Bitcoin Forum

Last week, I put together some thoughts on the potential impact of the Winkelvoss Bitcoin Trust on current exchanges such as Mt. Gox. At first glance, it might seem like exchanges would be dancing in the streets -- after all, shouldn't more potential demand for Bitcoins mean more potential business for exchanges? On the contrary, I'd suggest that the trust, if approved, would 1) wind up becoming the principal price discovery mechanism for Bitcoin, supplanting existing exchanges, and 2) drain much of the existing speculative and investment volume away from the exchanges.

In my view, this is partially due to the larger potential volume for the trust, which would remove many of the barriers that currently keep the ordinary person on the street from participating in the Bitcoin economy, and partially due to the sorry state of existing exchanges, especially their universal failure to grab the counterpary risk baton and run with it. (Existing exchanges just provide networks of buyers and sellers, as opposed to acting as counterparty for each trade.)

The full article is here:

Winklevoss Bitcoin Trust May Become THE Price Discovery Mechanism for Bitcoin (http://psychologicalinvestor.com/lib/real-markets/winklevoss-bitcoin-price-160/)

Comments, criticisms, corrections welcome...

Wouldn''t the ETF just be available to US investors?

If the ETF is US-only, how could it possible become THE price discovery mechanism for bitcoin? Bitcoin isn't USD 2.0 ...

Why do you think it would only be available to US investors? Anyone can trade on NASDAQ or NYSE or amy of the other US exchanges.

BTC doesn't need to be USD 2.0 if the volume of investment and speculation behind the trust and eventually options on the trust outweighs the volume on existing exchanges. In fact, it probably doesn't even need to outweigh it, since as I mention in the article, the amount of gold currently held in ETP form is only around 6.5% of global demand, and yet the ETPs and options on those ETPs exert a very strong influence on the price of gold itself. Whether it's the tail wagging the dog, or whether the tail becomes the dog, it's hard for me to see how an exchange like Mt. Gox could continue to 'lead' when so much investment interest and speculative interest may be brought to bear via the trust.

I don't know whether you've had a peek at the original article, but I also suggest there that if the ETP were to be approved, it would also provide a strong nudge in the direction of creating a 'real' exchange -- one which acts as counterparty to all trades, rather than merely lining up individual buyers and sellers. If that should come to pass, the days of trading network style exchanges may be numbered.

It's pointless to treat this unformed molehill as if it was Mt. Everest.
The ETF may never be approved by the SEC.  If it is, the process is a long one, and MtGox, the Bitcoin, Winklevoss or our interest in one or all of the above may be gone by that time.
Many Bitcoin users object to any form of regulation as a matter of principle, but this user sentiment is also difficult to gauge -- surveys & statistics are meaningless when dealing with subjects who value anonymity, independence, and a stated bias against disclosing personal information.
TL;DR:  Nothing will come of it. Not causing ripples in this puddle.

I think it will happen, it just seems right, it is an opportunity for the appropriate speculative wealth transfer of the QE inflated stocks market to XBT, and a legit way for politicians Powers that be to preserve wealth during the QE slowdown. 

I think it will be a great opportunity, IRA's can now invest in Bitcoin, so yes stabilising for sure, but just 1% of Bitcoin's in the EFT, may not be more stable than Gox. But ultimately it will stabilise the price, or become a detached "Paper" Bitcoin. 

I'm not sure that the total volume of Bitcoins in the trust would matter as much as the total volume being traded via the trust -- especially once the influence of derivatives on the trust are added in. I.e., if that's where people are active in bouncing the value of BTC/USD around, it doesn't matter so much how many actual underlying BTC are really there, just how many trades are occurring. Other things being equal, a single Bitcoin regularly traded one million times per day would have much more influence on determining the exchange rate than one thousand Bitcoins each regularly traded ten times per day.

lol I highly doubt it.

Bitcoin was raped, milked & taken to the slaughter, but trading one a million times per day?  That's just wrong.

This really does make a lot of sense. Holding your own Bitcoins is still going to be the top pick for experienced users I imagine but this ETF is going to let the average person invest without fear of losing their coins to malware or a shady exchange. That's going to make it the number one place that Bitcoin is traded on a daily basis.

Thanks for the great insight!

BTW are you really Dr. Greg Mullhauser? If so, welcome to the forum!

There's a lot of smart people around but also a lot of people just here to try and make money who don't really understand economics. Don't let them scare you off!

