Winklevoss twins to offer Bitcoin ETF

> Anyone know how to estimate whether there's enough liquidity in existing bitcoin exchages to support it, and allow them to track the price accurately in the ETF?

Yes. The daily volume in the ETF must be a small fraction of the daily volume in the underlying asset, and it must be possible to both buy & short the underlying.

So net net: An ETF is incredibly premature. This is the Winklevii taking serious advantage of folks who don't understand ETFs in depth.

Edit: Clarified the relative quantity.

If the ETF grows in size and its net asset value must assume a large fraction of the outstanding bitcoin stash or towers over the daily trade volume, we could have some issues here...

Low transparency tends to lead to high transaction costs, low liquidity, and high volatility in a market -- which is pretty much what's going on with BTC right now. There's also very limited commercial exchange volume, from what anyone can tell, further hindering liquidity. Seems like it'd be pretty hard to earn a decent return from this ETF.

I'll be watching this one from the sidelines. Definitely not participating.

The price of ETF and the price of underlying are simply correlated as a result of market forces. There's no "tracking" between the two. The only "tracking" happens to the Net Asset Value of the ETF, which the quantitative fund manager must aim to follow the underlying as much as possible. In this case, by holding 100% of asset in Bitcoin in this trust, the NAV tracking can be assumed to be perfect.

The liquidity doesn't matter if the ETF has a fixed pool (with regular creation and redemption). The volume of the ETF can exceed the volumes of all Bitcoin exchanges combined, because the investors are actually trading paper - certificates that represents some units of the trust, which holds Bitcoin.

If creation needs to happen, the investor needs to give the underlying to the trust in exchange for units. In this case, only BTC changes hands.

If redemption needs to happen, the investor will receive the underlying from the trust. In this case, only BTC changes hands.

So, at the trust's side, it's entirely possible to eliminate all fiat transactions after the ETF is issued. All future changes in units will happen with the underlying only, which is Bitcoin. This is similar to and consistent with most of the stock indices ETFs out there in the market.

An analogy: The liquidity of gold ETFs can obviously exceed the liquidity of physical gold. Actually it already does (for retail investors).

I didn't read the SEC filling. But there are 2 major kinds of ETFs: those which trying to accurately track the index and those which tracking daily movements (usually leveraged). Many ETFs tracking commodities are of the second type, so buy&hold investors will lose money by buying them.

"Someone on one of Team Macro Man's chats recently described this ETF as a Rorschach test of what people think of digital currencies. That is utterly wrong: it's an IQ test. Bitcoin is anonymous, untaxed (for now) and quite liquid in and of its own right despite all the complexities of a cryptocurrency. A bitcoin ETF is taxed, has fees, may or may not be liquid at all. So, this is really a test: do you want to facilitate the exit of the Winkelvii from an investment at inflated levels which they will soon be taxed upon or do you want to sit this hand out? "

Macro-man gets it.

The thing that really jumped out at me was the proprietary "Security System" for holding keys developed by Winklevoss IP LLC and licensed to the Sponsor.

...and the fact that the Sponsor is not liable for security-related losses except in the case of gross negligence, which I don't imagine would cover advanced theft/hacking. (I am not a lawyer.)

Something close to 10% of all bitcoin currently in circulation have been stolen— it's a widespread problem and there are presently zero really robust solutions currently in use by bitcoiners. I eagerly await more data about their proprietary setup.

As you have said, the creation/redemption mechanism will enable fair price discovery. The inability of shorting the underlying doesn't matter here, because if the ETF can be redeemed freely, an investor can buy the underpriced ETF and redeem immediately and sell in the spot market.

The only difference of this from actually shorting is the time. During the time of this operation, there may be adverse movement in the underlying price making the arbitrage too risky. It's true that fully efficient arbitrage may not happen.

But saying that there's no mechanism to maintain equilibrium price of the ETF is entirely wrong. If the ETF price is $60/BTC and the spot is $85/BTC, there's a huge incentive for investors to buy ETF and redeem and then sell in the spot market, even if it takes days. People who already have both BTC and USD in their hands can also quickly increase their BTC holdings, for free!

