Bitcoin Forum

I have a few questions regarding the Winklevoss Bitcoin ETF and its effect on price. I keep reading that it will make skyrocket the price of bitcoin. However, I don't see how. Let me explain:

As far as I know the Winklevoss ETF consists on putting on the market shares representing the value of the bitcoins held by the twins. Let's say they have 100.000 BTC and they will create 1.000.000 shares (hypothetical numbers). I would expect that the price of each share would be calculated according to the price of BTC at the moment of the IPO. Afterwards, the price of the shares would change depending on supply/demand. How can this supply/demand of the shares affect the price of bitcoin in markets like Bitstamp/Huobi/etc? If the Bitcoins held by the brothers are not sold or they don't buy more, how can it affect the price?
The way that I understand it is that the price of the shares will be highly influenced by the value of bitcoin, but not the other way around!

Am I missing something? Otherwise, just let me know how the shares can affect the price of BTC.

Thanks in advance for clarifying my doubts!

Because we are assuming that they will have to buy more bitcoins eventually. And once they run out, there is a supply of only 3600 a day worldwide.

Let's put it this way. I have more money tied up in IRAs and 401k than I have invested in bitcoin already. By several times.  And probably most middle class Americans are in the same situation.

Then you have mutual funds, which can invest in an ETF, but not directly.

So, it's the sheer amount of money that CAN come in.

We are saying it will impact the price positively because we are assuming the fund will have succes and all the shares will be sold.

ok... there are several mechanisms...

1)  arbitrage between the ETF and actual BTC...  say the ETF values a "btc" at $1000, but spot BTC is only 800... it is worthwhile to sell short the ETF, and use those funds to buy actual BTC to offset your short..  net effect is BTC price goes up cuz you bought.

2) part of the ETF is the ability for whales to deliver BTC into the fund (I believe it has to be in blocks of something like 10,000 BTC) ..anyways.. once again if the ETF is at 1000, but BTC is only at 800... it is an instant 20% return for a whale to by BTC on the market and deliver it to the ETF for additional ETF shares to be created for him.    Once again, buying BTC on the market will raise the price of BTC...

Both the above examples also work in reverse if the fund is cheaper than the actual BTC....

so yes, it is very possible for the fund price to directly influence the price of BTC.

Sigg

So all they have to do is set the price a bit higher than regular market price? Nice. Like printing money.

As people said, they'd eventually buy more.

But I actually think the effect it will have will be more undirect: a big name like the Winklevoss will make other big Wallstreet investors aware and more likely to trust bitcoin.

As units of an ETF are bought or sold on the market, the unit price of the ETF can diverge from the price of the underlying commodity. This is addressed by the issuer creating more of it's own units and using the money to purchase more assests (in this case, bitcoins) or the reverse process when the price is low. As this is an on going process, you can assess an ETF unit for fare value by comparing it with the Net Asset Value (NAV), which is the current market value of all the assets held by the trust divided by the number of units. There are lots of different legal ways to set ETFs and ETNs up, I don't know how COIN will be set up, but that's the way some mainstream comodity ETFs are run.

I think the overall effect will be to increase the demand for bitcoins, because money that was already capable of buying them on exchanges already has, this is new money (trillions) that can only invest in legal exchange entities, such as stocks, bonds, ETFs etc.

isn't this what institutional money is waiting for? :P

I'm pretty sure it's going to have a positive effect on the bitcoin ecosystem.

think so too but dont expect that the price will be like a skyrocket because of one etf. maybe we see the 1500 - 2000 USD after some moths. that would be nice.

but silberts etf is also on the way and more will follow...what should cause a price rise  ;)

Think many people are expecting 4k-5k after etf is out.

Yes but it probably won't get there on the EFT solely.
One piece of good news along with it should do the job.

What people are underestimating is the shear lack of bitcoins available on the market. Any decent amount of institutional money that comes into the game when the ETF starts will push the price higher. 3600 coins a day for the next year and a half and then 1800 coins a day for the ENTIRE WORLDS SUPPLY.  Holy crap.

What about all the holders? Well, as Risto and others have shown, an average of about 10% of "hodlers" coins get redistributed during every bubble.  10% is a decent amount, but not anywhere close enough to bridge the gap betwen potential institutional/401k-like investments and 3600 coins a day.

And that's not even counting other financial ETFs that will follow in other finance centers in places like London, Germany, Asia, etc.

AN ETF is a regulated instrument ....@ a certain tipping point ratio they MUST buy more ...otherwise they are in breach and it can be wound up etc

The price should go up, maybe even a lot.

This is because a lot of people who are new to bitcoin will be able to buy it very easily without trust issues or having to send dox to God knows where.  Of course, they wont be able to USE the bitcoin they buy in the Winklevoss fund, but they will still be able to trade it.