Personally I would rather hold my bitcoins directly than hand them over to a SEC-sanctioned ETF, and get issued share certificates in a company I know very little about in a country where the government seems very anti-bitcoin.

Also, I don't think the average person on the street has any stomach nor the technical skills for a sentiment-driven "investment" like bitcoins. We have found that out during the recent bubble and burst.

Many thanks for your welcome and encouragement -- I appreciate it!

And yep, that's my real identity. (In case you're wondering why I'm using my real name, I wrote up some separate thoughts on the distinction between anonymity and privacy here:  In the Bitcoin Economy, Anonymity and Privacy are Not the Same Thing (http://psychologicalinvestor.com/lib/real-markets/bitcoin-anonymity-privacy-154/). I'm big on privacy, but I don't necessarily think that anonymity is the best way to achieve it.)

From what I had read the Winklevii are trying to get an ETF approved (not an ETP) - could you perhaps confirm exactly which it is (and if it is ETF then perhaps update your topic title accordingly)?

Although I agree with some others it is a little US centric (using US exchanges from overseas is not so simple and involves extra fees), however, I do think it could indeed be an important big step forward for Bitcoin in the mainstream.

I hear you!

Having said that, though, a decent derivatives market would be a godsend, and approval for the Winkelvoss trust could be the first step in making that happen.


Who knows how the characteristics of the market might change, though, were it to be opened up to more participants -- and especially if derivatives were to become available on the ETP? (For investors hoping for a dampening down of some of the crazy exchange rate swings -- or at least looking to protect themselves from those swings -- derivatives are the first port of call. Of course we have ICBIT, but it barely qualifies.)

Exchange Traded Product is just a broader, less specific term that can encompass Exchange Traded Funds, Exchange Traded Notes, etc. Some people have also started using ETC (rather than commodity ETF), for Exchange Traded Commodity.

Regardless of the final initial in the acronym, though, they all have that same central feature of wrapping up something (or some things) into a form that can be as easily traded as a stock. In some cases, as with GLD, SPY, QQQ, etc., options also become available on the securities.

Okay - thanks for clearing that up (there seems to be some confusion in other articles about this).

So I read your article and had a few thoughts about it. I agree that dealing with purely anonymous actors makes most people more hesitant to do business with Bitcoins. However it also provides the current biggest utility for Bitcoin. While being able to go down to Walmart and buy things with your Bitcoins would surely be awesome (and boost the heck out of the value of Bitcoin) it doesn't add anything for the average consumer buying products in a physical store. Anonymity is what really made Bitcoin this popular in the first place.

Where Bitcoin really surpasses current money for non-anonymous transactions is in its unique applications for transferring money and providing secure banking/money to people who otherwise wouldn't have access to it.  It's likely that technological advancements are going to bring the capability to use Bitcoin in the developing world long before they voluntarily reform their banking and monetary systems. I saw a project last week where someone is working on M-Pesa integration for Bitcoins in Kenya. With such a huge portion of that country's economy coming from remittances (something like 40% if I remember right) there is a huge potential for a method with lower fees to catch on. Beyond that many local currencies in the developing world are on shaky ground and can be devalued by their small central banks at a whim. People using their Bitcoin for banking and remittance applications are going to want to deal with real people rather than pseudonyms so this is a great area for "privacy".

Businesses are free to release as much information as they can in order to gain consumer trust. The problem with Bitcoin right now is that people are far too trusting of a community built around a trust-less system (the protocol itself). Escrows need to be used far more than they are currently if people don't want to release their real life info. I agree with your assessment that trusting forum user names is simply a bad idea no matter how many posts they have. I've seen many different people in the last few months posting useless post after useless post to jack up their post count and become a "Hero Member" very quickly. It's going to take a few more Bitcoin forum scams before people realize the value of dealing with a business that can be held accountable to the public.

The coolest thing about Bitcoin to me is that it's the world's first real global currency. Having a global currency is going to make international trade so much more efficient that I really think this will be the longest lasting contribution it makes to our society and the eventual highest contributor of value to Bitcoin.

I think what it really comes down to is choice. Bitcoin gives users the option to be anonymous, private, or public depending on how much information is disclosed and what procedures are used. There's a place in the global economy for all three of these applications and they all give Bitcoin more value. I never see Bitcoin replacing the US dollar entirely but I do see it possibly becoming the standard currency for international trade if it can spread worldwide and not depend so much on the Dollar.

Wow, thanks for this -- it's exactly the kind of discussion I'd hoped for with that anonymity & privacy article. (Not sure whether it's better to start a separate thread for that?)


