This is not a way to "grow Bitcoin". It's a way for a big holder to dump a lot of Bitcoins without, they hope, crashing the market.
The terms are awful: "The Shareholders’ limited rights of legal recourse against the Trust, Trustee, Sponsor, Administrator, Trust Agency Service Provider and Custodian and the Trust’s lack of insurance protection expose the Trust and its Shareholders to the risk of loss of the Trust’s bitcoins for which no person is liable."
"The Trust will not insure its bitcoins. The Custodian will maintain insurance with regard to its custodial business on such terms and conditions as it considers appropriate in connection with its custodial obligations and will be responsible for all costs, fees and expenses arising from the insurance policy or policies. The Trust will not be a beneficiary of any such insurance and does not have the ability to dictate the existence, nature or amount of coverage. Therefore, Shareholders cannot be assured that the Custodian will maintain adequate insurance or any insurance with respect to the bitcoins held by the Custodian on behalf of the Trust. Further, Shareholders’ recourse against the Trust, Custodian and Sponsor under [New York] law governing their custody operations is limited. Similarly, the Shareholders’ recourse against the Administrator and Trust Agency Service Provider for the services they provide to the Trust, including those relating to the provision of instructions relating to the movement of bitcoins, is limited. Consequently, a loss may be suffered with respect to the Trust’s bitcoins which is not covered by insurance and for which no person is liable in damages."
I've never seen terms this unfavorable to shareholders in a prospectus before. They're taking on less liability than Mt. Gox took on. If the Bitcoins mysteriously disappear, no one is liable.
You must be right when you say that big players will be able to sell a lot of bitcoins with a measured market impact. That's closely related to an improved liquidity on the markets which will help grow Bitcoin.
Otherwise, no large exchange insures bitcoins stored in their cold wallets - which will be the case here. The risks are not well understood/priced yet...
If the SEC approves it, this would be great news for bitcoin.
Assuming the ETF is sufficiently liquid, it would allow:
- easy shorting of bitcoins which facilitate price discovery
- lower transaction costs. The cheapest and most liquid exchanges still charge .2% per transaction + spread. Most (all?) of them charge you for getting cash in our out of their platform. Buying shares of an ETF would cost just spread + transaction cost charged by your broker which should be much lower (.0035 per share on Interactive Brokers for example)
- easy hedging of a real bitcoin position. Let's say you hold a large fluctuating position in bitcoin that would like to hedge in USD. You could continuously convert all your BTC to USD or go long/short the ETF which is much cheaper.
Not sure this is true. The registration documents claim shares can only be traded in 50,000 share blocks (called "Baskets", approx worth $1 million at launch) and you have to be a registered broker-dealer (with a bunch of other rich-people-problem restrictions) to trade.
Am I missing something? Or will broker-dealers turn around and sell single shares to the public? Or these statements don't mean what I think they mean?
APs are responsible for creating and dissolving trust shares in order to keep the share price close to asset value. The shares are traded on an open market, meaning retail investors can trade them. What retail investors can't do is take a bunch of BTC, give it to the trust and get USD back, or vice versa.
> lower transaction costs. The cheapest and most liquid exchanges still charge .2% per transaction + spread. Most (all?) of them charge you for getting cash in our out of their platform. Buying shares of an ETF would cost just spread + transaction cost charged by your broker which should be much lower (.0035 per share on Interactive Brokers for example)
The ETF has an associated Sponsor's Fee, to be paid in Bitcoin, that is not yet known. Also, a few relevant sections from the prospectus:
> Extraordinary expenses resulting from unanticipated events may become payable by the Trust, adversely affecting an investment in the Shares.
> In consideration for the Sponsor’s Fee, the Sponsor has contractually assumed certain operational and periodic expenses of the Trust. See “Business of the Trust—Trust Expenses.” Extraordinary expenses of the Trust (e.g., expenses relating to litigation) and any other expenses that are not assumed by the Sponsor under the terms of the Trust Agreement are borne by the Trust and paid through the sale of the Trust’s bitcoins. Any incurring of extraordinary expenses by the Trust could adversely affect an investment in the Shares.
