They say that there is an ETF strategy for just about anything. Now that Bitcoin has gotten a lot of coverage there is news that the famed Winklevoss twins, made famous by a legal fight over Facebook, Inc. (NASDAQ: FB), are apparently proposing an exchange traded fund for Bitcoin. A filing from Monday night with the Securities and Exchange Commission was made under the name Winklevoss Bitcoin Trust, registering 1 million shares worth $20 million.
The SEC filing showed that each share comprising the initial Baskets of shares represents 0.20 Bitcoins. The price of Bitcoins is based on a weighted average of the average of the high and low transaction prices of Bitcoins on June 27, 2013 on three major Bitcoin Exchange sites: Mt. Gox K.K., Bitstamp and BTC-e. No ticker has been selected, not has an exchange.
To 24/7 Wall St. this sounds like a really dumb idea. It seems about as serious as that “Gun ETF” we loosely proposed earlier in 2013 when there was so much hype and controversy around gun control. The Winklevoss twins own a slew of Bitcoins and this seems like a very self serving attempt to validate a controversial virtual currency. The risk factors in the SEC filing are literally 18 pages.
Frankly we will leave the reading of the Bitcoin ETF prospectus up to you. The full SEC Filing is here, but here are just some of the “Risk Factors” which are worth looking at:
- The loss or destruction of a private key required to access a Bitcoin may be irreversible. The Trust’s loss of access to its private keys or its experience of a data loss relating to the Trust’s Bitcoins could adversely affect an investment in the Shares.
- The slowing or stopping of the development or acceptance of the Bitcoin Network may adversely affect an investment in the Shares.
- Currently, there is relatively small use of Bitcoins in the retail and commercial marketplace in comparison to relatively large use by speculators, thus contributing to price volatility that could adversely affect an investment in the Shares.
- The administrators of the Bitcoin Network’s source code could propose amendments to the Bitcoin Network’s protocols and software that, if accepted and authorized by the Bitcoin Network’s community, could adversely affect an investment in the Shares.
- If a malicious actor or botnet obtains control in excess of 50 percent of the processing power active on the Bitcoin Network, such actor or botnet could manipulate the source code of the Bitcoin Network or the Blockchain in a manner that adversely affects an investment in the Shares or the ability of the Trust to operate. Wait a minute, WHAT?
- The Blended Bitcoin Price is based on the daily average of the high and low trading prices on various Bitcoin Exchanges in the Bitcoin Exchange Market chosen by the Sponsor. Pricing on any Bitcoin Exchange on the Bitcoin Exchange Market can be volatile and can adversely affect an investment in the Shares. Sorry, but again, WHAT?
Our take is really simple. A virtual currency works in theory. The problem is that at the end of a day, a buck is worth a buck. The global currency markets are the most liquid market in the world. If you want a currency ETF, there are better options available than this like actually buying the currency or other liquid exchange-traded products tracking major currencies.
Regulators have made it pretty clear that they are not exactly fans of Bitcoin. Oh and by the way, just recall that Mt.Gox recently suspended dollar distribution out of Bitcoins due to technical matters. Frankly, a gun ETF would be easier to pull off here.
There are many ways to lose your money in investing. Perhaps one of the easiest ways to lose money is simply by not understanding exactly what it is that you have invested in. It is our opinion that most of the investing public will never really understand this “security.”