And even for those of us who do have access to the modern accoutrements of electronic banking, I think Bitcoin still offers tremendous value -- people can actually do what they want with their money, rather than waiting on permission from a bank behaving as if it's their money.


Touché.


I certainly agree that it could make it more efficient, and it could be great it if it did...but I'm not yet convinced that it will.


I couldn't agree more.

Other than moving speculation out of the blockchain, and maybe some press, there's not much value added.
I hope they make some $$ but since they are adding zero BTC merchants, what does it add to the BTC economy.  It isn't even the first Bitcoin ETP/ETF

The value added to Bitcoin from this ETF comes from opening the market to many more potential buyers. The current Bitcoin exchanges are exceedingly bad at what they do and scare more conventional investors away. The price of BTC goes up when more people want to buy it than sell it at any given price point.

There are a ton of people who are not tech savvy but would love to make money. If those people are enabled to buy rather than being scared off by technical hurdles Bitcoin would be much more valuable. Exchanges are going to be for the exceedingly tech savvy people who make up Bitcoin's current community and really want to hold onto their own coins. That's going to make this fund the market's primary price setter.

Personally I see another bubble an order of magnitude bigger than the spring 2013 bubble occurring after this ETF becomes available. I'm not necessarily saying the ETF's creation itself will cause a bubble just that it makes the next bubble (which I see as inevitable unless BTC's protocol is destroyed) potentially much bigger than without the ETF available. Think about the public's reaction to the media hype this spring and imagine if there was a safe and easy way for everyone who heard Bitcoin was "the next big thing" to buy it. If this year and 2011 are any indication then bubbles potentially increase the baseline value of Bitcoin simply through the public exposure each spike creates (though we will see where the baseline for this bubble finally settles).

But there are no bitcoins for sale, just shares in a bitcoin fund.  So there are zero more potential buyers, and zero more potential bitcoin users.  Its just tulip trading.
Someone has to plant the bulbs and grow the garden or it is just so much nonsense.

Quite the opposite.

The fund has to be backed by BTC. If it is popular, they will have to acquire more BTC to keep up with demand.

The value that this ETF adds to bitcoin is the ability for institutional investors to invest, 10's to 100's of billions of dollars of investing capital, that have no barrier to entry to the bitcoin world.

Right, tulips.  And there is already a bitcoin fund run by Exante that serves the institutional investors.  (EUR100K min)
Economy is benefited when there is trade.  When both sides of a trade get something useful.  There's nothing useful here.

You see the use being that BTC price might go up?
Consider also that central banking can short the ETP and drive the price down with as much fiat as they like.   They print the stuff, and it doesn't take much.   Up or down either way the Winklevosses will make $ but nothing comes of it for anyone else.  Might as well make lottery tickets.

It would be better if they were using it for enhancing the marketplace, buying and selling goods and services.

They are late to the party:
http://www.forbes.com/sites/jonmatonis/2013/03/08/first-bitcoin-hedge-fund-launches-from-malta/

Or as the OP pointed out the increase in demand in the ETP will set the trading price of XBT (http://www.xe.com/currency/xbt-bitcoin).
So what happens is Bitcoin's becomes a store of value, a meme just one rung up on the complexity scale when compared to the meme "medium of exchange".


The fund won't just attract billions of dollars, without creating some kind of ponzi effect, they will have to go to the market to get XBT (http://www.xe.com/currency/xbt-bitcoin) so before the stabilising effect the OP predicts there will be some market discovery and a few disconnected arbitrage opportunities while the Fund grows but before it acquires XBT.

A set of informed speculative points, but it all rests on ETF providing a significant source of market depth.

Hopes of increased price stability also rest on derivatives not becoming yet a stronger source of price volatility, completely overshadowing direct ETF holdings or buy plans.  EFT's are, after all, a vehicle to facilitate further speculation, one which has no designed-in price stability goals.

Other important speculative factors: regional taxation and bitcoin adoption rates, are pretty much up in the air, but I'm inclined to think bigger fund players will just avoid bitcoin until busines volume materializes, even more than penny-stocks.  C'mon, Bitpay, the largest bitcoin business connector, can only make $50K gross profit a month for all it's work.  Beyond tiny.

Unless and until business transaction volumes pick up, I just don't see an ETF coming out of the gate as much more than just a novel trinket out in a corner of the market, one that will accumulate ugly examples of early investors getting zapped by price swings.  Without any real-world fundamentals providing steady demand support, not much more than a chit-chat theme of fund managers.