This is a win, and maybe even a big one.

However, I thought it was going to be a closed end fund.  If it's that, then they will NOT be buying more coins for it.  If it is an ETF then they may have to buy more coins for it.

Nope clearly looks like an ETF: http://www.sec.gov/Archives/edgar/data/1579346/000119312514058712/d562329ds1a.htm

Yes, but these are not paper bitcoins. The shares are fully backed.

If on the other hand someone should offer contracts to buy bitcoins in the future, not holding any bitcoins at the sale of that contract, it constitutes naked short selling, which will effectively increase the supply of coins. It is not what is going on.

Amazing to think about, yes.

You're referring I think to a fractional reserve banking system, where the bank's holdings equal only 1% (assuming a leverage of 100) of what is lent out. I think that a deflationary currency like bitcoin would be less likely than an inflationary currency like the USD to support fractional reserve lending. My rationale is that people will be less willing to borrow (with interest) a deflationary currency than an inflationary one. Just think about it from the borrower perspective.

I could be wrong -- I've never actually pondered this issue in depth before. People will always need to borrow money in one form or another. So in a bitcoin world, how would that work? Would a loan be denominated in something other than bitcoin, something that loses value over time? What would that be? Hmmm.
 

I suspect the fractional reserve banking will not work very well with bitcoin. This is not because bitcoin is deflationary since fractional reserve banking worked well with gold, but rather because it is extremely easy and cheap to take delivery of bitcoin, when compared to gold and even fiat currencies. Fractional reserve banking ultimately involves short selling and there in no more effective way to push a short to the wall than to take delivery.

By the way fractional reserve banking has been tried with bitcoin. Pirateat40 was the first significant case and he managed to suppress the price of bitcoin in 2012 before he came to grief. There is also a very good case the MTGox was running a bitcoin fractional reserve before it also came to grief. My take is that Bitcoin will end up complementing rather than replacing fiat currencies for this reason, with bitcoin being an equity based currency complementing the debt based fiat.

The thing about the ETF is that it gets more volume, both long and short. And the thing about Bitcoin is that volume = good in the long term, either direction. Also, its a lot of publicity. There will surely be a lot of volume that comes the moment it drops on the market. Basically whats going to happen is:

1) A whole bunch of traders who didn't trade on bitfinex/bitstamp etc... "trust" the etf more, so they trade that instead.
2) A whole bunch of BTC-likers will buy the BTC in their IRAs, etc...
3) A whole bunch of BTC-haters will short the BTC.

Probably, the amount of money longing from (2) is going to be greater than the amount of money shorting from (3) because the people in (2) tend to be more risk-on than those in (3) so they will put more money on it.

But its also true that some traders, the most risk-on group of all, might decide to short. Also, its also true that group (2) has had places like bitfinex & bitstamp the whole time, while group (3) was very unlikely to use these services. So the amount of shorts might actually become pretty large.

Either way, it doesn't really matter. No matter, the volume is going to be really high, and that's the main bullish indicator in the long term. If its short interest causing it, then the price will crash for 2 years, while BTC-likers accumulate and shorters pay interest, eventually causing price increase.

If its longs causing it, then the price will bubble immediately, just causing a repeat of 2013 all over again. Bubble-burst bubble-burst each bubble being higher.

The bad situation would be if the ETF was canceled or if it needed to be pulled due to some kind of scandal or concerns over what someone somewhere can label "insider trading."

The less bad situation would be if the ETF didn't take off in popularity/volume, kind of flopped, but continues trading nonetheless.

True, the Scottish period of free banking demonstrated that. Although how deflationary was gold during that period? I would think of it like this: if the purchasing power of the currency is expected by all parties to rise by X% per year, then the interest rate in *real* terms has a floor of X%. So higher X would result in less demand for lending in that currency, although it would not eliminate it completely. (And of course it's complicated by the fact that different people will have different estimations for X.)

I agree. A fiat currency would have to collapse first (and not because of bitcoin) for bitcoin to replace it. It will be very interesting to see if that happens in various troubled countries around the world.

I would love to short bitcoin on a legit exchange through a legit broker.  I can do it w options with defined risk.   Don't need to borrow

If some famous short hedge fund guy like Einhorn get shorting bitcoin the price will  crash til another famous hedge fund guy buys the bottom.

So far few big investment banks are pro bitcoin so I don't see any big funds getting into it.  It be smaller hedge funds.   Which would do their typical pump and pump

You cannot short what you cannot borrow.

What would you charge to loan out your bitcoin, in USD terms?  I would very much worry about getting it all back.

There is a hefty premium to pay for the right to get stuck short in a squeeze.