And:
> The Trust’s transfer or sale of bitcoins to pay expenses or other operations of the Trust could result in Shareholders incurring tax liability without an associated distribution from the Trust.
> Each delivery or transfer of bitcoins by the Trust to pay the Sponsor’s Fee or other expenses will be a taxable event to Shareholders. This or other operations of the Trust could result in Shareholders incurring tax liability without an associated distribution or dividend payment from the Trust. Any tax liability could adversely impact an investment in the Shares and may cause Shareholders to prepare and file additional tax documents. See “United States Federal Income Tax Consequences—Taxation of US Shareholders.”
I don't see how anybody actually taking the time to read the prospectus could come to the conclusion that this ETF will provide a lower cost vehicle for investing in Bitcoin.
Transaction costs have nothing to do with the sponsor's fee.
If you want to "invest" in bitcoin and by that I mean buy some bitcoins and hold them for years, sure, you shouldn't buy an ETF. If you want to trade bitcoins, you're better off trading a liquid ETF than transacting on Coinbase or Bitstamp.
You can have a substantial sponsor's fee of 1%. Let's say you're comparing the ETF to Coinbase - they have a transaction fee of 1% - then as long as you're making more than one transaction a year, you'd rather trade the ETF.
> Transaction costs have nothing to do with sponsor's fee.
This is true, but choosing a particular security based on transaction costs alone can be penny wise and pound foolish. Savvy traders are obviously cognizant of the pernicious effects of high transaction costs, but you don't win as a trader by minimizing transaction costs; you win by delivering risk-adjusted returns. If the structure of a security produces lower returns or adds a high level of unnecessary risk, the transaction cost savings can be moot.
> If you want to trade bitcoins...
I'd argue that it's premature to suggest this is a realistic vehicle to "trade" Bitcoin until we see how well it actually tracks the Bitcoin market. Obviously, it needs to get the green light from the SEC before anyone has the opportunity to do that.
> You can have a substantial sponsor's fee of 1%. Let's say you're comparing the ETF to Coinbase - they have a transaction fee of 1% - then as long as you're making more than one transaction a year, you'd rather trade the ETF.
No, that's not necessarily true. Again, read the prospectus. Unless you fully understand and are comfortable with the risks associated with the structure of this ETF, the possible consequences of how the Sponsor's Fee and other potential expenses are paid, and the potential conflicts between the parties involved, one might have very good reason to chose a service like Coinbase over the ETF.
I don't think it matters. Per blockchain.info, the volume of Bitcoin transactions is in gradual decline over the last year and seems stuck at about $50m USD/day, despite many more merchants offering to accept payment. Market cap is fairly steep decline and hash rate has been leveling off.
It just struck me that the market cap trend seems to have gone down in very similar fashion tot he price of oil over the last 6 months. If enough people who bought bitcoin did so primarily as a hedge, then you'd expect it to loosely track a basket of popular commodities like oil and gold (the price of which looks quite similar to Bitcoin's market cap over the last year IMHO - http://goldprice.org/). Can't wait for Google to get their automatic statistician tool online - I don't like statistics well enough to want to use R regularly but I would love a tool that I can use to quickly measure the coupling between different datasets.
The amount of bitcoins being spent is a function primarily of the amount of bitcoins earmarked for spending by the userbase, rather than the number of deals closed by a payment processor's sales team.
It's not about the liquidity.
It's not about shorting.
It's not about leveraging.
It's a little bit about ease of investing.
It's a lot about the fact that once this is available, hordes of brokers can make commissions by recommending their clients buy into this ETF.
By being in the general markets, bitcoin will finally have mass access to leveraged trading. The result will be that bitcoin will finally see a 'true bubble'. While the bitcoin price has been decreasing, it's not really been a bubble as the popping of a bubble is usually twice as fast as its inflation, the opposite of which is true in the current bitcoin decrease.