Therefore, the ability to short underlying simply doesn't matter, as long as ETFs can be created and redeemed fairly freely.

not sure I agree with your detective work.

If the price of the ETF is too low... you can buy the ETF, take it to the ETF sponsor, they will convert it into the underlying, you can then sell the underlying.

Ability to short = ability to borrow. If you can borrow Bitcoins from someone, you can sell them, and then you're short. While there may not be an active lending market, in principle no reason it couldn't be done.

A lot of times the ETF sponsor or a related entity will participate in arbitrage to keep prices in line... they might have ability to lend to each other. In fact, that may be an important way the Winklevii expect to make money. (in addition to the fact their Bitcoin hoard is more valuable if it's more liquid and more accepted by traditional investors)

Now, if the underlying is illiquid and doesn't have good price discovery, the ETF will probably be in the same situation. In the example above, if you're not darn sure you can sell the underlying pretty quickly at a higher price than the ETF, you're not going to attempt the arb. So if the market is illiquid, the arbs don't step in until the spread is more egregious.

If I'm reading this right, doesn't that mean a "basket" at a time, or 10k BTC increments?

It's a fund that invests in Bitcoins that trades like a stock on the stock exchange. If I'm reading this correctly, one share will represent 0.2 Bitcoin.

A normal, unleveraged, passive ETF represents an underlying investment or basket of investments, like gold or the S&P 500, or in this case, Bitcoin.

At any point, people can go to the sponsor and exchange the underlying for the ETF. So if the price gets out of whack with the underlying, people step in and buy one and sell the other, to bring prices back in line.

So it has a lot of the benefits of publicly traded stock, easy/cheap to trade, put in your brokerage account etc.

It does add a layer of fees (not specified yet as far as I see in prospectus on p. 40). You can just buy Bitcoin yourself, you avoid the fees, but investment advisors, retirees, may find it worth the usually small fee (like 0.1% for the SPY, probably not quite that low for this ETF).

ETFs, used properly, are great - liquidity, tax efficiency, ultra low cost.

However, as Gandhi said, "The greater the institution, the greater the chances of abuse."

The problem here is, if the underlying Bitcoins are illiquid, in a volatile market, the price of the ETF can diverge a lot from the price of the underlying.

Basically, unless you know what you're doing

- Stick with big sponsors, like Vanguard, iShares, State Street (SPDRs)

- Index ETFs only (not actively managed)

- No leveraged ETFs

- Liquid underlying securities, actively traded ETFs (e.g., probably doesn't apply to this ETF)

An ETF is basically a bunch of money pooled in to invest in diverse stuff such as stocks, bonds, etc.

The thing is, they can be traded like stocks and their value depends on the total value of all the stuff they're holding.

If you invest in ETF it's generally safer since your investment doesn't depend on one stock (putting eggs in one basket) but you're still affected by the market.

Overview:

An Exchange Traded Fund or ETA was originally a way to buy an index or basket of funds.

Say you wanted to buy Standard and Poor's top 500 stocks. As an individual investor, you'd would need a lot of money and would pay a lot of fees to buy up all 500. Then if some stocks were added and others were removed from the index, you would have to pay to get in and out of those.

Enter the ETF ticker symbol SPY. If you buy it, you own a single stock that reflects the composite value of the Standard and Poor's top 500.

ETFs are generally cheaper than mutual funds.

Common ETFs:

DIA is the Dow Jones index, it is only the biggest/"safest" blue chips.

RUT is the Russel 2000 which is a larger number of smaller than SPY stocks.

There are now ETFs for everything. GLD for gold, SLV for silver. I'm pretty sure if you wanted to buy cows via ETFs you could do it.

ETF Negatives:

There is a lot of debate on the precious metals ETFs because there is a LOT more paper being traded than known world supply of Gold or Silver. If everyone called it in, there would be a lot of unhappy people holding paper instead of metal.