I've heard of the greater fool theory, but this would require the mother of all fools.  MoAF.


Premium is going to be a bitch.

You can sell calls when IV is high.     Or buy put verticals.   Or sell call verticals.

Its only foolish if you don't know how to do it.   I take bearish positions all the time.   The only hard part is the timing.   But usually price crash harder than it goes up.   Escalator up elevator down type thing

There are some traders who mostly short or take bearish positions.   I think they're licking their chops to short bitcoin.  Its got all the ingredients

LOL.  And the only hard part about winning the lottery is picking the right numbers!

I think an ETF is going to have a short term bump, but then stabilize the btc price long term. Maybe a quick double the few months after it's released then stagnant for a year.

There's always somebody on the other side of your trade

Yup thats true.  I think what will happen is that it'll get pumped for 1-3 months while hedge funds build their short positions.  Then they use media to scare off retail and dump the price causing a crash.  It happens all time when there is a cult stock w irrational exuberance

Good luck with that. Let me remind you of NFLX lately, which has been a major headache for some shorters. Don't think you know something..

NLFX got dumped after that GS upgrade.  Its dropping now

Once the fund is registered, and the price will start functioning. Reasons - the arrival of large investors WallStreet

There is no chance that one ETF is going to push the price to 4-5k...

Every post like that means it is more likely!

And when we are at 4-5k, the ETF in action, we can not say if there is causation.

I don't know jack about traditional Wall Street mumbo jumbo, but I read today that the Winky ETF is modeled after the GLD fund – which set records by attracting over a $billion in new investment in just 3 days. Obviously that's a pretty lazy comparison, but consider this: Bitcoin represents an entirely new asset class. Lots of institutions and investors will want to get in on this on the ground floor, whether they support or even understand virtual currencies at all. Once the general public sees how much easy money can be made, money will start pouring in. IMO the ETF is the next big step for bitcoin and it will likely be the spark for the next bubble...

If $1 billion came in the first 3 days of the COIN, how many bitcoins would have to be purchased on the market?

At $650 each, let's say for simplicity they could cover the first $65,000,000 with their 100,000 bitcoins.  After that, they would need to cover the remaining $935,000,000 with whatever is available for sale on the markets.  And people think I'm ridiculous for saying that this is the vertical.

I could be wrong, but I remember reading that there was something like a 1:5 leverage ratio, so divided by $620 (price today) and divided by 5, it's about 307,000 coins.

Another way to look at it would just be to take $1 billion divided by the 12,000,000 mined coins and that comes to about $83 per coin.  

Or that the current market capitalization would be about $8 billion, so you're adding 12.5%.  It probably ain't the moon.  And that's not even considering whether or not a bitcoin ETF would be as attractive as gold, which it might well not be.

I'd welcome it, but I don't think it's going to pay for my daughter's college or anything.

Hmmm, very interesting. While your analysis certainly makes sense fundamentally... never underestimate speculative mania. :)

Well, its not a 5 to 1 leverage ratio. 5 shares = 1 Bitcoin.

So lets redo that math, shall we??

The fund already has 100,000 btc. So if 1 billion came in, the first 100k btc (@ $620) would equal $62 million.

So that would leave an additional $938 MILLION worth of bitcoins that would need to be purchased.

You still think that would not effect the price in a substantial way?

PS. You realize that $1 billion in INVESTMENT capital is a completely different beast than 1/8 increase in market capitalization. Right?

Oh, I see.  I re-read the article and you are correct on the 5 shares = 1 bitcoin.  I suppose they want to target an ETF price that is lower than the price of bitcoin.

Still, $938,000,000 divided by 12,000,000 mined coins (factoring in their 100,000 bitcoin stash which accounts for $62 million--again, you're correct about a fact that I hadn't included) gets you to $78.

Could it drive the price up a LOT further due to market factors?  Sure...absolutely, in part, because, as you say, $1 billion of incoming investment operates a lot differently than just adding that $1 billion equitably in market capital.  Especially when you factor in that about 1000 people own about 50% of the mined bitcoins, the available float becomes more scarce if the 1000 are all hodling.  It could drive the price up considerably if there are only, say, 2 million coins that aren't being hodled no matter what.

But there are a lot of what ifs.  What if the 1000 decide that a big influx of investment capital represents the perfect time for them to cash out without destroying the value?  What if the bitcoin ETF doesn't attract $1 billion, but more like $200 million?  The Winklevii have about 1/3 of that covered already, so you're only talking about a demand of 200,000 bitcoins. 

This probably isn't very scientific, but I just pulled up the weekly chart and looked at the last 3 weeks I could find with 200K volumes.  One was an
up week and two were down weeks.  Might see a 20% change...might not. 