Winkledudes wish they can put the cart before the horse, but the immediate and magical curative powers of this ETF are far from likely.

I think it's important to distinguish the Exante fund from an ETF. Among other things, the Exante fund does not trade on an exchange and cannot have standardized derivatives built around it. It does nothing to enhance liquidity in the USD/BTC trade, it cannot be shorted, and it is not available for arbitrage. By contrast, an ETF is open to all comers and is suitable for the eventual introduction of standardized derivatives. It can be shorted, it is available for arbitrage, and it provides a paradigm example of adding liquidity to the trade between the quoted currency and the underlying commodity.

Relative to the existing fund, the proposed ETF seems to me like a very different kettle of fish, and if approved seems likely to have a qualitatively and quantitatively different impact on the Bitcoin economy.

Have you watched the Bitcoin 2013 Conference recording about the Bitcoin Fund (https://www.youtube.com/watch?v=jNVc2Vj-CCk&list=PLUOP0P68GJ3BGjfqoLLnzAefk3ZzXQtJ7&index=49)  Those guys made a hedge fund that invests in bitcoin, essentially.  They have pretty close to 100,000 BTC that were invested in the fund by qualified purchasers (people able to invest $5 million or more).  

They don't have an ETF yet, but they mentioned in this video that they are planning on starting an ETF at a later date.  I have investor friends, and personally, I'd much rather refer them to an ETF managed by these guys even if the fees are higher than the Winklevoss twins because unlike those two, these guys are professional investors.  I don't know if either ETF will be approved, the one managed by Bitcoin Fund or the Winklevoss twins.  But if they are, I'd much rather the one managed by Bitcoin Fund become the more popular one than the other one.  

My opinion of this ETF by the Wiklevoss twins is that they're not looking at it as a way to help investors.  They're looking at it as a way to cash out since they bought a ton of bitcoins and then realized that it's largely an illiquid market and you can't sell a ton of bitcoins all at one point without moving the market.  

Hmmm, I may have missed something, but with one exception, I have a hard time reading much value into this particular setup. It's designed as a straightforward currency fund, not a hedge fund, and thus all the comparisons about how great their fees are, relative to hedge funds, are apples to oranges comparisons. How could there possibly be a performance fee, for example, given that there is no performance whatsoever that is internal to the fund: 1 BTC = 1 share, always and forevermore. The QP restriction eliminates huge swathes of ordinary investors, while the prohibition on BTC redemptions means arbitrageurs cannot force the price of a 'share' (in quotes deliberately) to track the BTC/USD exchange rate. The principal marketing message I take away is hand-holding: we'll act as caretakers for something so complicated that you really shouldn't worry yourself about it...i.e., we'll buy Bitcoins for you and keep good backups, and we'll even call and wake you at 3 a.m. (their example, not mine) if we think you should know that the exchange rate is moving significantly.

The one value I could identify is one offered by any currency fund: denomination in the native currency provides balance sheet transparency for businesses or individuals who want or need exposure to BTC. (They introduced a clever bit of FUD referring to IRS audits and how they want to just blend in so nobody takes any notice of them.)

Again, maybe I missed something, but this seems to me like it has many disadvantages and very few of the advantages of an ETF. On the contrary, it strikes me as cherry picking designed to part the very rich with .5% of their 100K -- plus the BTC/USD bid/ask spread, which lurks in the background...

Do they make this auditable in any way? If so (or if you can "redeem" a share for the respective amount of bitcoins), then I think this is a good thing.

If not, it'll be like the good old paper gold games ("nope, sorry, no inventory, we'll settle in cash") and could be used to suppress bitcoin valuation. A very very bad thing.

People could just buy up the shorted "undervalued" paper and redeem it for real bitcoins until the ETPs stash is exhausted, no?

Indeed - if they did this it wouldn't last very long at all (so I very much doubt they would put in the time, money and effort to do this).

If they get it right then I don't think it would be anything other than good for Bitcoin so I think the potential upside outweighs the risk that it is somehow going to be a scam (especially as their reputations would be in tatters if that is what it turned out to be).

It doesn't take a scam, just some lawyers and bankers and the rule of law.  :)  Some facts and history, and if you will permit it, a modicum of forward looking:

Do not forget that ETF can also be required to be redeemed in cash rather than Bitcoin (as was done with gold).  Read the fine print.  ETFs, if they become the authoritative pricing mechanism, are the most efficient method for a central bank to fix the price of opposing currencies. It only took a US$28 billion block sale to drop the gold/dollar price one fine morning in April.  I'm guessing that wasn't from the pocket of an individual investor.