A good resource on the connection between leverage and financial bubbles is Kindleberger's "Manias, Panics, and Crashes"
You really can't lever up equities all that much. Mom & pop can margin up to 50%. Even professional investors are quite constrained in how much leverage they can apply for outright bets.
Which is ridiculous, because an S&P500 index fund is a much less risky asset over 30 years than a 4-bdrm house on Maple St in Anywhere, Michigan, yet 20:1 leverage is available for the latter. Unfortunately the government favors homes as an asset class and has distorted the market with policy.
I'd much rather put $50,000 down on something like a 30-yr mortgage for $250,000 in a diversified index fund than do the same in a house. But alas this isn't an available product.
I'd much rather put $50,000 down on something like a 30-yr mortgage for $250,000 in a diversified index fund than do the same in a house. But alas this isn't an available product.
I agree with your point, but at the same time I'm not sure I'd want the irrational exuberance that we saw (and will see again) in the real estate market to start happening to equities!
Nonetheless I think the culture of bitcoin as it is currently is more leverage averse than normal which is why the decline this year has not been a precipitous one. My point being that the up and down dynamic of bitcoin will start to change.
One thing sticks out as a red flag to me: they invented their own spot index (the Winkdex(R)) to price their NAV and that index includes BTC-e. BTC-e is a widely used site in the Bitcoin world, but no one knows who operates it or exactly where they are located (Bulgaria? Russia?). You would seriously base a large component of your index pricing an SEC regulated instrument on a number coming from unknown individuals who can not sign a contract or accept any liability? When people in the Bitcoin world always wonder "Why did X not include BTC-e?? How incompetent!" they never stop to think that there is no one on the other side that can pick up the pen.
> The Index Provider’s Winkdex formula provides a volume-weighted, exponential moving average market price by blending trading data from the three largest Bitcoin Exchanges by volume on a list of Index Provider-approved Bitcoin Exchanges.
> As of December 26, 2014, the eligible Bitcoin Exchanges include Bitfinex, BitStamp, BTC-e, CampBX and LocalBitcoins.
Needless to say, if BTC-e is not one of the three largest BTC exchanges, then it won't be included.
Assuming there's a way to verify every trade reported by BTC-e on the blockchain, shouldn't irregularities show up relatively quickly? More importantly, it seems that they do recognize that possibility: "Even in the absence of large trading fees and fiat currency deposit/withdrawal policies, price differentials across Bitcoin Exchanges remain; for example, bitcoins on BTC-e traded at a discount of approximately 0.9 percent relative to the average daily weighted price for bitcoins on BitStamp and Bitfinex during the week ended December 26, 2014. During the prior month, prices on BTC-e typically traded at a discount of between zero and five percent."
> Assuming there's a way to verify every trade reported by BTC-e on the blockchain
There is no way to verify the veracity of trades on any of these exchanges. The only part that touches the blockchain is deposits and withdrawals, and those are extremely hard to track.
I agree that including BTC-e on that list is a very odd decision, considering they have excluded OKCoin, Huobi, and other Chinese exchanges which make up the lion's share of the market (even ignoring the wash trading).
BTC-e has a reputation of being something akin to Liberty Reserve, in that they exist primarily to enable drug dealers, thieves, and anyone else with dirty money to obtain fiat no questions asked.
> Assuming there's a way to verify every trade reported by BTC-e on the blockchain
Trading doesn't happen on the blockchain, it can't, block chain confirmations are far too slow for trading. All trading on all exchanges happens off chain.
That's just being consistent with the reality of the Bitcoin market. BTC-e, whatever its structure, is one of the main Bitcoin exchanges, and as such it is necessary that it is represented in the index, else the index would present a distorted picture of the real market.
This could be one of the reasons the SEC hasn't approved the ETF for sale to the public. The first S-1 for this ETF is dated 2013-07-01, so it's not like the SEC hasn't had time to look at it. That said, there is a whole universe of bizarro exchange traded products in the US equity market so who really knows. I don't think the feedback from the SEC to the Winklevoss brothers has been made public.