Don't get me wrong...I think it's a great thing for a variety of reasons.  A short term bump of some sort is one of them.  Keep in mind, also, that the bump will likely be spread out a little bit...won't hit on the day the ETF opens.  More liquidity is helpful long term.  I just don't see this as a moon shot. Could it be 20-25%?  Sure.  Could be a little more.  Could be a little less.

Say their initial stash gets bought out and they need more. How will they get it? Can they just do some market orders and set their own price a bit higher? Do they have any reason not to do it like that? After all, they are buying for other peoples money and probably getting a cut.

 
Let's split the difference and say they need to buy 500 million worth. Where do they buy them? Someone's going to sell for 800$? No. They have to go to exchanges and that's going to be another bubble.

Could happen. I kind of doubt it, but i might be hoping instead of predicting.  Maybe an even better scenario would be a more sustained influx of capital...it starts at $200 mil, which raises the price, which attracts more capital, which raises the price, which attracts even more...and that sustains over a period of time.  That might be better than $500 mil or $1 bil that causes a bubble, which attracts the shorts and bubble pokers.

Hi guys, this is the first time ever in my life that I will post anything on the internet, but I think you'll get the point.

I think bitcoin is due to an amazing future and that we should get people to think in smaller denominations than a full bitcoin unit. By analogy to our current fiat currencies like $ or euro I'm sure you'll agree that the most easily used subdenomination of the bitcoin should be the milli-bitcoin.
I think that the psychologically extremely high price of the most used bitcoin denomination (the unit) will slow its acceptance until "named" subunits are used more regularly, I would guess our visual system also plays its role because i start to have problems counting the number of zeroes after the comma you need to be able to buy a damn coffee in our beloved currency.

This is my request: Please please, do not divide the value of one bitcoin by 5... FIVE to get one damn sharee of COIN ETF!! Divide it by 1000, 1000000 whatever you want, but please let people get used to think in smaller NAMED (mBTC) bitcoin denominations, not in new base5 base8 or whatever system that doesnt have even a name! We need to get used to a higher bitcoin value, please help us do that...

1 COIN share = 1mBTC is all we should ask for

Well that price was set probably when bitcoin was not as high in price as its now, anyway 1mBTC= 1 coin share is extreme low, it would be good perhaps, 1 share = 0.05 or 0.01, but less than a dollar share for a wall street asset is ridiculous.

ETFs do splits and reverse splits all the frickin time. They'll probably just do a 20 to 1 split during next bubble, when bitcoin goes up to $4000-$5000.

There must be some stickiness going on. Do they not know that we have invented a practically inifitive divisiveness in bitcoin? At this stage in the development in the human kind, we have parted from the evil of fixedsharesizeness.

But 5:1 for the start was indeed quite retarded.

The ETF is an extension of bitcoin, hampered by a confusing share size, with a market that is open maybe 40 hours in a week of 168 hours, with a liquidity somewhat reduced from the liquidity of 1 in bitcoin itself, with extra cost attached for holding, and an invitation to the taxman.

It's a free market, so come on with everything you have, but for me, I think I will just stick with the coins.
 

Making one share of COIN worth 1/5 of 1 BTC is a good idea. If the price of the ETF is too high then it will turn off too many retail investors as it would be difficult for them to purchase whole shares of the ETF.

Let's say for the sake of argument I have $100,000 in my self-directed IRAs.  That's $100,000 that by law I am not allowed to invest in bitcoin.

When the ETF hits, I can invest it.  Right now, I can't.

Let's say Fidelity or Vanguard wants to add bitcoin to one of their mutual funds.  Right now, they can't.

Do you see that this changes things drastically in the US.

That I can understand.

It is possible to invest your IRA money into bitcoin directly, using a self-directed IRA, although it is complicated. Doing so entails setting up a "self-directed IRA LLC" and using the LLC to buy bitcoin directly. Broad Financial walks you through the process:
http://www.broadfinancial.com/self-directed-ira/bitcoin-ira
However, setting this up takes quite a bit of time and effort. And it costs money. And there are differing legal opinions about whether or not the existing rules even allow for self-directed IRA LLCs.
 

The ETF does in fact change things drastically in the US. Not just for IRAs, but also for regular investment portfolios. Most regular investors, and an even larger percentage of professional investment account managers, simply won't even think about an investment that hasn't been blessed by the powers that be.

I hardly think this counts as "blessed". I think it more counts as "grudging acceptance." Still, its an improvements.

Point well taken. There are large investment pools that probably still won't touch bitcoin until it's been blessed a few more methods, by which time a few more bubbles will have gone by. Large banks, for example, with all that fiat that they have stored with the Fed that they don't know what to do with.