To make use of betting in cryptocurrency, one should register with an online casino providing these games. Dice games are offered by many players like YoloDice, Luckygames, Stake.com, BitDice, Primedice, MintDice, etc. are the most popular. The most important numbers you need to know when choosing your optimal game provider are the House Edge, maximum/minimum bet value and the speed the dice is rolled, the latter is of the most importance, as the more often the dice is being thrown, the more profit can be made. Calculations being given in this post are made using the numbers given by BitDice, as it rolls the dice at 8 rolls per second (although others are catching up, they are still a bit slower). Here, you can read on our extensive research on how to fast the dice is being rolled across different game providers link.
Imagine you have a bankroll of 2148 tokens and your bet size is 200 satoshi, with the betting speed of 8 bets per second, the top speed for online Dice services at the moment, mean that if you run a game for a year you’ll make around 105120000 bets, and if you are willing to have an annual return of around 12%, with a chance of 68% you will reach your goal. With the same bet size and strategy and approximately the same annual return. but with a bankroll of 2000, the chances are lower and around 37%. How come, one would ask? If you bet 200 satoshi and you lose the bet, your next bet when using the martingale strategy should be 400, if you lose again it should be raised to 800 and so on. If you lose 18 times in a row your bet shall need to be equal to 1073.741822 tokens and if you lose that bet you won’t be able to go further with your game, as your bankroll will be too small to double the bet, as you’ll need twice as much (2147.483644). That means that having a bankroll that is higher than 2000 tokens by 148, your risks become twice (!) as low. Now, let’s compare the martingale strategy in dice with angel investing and venture capital funds. The chances to make an annual profit of 12% or higher are about 5% in the case of angel investing and VC funds and 40% of such investments result in investors losing all of their money, 75% chance of making no profit. Compared to martingale in dice, those types of investment provide less profitability, although the risks are somewhat higher.
If a 32% risk chance is too high, and you would like to play it safer, then using the previous values, apart from lowering the bet to 100 satoshi instead of 200, you’ll make a return of 5,82%, but your chances not to lose increase from 68% to 84%. If you would be using 1 satoshi (0,00000001 of the crypto token), your chances to lose would be so little, that you would have to play the game, on average, for 376,72 years. That means that you, as an investor, could choose from a broad range of risk/profit ratios and crypto tokens, to test your strategy and to eventually use it to make a nice return on investment.
Because of the aforementioned, one can conclude that playing martingale in a smart way can be considered to be an investment with calculable risks, and therefore better than investments into emerging companies during a volatile market.
Angel investing can be profitable, as well as giving your money to a venture capital firm, but the risk of losing your hard-earned money is quite high and the chance to make a 12% annual return or more is merely 5%. Investments into publicly-traded stocks could be a safer option, but only when the economy is growing. During the years of recession, those investments would have a high chance of being unprofitable and there are strong signs that the global economy is in fact heading towards one. The same accounts for the properties market. In such a volatile environment the investors should turn to more calculable investment methods, for example using the martingale strategy in sports, cryptocurrency tradings, roulette and other situations, where the risks and profits can be mathematically calculated. One of the most profitable ways to use the martingale strategy is the online game of dice because the maximum number of bets that can be made nowadays is 8 per second (such a figure is provided by BitDice, with other online casinos like YoloDice, Primedice, etc to catch up soon). Using these kinds of calculations you can decide which strategy to use depending on the annual return you are expecting. A well-calculated bankroll leads to 12% annual profits with a lower risk chance than in angel investing and investing in-to VC funds.
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In our next articles we shall cover the aspects of increasing the profits earned by using martingale strategy even more by reinvesting and will dig deeper searching for your ideal multipliers. Stay tuned!