Creation/Redemption means that if the price of the shares diverges from the true price of Bitcoin, you can convert Bitcoins into trust shares and vice-versa.
An amusing oversimplification, but an oversimplification nonetheless. They didn't view it as a "billon-dollar secret", but there's clearly something morally deficient about being contracted to work on something and then moving on with a clone of that something.
Doesnt the ETF also open the door to institutional funds that are normally restricted to specific assets? Seems to me that is the biggest advantage of a bitcoin ETF as it will open the gates to more capital for bitcoin investments.
This is exactly my thought as well. Not just for institutional money either. This makes it dramatically easier and simpler for retail investors (in both taxable and tax advantaged accounts) to get some exposure to BTC.
The main point of the vehicle is to make it easier to trade BTC by removing the need to acquire BTC directly and by allowing trading to occur on conventional financial markets.
It is difficult, for example, for investors to trade physical gold because it is difficult to acquire and store, difficult to trade in smaller amounts, and does not trade on conventional markets. Gold ETFs solve these problems.
The creation/redemption process is intended for market makers known as Authorized Participants (APs) to arbitrage differences in the ETF price and the underlying price. While, yes, you can sell bitcoins to the trust in exchange for shares of the ETF, you would then need to sell those ETF shares in the market. So in other words, you would only have liquidity if there were demand for the ETF. It's possible that there will be more demand for the ETF than for bitcoins simply because ETFs are more accessible.
Could those cash out holdings in the ballpark of the Winklevoss twins? Another comment put their holdings at about 100K BTC. I didn't think there were any exchanges that had near that sort of volume.
I see the down votes but I'm genuinely curious. I'm assuming the Winklevi stand to profit from this and hold a large number of BitCoins that would probably be hard to get liquidity from.
From looking at market volumes, I think a skilled group using trading software could probably sell a few million USD worth of bitcoin per week without giving up a huge edge.
But I agree that this is one of the few ways to get liquidity on a huge position.
huh? they're talking about starting this with 200k worth, I though (1M shares at 0.2 BTC each).
On Bitstamp right now "A market order to sell 200000.0000 USD worth of bitcoins right now would sell 639.80163 bitcoins and would take the last price down to 310.7300 USD, resulting in an average price of 312.5969 USD/BTC."
Ticker last is currently $315.15, so just dumping it on a public market orderbook would only cost you two tents of one percent.
One million would cost you 2% in market movement. Four million would cost you 10% in market movement.
So that gives you some boundaries on how much volume you're talking before "just press sell" is no longer a reasonable sales strategy.
"1M shares at 0.2 BTC each" is correct, but that's 200k BTC or roughly $60 million at current prices. The S-1 was originally drafted when BTC was at ~$100 back in June 2013.
I think it's really sad that Bitcoin trading ended up being so ridiculously expensive to trade that an ETF listed on traditional markets will drop the costs by an order of magnitude.
> In March 2014, it was announced that the twins had purchased seats on Richard Branson's Virgin Galactic shuttle using the profits they had made from Bitcoin. [1]
On April 3rd, 2013, there were 10,988,125 bitcoins in circulation[1].
10,988,125 * .01 = about 109,881 BTC.
109,881 * $320 (current market value of bitcoin) = $35,161,920.. not bad.
The price of bitcoin in April 2013 was about $138[2]... so if they bought all of them then (I think they got into bitcoin earlier than that so this is unlikely) they would have paid around $15,163,578 for them, so a return of approximately $19,998,342 (131%) from April 2013 to now.
If you have access to the dev console I highly recommend setting the max-width of the body to 40em. The text spans all the way across the screen by default.
What will definitely fall out is whatever fees the Winklevoss brothers decide to pay themselves. We don't know what those fees are though, because they haven't said. You can ctrl-f around in the S-1 for "sponsor's fee" and note that it's left blank in the filing.