The central bank have in its charter the manipulation of opposing currency.  The Fed, as an agent of the US Government, will rig any market that poses a threat (or “disorderly condition”) to the value of the dollar.
http://www.federalreserve.gov/pf/pdf/pf_4.pdf
Check the bottom of page 53-54.

Then contemplate this in conjunction with FinCEN deeming Bitcoin a currency, and it being traded on the NY exchange markets...  you can see where this may go, yes?

This combination provides a recipe for direct manipulation of Bitcoin/dollar pricing through a non-redeemable bitcoin marketplace in which only quantitatively eased dollars are traded.  It is all perfectly legal, and has been practiced and previously executed right out in the open.  (Do you think there is any federal investigation by the SEC or CFTC over the gold price manipulation?)

Or is your ultimate contention is that the Winklevoss bros are not going to allow this because it would tarnish their reputation among the Bitcoin populace?
I certainly do not know their mind or intentions.  They may be full of grace and truth deep in their hearts, but if you were they, and the time came down the road where you had to choose sides between the most powerful central bank on the planet, and us Bitcoin geeks that remind them of Zuckerberg, which side would you choose?

Again, I hope they make a bunch of money, I wish them every success and appreciate their interest.  If they are interested I could probably help them to make a lot more money still.   BUT, I am not counting on this new ETF to be any kind of savior of Bitcoin, or even to be particularly helpful to Bitcoin.  It flows the very much in the other way...Bitcoiners are helping them.  If you are relying on it for anything, consider why you do that. 

I must admit I don't know that much about ETF's so if what you say is true then perhaps there is more of a downside to this than I had envisaged (perhaps some others with more knowledge about this could comment).

Oh, you're right, it is more of a currency fund than a hedge fund really.  I was more referring to the ETF that they're planning on releasing than the currency fund that they already have released.  I much prefer actively managing my bitcoin holdings personally, but if you're wealthy enough to invest in that fund, you probably have enough time pressures that you wouldn't have time to actively manage a $100,000 bitcoin investment. 

In any case, likely the big advantage for people investing that amount is that they have processes setup to do the buying and selling so that people don't move markets which is pretty much a necessity since anyone who tried to buy or sell that kind of money worth of bitcoins all at once probably would move the market.

What it adds is ease of access for a large segment of the worlds population (in particular, those with lots of money).  If 1/100th of 1% of the people who will have access to this ETF buy 1 share it would have a huge influence on bitcoin price.  When price rises, long term investors spend their bitcoins on infrastructure improvements and bringing in new merchants.  It's called a business cycle, and it is part of how an economy gets off the ground.

Should we found the "Bitcoin Anti Trust Action Committee" already?

*goes and reservers bata.org.

Without speculating about who might want to do what to which currency pair and for what sort of reason, I'd just like to clarify some of the mechanics of how ETFs operate.

From the standpoint of individual investors, shares or units in ETFs are traded -- i.e., bought and sold -- rather than created or redeemed. For present purposes, 'creation' refers to the issuance of a share and the placing of the underlying entity into the issuer's safekeeping to back that share, while 'redemption' refers to the reverse process of removing the underlying entity from the issuer's hands.

In the case of index-based ETFs and commodity ETFs, creation and redemption only occurs in relatively large baskets. The sheer size and value of those baskets means that individual investors never actually wind up redeeming them. The creations and redemptions still occur in the background, however, courtesy of 'Authorized Participants', as they're called in the case of the Winkelvoss trust.

For a real world, happening-right-now sort of example, consider the SPDR Gold Trust: it really does add gold to its custodian's vaults when investors add money to the fund, and it really does liquidate gold from the vaults when investors "cash out". But this process is intermediated typically by large financial institutions who agree to perform this role. When an individual buys one unit in the gold trust, it does not mean that one specific piece of gold is immediately added to the vaults. What actually happens is that the individual is really buying not from the trust itself, but from an intermediary, and they are buying a unit which has already been backed with gold added to the vault. (Otherwise, the intermediary wouldn't have had the unit to sell in the first place.)