My opinion on a bitcoin ETF:

Bitcoin is bitcoin. Unless you want to say that you are starting an ETF that represents a diverse amount of exchanges and in so doing lowers spread risk, then there is really no technical reason for this ETF being founded.

However, if you think that the less technically savvy stock traders in the world might not be able to buy bitcoin because they do not know how but do know how to trade stocks, then you could act as an easier means to the value store they wish to hold.

This is likely what they are up to, and I think it'll work for a while.

I don't understand how this would be the case. Not challenging your assertion. I literally don't understand.

My understanding was that ETFs are usually intended to track the underlying commodity, not the other way around. In fact, they are frequently backed by the commodity itself of course (sometimes leveraged. Sometimes not).

So, to that extent pricing should still be pegged to Bitcoin, which would mean that supply and demand on the exchanges should be the biggest determinants of price/discovery. If anything, an ETF would seem to obfuscate the price given the difficulty of tracking the underlying commodity that can occur with some ETFs.

So, in my mind, for an ETF to even accurately track the commodity, the liquidity, price discovery, and other market mechanisms for efficient trading of that commodity itself must already be in place. Only then would the ETF serve as a proxy. Otherwise, layering another abstraction would seem to add more confusion than clarity.

The same reasons there are other ETFs for commodities like gold, etc.

As someone outside, I have the impression that buying bitcoins is a bit of a pain, plus once I have them I have to keep track of them.

Buying into the market through my already existing brokerage account is much more user friendly especially for non tech people. Bitcoin value is highly speculative at this point, and that means a lot of people will be wanting to get a piece of the action without really understanding how it works. Asking why they don't just buy some directly is kind of like asking why you'd buy a gold ETF instead of buying gold.

Small retail investors that see Bitcoin in WSJ, FT, etc. sit around and say "Hey! I want some of that," and their neighborhood financial planners don't know enough about it (and are not incentivized) to get them to directly buy Bitcoins. An ETF would give exposure to Bitcoin to these Baby Boomer retirement types, of which there are many.

Same argument can be made for the gold and silver ETF's but they are wildly popular.

Because that would allow larger, regulated funds (like pensions and university endowments) to invest in them, as they're generally restricted to securities listed on credible exchanges.

Good news for bitcoin owners, as that means more potential buyers and thus a higher price.

I am a bit worried though, about workers who may lose out because a manager got too caught up in the hype.

Investing in bitcoins by buying bitcoins means choosing an exchange, funding an account, holding the bitcoins, worrying about the security of the bitcoins being held by whatever exchange you've chosen or the security of whatever computer you're holding them on...

Investing in a bitcoin ETF means clicking a buy button in your online brokerage account. You invest with minimal effort and minimal risk aside from your investment losing value. Someone else -- a regulatory system and set of agents acting on your behalf -- takes on all the responsibility for enacting and securing your investment.

Buying shares on a publicly traded and regulated market (like NYSE), through your usual stock broker, would be a lot safer and more convenient for many investors than the current options available for investing into bitcoin. You don't have to worry about the unreliable exchanges, and semi-shady payment processors like Dwolla.

It makes betting against these items easier.

Converting USD to BTC is still not trivial.

plus it turns an underground darknet into something taxable!

thus fully transforming an anti-establishment force into a plaything for speculation and extraction for the 1%.

Could also have something to do with Mt. Gox registering with the US Treasury Dept as a money services business.

http://www.coindesk.com/mt-gox-registers-with-fincen-as-a-mo...

it was dropping before the announcement. this stabilized it

It's difficult to invest Bitcoins since the expected rate of return of holding them exceeds the rate of return of almost all legitimate businesses. Although I haven't read the registration document, the idea of an ETF is to simply hold the underlying asset and pass through its appreciation to investors.

They'll be purchasing and (and most likely) holding Bitcoin for prolonged periods

GLD, the largest gold based ETF, holds bullion. Gold bullion trades in the unregulated OTC markets.

If the Winklevii own "1% of all Bitcoins," I would hope that they know how to do split key sharing and store their Bitcoins on paper.

I would hope.

Why not? I found it particularly interesting, a new step toward making Bitcoin more official of sorts.