I get gold trusts, like GLD -- transporting and storing and selling gold is a pain. But it's easy to buy and store Bitcoin using a service like CoinBase. Not to mention the fact that you'll be paying management fees.
I suppose if you wanted to put bitcoin in your IRA this would be helpful.
I honestly don't understand using a service to store bitcoins when a paper wallet using keypairs with offline-generated addresses is so readily available.
One of the aspects of Bitcoin that gives it value is cutting out third parties for storage.
> I honestly don't understand using a service to store bitcoins when a paper wallet using keypairs with offline-generated addresses is so readily available.
I honestly don't understand using a bank to store dollars when using a wallet is so readily available.
Do you not see the flaw in your thinking? People with large amounts of money don't want the responsibility of securing their own money themselves. Storing Bitcoin's despite what people may say, is not trivial for the average person.
I see no flaw in my thinking. I'm not the average person.
Perhaps people should get up to speed before using Bitcoin unless they want to lose their money. Storing btc with a third party is a great way to lose them.
The whole concept isn't ready for prime time. In my case, I lost a (fortunately) small hoard of BTC when I made the grievous error of backing up my wallet.dat file to a Synology NAS that was also using an open port to run my security camera server.
About 4 BTC in my case, but many people lost a lot more. I was definitely not individually targeted, and definitely did not make any of the usual novice mistakes. Since the Synology NAS systems are commonly used as backups for small and medium-level enterprises, they were (and are) exceptionally high value targets. In my case, I had a root exploit in the OS that allowed all kinds of malware to be installed by anyone who cared to scan the Internet at large for systems on port 5000.
Most of the publicity centered around trojan miner applications, but the same issue also exposed the entire file system. So, searching the exposed file systems for wallet.dat files was a trivial and obvious free lunch for the crackers, much more so than mining.
In retrospect, I think the biggest mistake was using the same port for things like the security camera server that is used for remote administration. Taking the time to learn how to use a nonstandard port would probably have kept this particular system safe. I can't blame Synology, really... just a bad threat assessment on my part. My thinking was that keeping the wallet.dat file off of any Internet-accessible Windows boxes would provide enough "security by obscurity," but we all know how that story usually ends.
MtGox is the chief example of a litany of skeezy & sketchy schemes associated with that could be, charitably, called badly done. Less charitable intepretations might be, "cons", or "fraud". Lots of that has shaken out, but the BTC community is rife with bad thinking.
I feel far more comfortable throwing a $100 payment at my stockbroker account for an ETF, knowing that several layers of reliable cutouts stand between my bank account and some seriously dodgy businesses.
And, frankly, I don't particularly feel like going through the dedicated work to secure & backup a bitcoin wallet, and I really don't feel like outsourcing that to a company which isn't already reputable and respected for being secure.
The actual value of the underlying assets may, of course, turn into dust and dreams like so many other assets - that's as risky as all get out, and COIN has a lot of direct risks - it's a VERY speculative ETF. That's just the nature of things. And, too, I'm not going all in on COIN, I diversify my assets as a risk hedge. COIN would strictly be a sideline for amusements & maybe some profit.
So the summation of this is, my fine trading account has a variety of services which serve to mitigate fraudulent behavior, and I will mitigate my risk vs. fraud by paying the trading fees & ETF fees, rather than assuming that risk directly on my systems.
One time this guy e-mailed them and then had to give up what ended being millions of dollars worth of his company, that's not the sign of people who are trustworthy.
> Bitcoins held by the Trust are not subject to FDIC or SIPC protections.
> The Trust is not a banking institution or otherwise a member of the Federal Deposit Insurance Corporation (“FDIC”) or Securities Investor Protection Corporation (“SIPC”) and, therefore, deposits held with or assets held by the Trust are not subject to the protections enjoyed by depositors with FDIC or SIPC member institutions. The undivided interests in the Trust’s bitcoins represented by Shares in the Trust are not insured.