If it is approved, investors will find a very similar process in the Winkelvoss trust as the size of the fund expands or contracts in response to demand. The Winkelvii will not be rushing out to buy or sell .2 Bitcoins each time an individual investor buys or sells one share in the trust, and they will not be swapping out .2 Bitcoins in response to individual investors saying they'd like their one fifth of a Bitcoin now please. However, the APs will be causing exactly that sort of process to happen on a larger scale as they handle baskets of 50,000 shares at a time and either distribute them to buyers or collect them from sellers.

Without the involvement of these intermediaries providing a buffer between the issuer and the trade in ETF shares, it would be difficult for the thousands of different ETPs out there even to exist.

Thanks for these clarifications, Dr. Mulhauser.

Does this mean - theoretically - I could take a bunch of Bitcoin and become an accredited intermediary in the Winklevoss ETP, deposit the coins into their "vault" and then just simply have a bunch of shares I can place sell orders for on the exchange?

Sort of like I deposited some bitcoins as collateral and was then given Difficulty future shares (for example CoinBr.iDiff-E on Bitfunder) by the issuer and was then a "market maker" for the futures and able to freely trade my shares.

As long as things are setup in a way that ensures that 1 share floating in the market always has 1 associated bitcoin in the "vault", I think I see no danger here. Let them build all the derivatives they want on the ETP as long as they are forced to cover their shorts or whatever and deal with the consequences of their actions.

You're very welcome -- just 'Greg' is fine by me, though.  :)


The S-1 doesn't specify who the Authorized Participants might be, or what requirements might be in place for becoming one, but in theory, the answer to your question seems to be yes, given this from page 4 of the S-1:

"The creation and redemption of Baskets require the delivery to the Trust, or the distribution by the Trust, of the number of Bitcoins represented by the Baskets being created or redeemed, the amount of which will be based on the combined NAV of the number of Shares included in the Baskets being created or redeemed. The initial number of Bitcoins required for deposit with the Trust to create Shares is [10,000] per Basket."


Without peeking at the specific futures contract you mentioned, I can't say whether the analogy holds, but I can say that this creation and redemption mechanic is exactly what makes the intermediaries well positioned to provide market making services and to engage in arbitrage that ensures the price of Bitcoins via shares closely tracks Bitcoins purchased directly via the same currency as the shares. It's the job of the Authorized Participants to gauge market demand and create or redeem accordingly, and it's very much in their interests to keep everything operating smoothly and efficiently. Far from being a bad thing, as some folks might infer due to their privileged role in being able to swap shares for the underlying entity, their involvement is actually what make the whole thing possible.


Yep, I agree -- although there might be plenty of risks associated with the whole thing, I don't think the design itself is flawed in such a way that it would contribute to those risks. In other words, yes, there might be all kinds of problems and all kinds of unforeseen consequences, but those won't be the result of someone's having just set it up crazily in the first place.

Thanks again, Greg, for the info. I'm seeing quite a bit clearer now how this works.

Eager to see how this plays out, but I guess there'll be a long wait now for the SEC.

Adding my gratitude to Greg for investing his time here and sharing the details on the mechanics of the ETP.

The basket, market-maker, and non-connectivity of micro-trades vs. exchanges was enlightening. 

And many thanks for promoting such a friendly environment on the forum -- I appreciate it!  ;D

Yes, we are all friends here.  :)  So I will apologize in advance for the terribly long post to follow.
TL;DR? The ETP does not guarantee 1 bitcoin = 1 share, and the manipulation mechanisms I've described are in the design.


The redemption, especially if intermediated, is where the 1 Bitcoin to 1 share in the vault link breaks.
Due to your sophistication with the operation of ETFs, you are likely very aware of how this breakage has affected some commodity and currency ETFs previously, so among friends, let us make at least one more friendly mention of it.

The breakage occurs through collateralization.

In the discussion before us, the Winklevoss SEC S-1, redemption works as follows
This is on page 54 for those who are reading along http://www.sec.gov/Archives/edgar/data/1579346/000119312513279830/d562329ds1.htm
Delivery of redemption distribution
The redemption distribution due from the Trust will be delivered to the Authorized Participant on the third business day following the redemption order date if, by 9:00 a.m. New York time on such third business day, the Trustee’s DTC account has been credited with the Baskets to be redeemed. The Trustee will transfer the redemption Bitcoins from the Trust Custody Account to the redeeming Authorized Participant’s Authorized Participant Custody Account. If the Trustee’s DTC account has not been credited with all of the Baskets to be redeemed by such time, the redemption distribution will be delivered to the extent of whole Baskets received. Any remainder of the redemption distribution will be delivered on the next business day to the extent of remaining whole Baskets received if the Trustee receives the fee applicable to the extension of the redemption distribution date, which the Trustee may, from time to time, determine and the remaining Baskets to be redeemed are credited to the Trustee’s DTC account by 9:00 a.m. New York time on such next business day. Any further outstanding amount of the redemption order shall be cancelled. The Trustee is also authorized to deliver the redemption distribution notwithstanding that the Baskets to be redeemed are not credited to the Trustee’s DTC account by 9:00 a.m. New York time on the third business day following the redemption order date if the Authorized Participant has collateralized its obligation to deliver the Baskets through DTC’s book-entry system on such terms as the Sponsor and the Trustee may from time to time agree upon.