Also see "Risk Factors Related to the Regulation of the Trust and the Shares." The protections you apparently think you have don't exist.
I'm not going anywhere near this, just like I'm not going anywhere near any BitCoin wallet service.
I realize the underlying assets are subject to some of the same risks as owning BitCoins themselves. The person who said do you trust the Winklevoss's more than the wallet service is on the money.
According to the filing, they have a 50,000 share minimum, which works out to $1 million at IPO price. Going to buy a few of those $1 million lots on a whim?
That is only for "Authorized Participants" converting between bitcoin and shares in the ETF. It's the so called "creation and redemption" process and virtually all ETFs use a similar scheme. If the shares trade publicly you will be able to buy them one at a time if you want.
This is mostly irrelevant. The index used for pricing could be a weighted average of Thomas' and my karma, but if the trust was still backed by ~0.2 BTC per share and had working redemption mechanics, one would expect shares to trade around where rational market participants thought 20% of a Bitcoin was worth.
The Winklevoss twins have been active in the bitcoin space since the early days. Mostly as passive investors lending their fame to the asset, admittedly, but they do at least know the technology and the space.
The price of Bitcoin in early 2014 was based on popularity and hype. I really think that the normalization of a price for Bitcoin is good for the currency, and that's what I've seen happening.
Not to be argumentative, but I see very little indication that any "normalization" is happening in Bitcoin prices unless you simply mean that it is trending downwards more steadily over time.
Jan 1, 2014: $770.44
April 1, 2014: $478.72
July 1, 2014: $635.59
October 1, 2014: $381.33
December 31, 2014: $315.33
The numbers above indicate massive volatility. At first glance, it doesn't look as bad from October 1 to December 31, but if you look at the chart then you'll see it went up to $427.24 on November 12 before losing an average of $2.28 per day for a month and a half to get where it is today...
I do agree that the earlier prices were simply based on hype though. Typical buy high and sell low behavior.
You could look at an actual calculation of volatility instead of eyeballing some random prices: https://btcvol.info/ Right now we're in a pretty quiet period after the bubble in Jan 2014.
Yes the actual volatility calculation is better but my numbers illustrate my point which is that the price is by no means stable in an absolute sense. We are in a "quiet period" relative to what happened during a massive bitcoin bubble but even the site you linked indicates that the volatility is twice that of gold and approximately three times that of major currencies even though we're in a quiet period.
Also note that the site is measuring historical volatility instead of implied volatility as is customary for most financial instruments so it can't be compared one-to-one with VIX or similar measures.
The terms are awful: "The Shareholders’ limited rights of legal recourse against the Trust, Trustee, Sponsor, Administrator, Trust Agency Service Provider and Custodian and the Trust’s lack of insurance protection expose the Trust and its Shareholders to the risk of loss of the Trust’s bitcoins for which no person is liable."
"The Trust will not insure its bitcoins. The Custodian will maintain insurance with regard to its custodial business on such terms and conditions as it considers appropriate in connection with its custodial obligations and will be responsible for all costs, fees and expenses arising from the insurance policy or policies. The Trust will not be a beneficiary of any such insurance and does not have the ability to dictate the existence, nature or amount of coverage. Therefore, Shareholders cannot be assured that the Custodian will maintain adequate insurance or any insurance with respect to the bitcoins held by the Custodian on behalf of the Trust. Further, Shareholders’ recourse against the Trust, Custodian and Sponsor under [New York] law governing their custody operations is limited. Similarly, the Shareholders’ recourse against the Administrator and Trust Agency Service Provider for the services they provide to the Trust, including those relating to the provision of instructions relating to the movement of bitcoins, is limited. Consequently, a loss may be suffered with respect to the Trust’s bitcoins which is not covered by insurance and for which no person is liable in damages."
I've never seen terms this unfavorable to shareholders in a prospectus before. They're taking on less liability than Mt. Gox took on. If the Bitcoins mysteriously disappear, no one is liable.