This opens the door for settlement of redemption in collateral rather than in Bitcoin.  The typical collateral honored is "Legal Tender" which discharges a debt.


In light of this language in the design, would you consider the design to contribute to the risk that 1 share floating in the market always has 1 associated Bitcoin in the "vault"? 

We agree, I also would not characterize this as "crazy".  "Savvy", "cunning", or "clever" would be more my choices.

Again, I wish the Winklevoss brothers every success in this adventure, and hope for them to profit greatly.  It is brave and bold and can be a game changer.  I also would likely personally enjoy working with them on projects of this nature or others, they are smart and motivated. 
To the topic of this thread, I will suggest that for the sake of Bitcoin's success as a medium of exchange, I am not so eager for the Winkelvoss ETP to become THE pricing mechanism for BTC, as some others might be.

In pursuit of a friendly athmosphere I first thank NewLiberty for his insightful post.

Now some questions: "settlement of redemption in collateral" means "give USD instead of bitcoins", right?

But then the brothers could just sell coins from the vault on the physical market (no audit, right?) and the bitcoin money supply (physical + ETF holdings) would get inflated (nooooo!).

Did I get that roughly right?

If not, could someone sketch a scenario how this could go wrong (for bitcoin)?

yes


Sort of...there are audits (pp 39,48,64 et al), but the requirement is for bitcoin or sufficient collateral, and the auditor is not yet named.  

There are other risks identified in the S-1 as well which might be interesting on Page 18.  The bitcoins can be lost, and "The Trust will not insure its Bitcoins."  They will have some insurance for their custodial activities, but there is no guarantee that you will get Bitcoins out.  If insurance is paid out, it is almost guaranteed that it will be paid in fiat legal tender.  Your statement about the brothers selling them out from under the trust is not going to happen, that would be fraud.  But if somehow the Bitcoin mysteriously disappeared and no one could figure out how or where they went... and the insurance kicks in...  you get the same result.

Essentially, we Bitcoin folks are very likely NOT the intended customers for this ETF.  We can already buy sell trade our Bitcoins with little economic friction or risk.  This is for the investor marketplace.  Folks that DO need this are those don't have / don't want Bitcoin wallets, the speculators, and ... financial institutions up to and including central banking agents.  If they want to go short on Bitcoin, without ever owning a Bitcoin, this is a way to do it.  

Another fundamental problem arises when and if there is ever a serious economic event that causes major currency collapse.  You won't have any bitcoin, you will have ETF shares which may or may not be redeemable.

Just to clarify first: the proposed ETF provides an initial ratio of 5 shares to 1 Bitcoin, and this ratio will change very slowly over time, as the fund's fees are deducted from the Bitcoins it holds.


Since the S-1 -- remember, it is only an S-1 -- specifies just that the AP, Sponsor and Trustee must agree on appropriate collateralization, it seems to me premature to speculate on the nature of the collateral they might agree upon. Possibly more to the point, though, is that to my mind, this proviso sounds more like a mechanism intended to promote the orderly operation of the fund -- and to prevent it becoming bogged down by Trustee nitpicking over the precise time of day or day of the week that a Basket of shares is to be delivered -- than a mechanism intended to provide a disguised back door for market manipulation. What we're talking about here is the AP promising to deliver the shares even if they may wind up being late, and the Trustee being willing to remove Bitcoins from the trust and discharge them to the AP on the understanding that the corresponding shares will in fact be delivered to it. As far as I can tell, qualitatively speaking, this is little different from an arbitrageur shorting the shares of any ETF while buying the underlying on the spot market.

Yes, I'm sure you're right on this: this is not aimed primarily at the folks who are already buying and selling Bitcoins anyway (and who would not want to hand over a fee to someone else for the privilege!).

We agree that we are prematurely speculating.  This is a conversation about the future, in all its nebulosity.  We are prematurely speculating on what the ETF could become, pricing mechanism and all the rest of what might or might not someday be.  Speculation and hedging are normal for ETFs.

We also agree that the proviso is carefully worded to sound like a mechanism intended to promote the orderly operation of the fund, as it should be.
We also agree that the back door for market manipulation is not disguised.  Indeed, it would be difficult to disguise it.  ETFs are famous for being the vehicle of choice for such mechanisms.  It does not need to be intentional on the part of the Fund creators, it comes along on the ride as an unintended (but predictable) consequence.  I am alleging no mal-intention at all.  The kind, deeply litigious, gracious and wise founders of this ETP clearly only have the best of intentions.  

We also agree that an arbitrager might short the ETF and buy on the spot market.  They also might not be arbitraging and be simply selling short and not buying Bitcoin anywhere.  They can do this by posting sufficient collateral in fiat.  There are some entities with a whole heck of a lot of fiat legal tender and the ability to print more at will.
Again all of this is purely premature speculation on the future.  The document is less than a month old, everything can change before any of this becomes real.  Further, that the risks are out in the open is good for the Fund creators, as it shows that the fund investors are accepting of them in order to receive the benefit of fund ownership, and it is in that spirit that this is offered.

There is another customer that could deeply benefit from ETF use: large merchants.

If, to pick a name out of a hat: Amazon wanted to accept Bitcoin, they may need to use the swift liquidity of the ETF to manage volatility risk.  In this way, it could be a tool to GREATLY expand the Bitcoin merchant economy.

If the brothers took the coins from under the trust, they would certainly make it look like they "mysteriously disappeared" and it'd be hard to catch them.


I don't quite understand how this is any different from the "paper games" being played with gold and silver in order to suppress them. So could this ETF be the instrument the enemies of bitcoin could use to suppress its price or not? I still can't answer this question even with this detailed info you guys here are distilling from the document.

Why would they bother with this when there are already tools that let merchants manage (or even eliminate) volatility?  Coinbase and bitpay already have functionality that can do this for merchants.

As far as I'm aware, the existing ways of managing volatility are pretty weak -- and lack the liquidity necessary for hedging any kind of larger position. I took a look at this awhile back in an article called Bitcoin Derivatives, Liquidity and Counterparty Risk (http://psychologicalinvestor.com/lib/real-markets/bitcoin-derivatives-liquidity-counterparty-risk-134/) and concluded that the situation at the time was severely limited. But I'd be very happy -- eager, in fact -- to learn of some new addition to the fray.

(The last I knew, when the likes of Coinbase or BitPay referred to "managing volatility", what they meant was "avoid volatility by not holding Bitcoins any longer than necessary".)

The eventual availability of options on something like the proposed Bitcoin ETF would be an absolute godsend in this respect.

Hmm, I'm pretty sure I wouldn't agree with all those agrees...but we can at least agree to disagree on that.  ;)

yes. Coinbase and Bitpay service function in an automatic way rather than managed, in short they aren't ETFs.  When you are looking at large merchants, there are even better options than what Coinbase and Bitpay type services do.  This is one of the things that ETFs and commodity futures products were designed for, to manage volatility in your supply chain.  If you want to manage risk (as it take some measurable and flexible risk and get the reward of that) but not lose flexibility, you can hedge against your risk with an ETF to as much extent as you please rather than being in a fixed percentage with automatic conversion to fiat.  Coinbase and Bitpay have the Small-Medium Enterprise (SME) as their sweet spot for marketability.

Anything in particular?

For my part, I would have imagined that folks concerned about market manipulators would be more concerned about the relatively low volume exchanges we have at the moment, where just a few million dollars here or there can exert quite an influence on exchange rates. Generally speaking, I think boosting volume and increasing market breadth makes it harder, not easier, to fiddle with free markets.

It seems that if we want big business to start accepting bitcoin, we need an ETF for them to manage risk - at least while the currency is so volatile.

TL;DR?   Yes


It isn't much different to the gold and silver paper games except in respect to time-frame.  Gold and silver ETFs in large part did become the primary mechanism for price discovery.  In part that is an artifact of how gold pricing was previously set (using a very old and non-transparent method of five bankers in London deciding what it was).  That was easily replaced by the real-time pricing of ETFs.  Bitcoin already has that real-time pricing though, so it may likely not follow the same path...

But to put out an answer...

If Bitcoin has enemies, and if they wanted to suppress the price, (or introduce volatility) and if these enemies have enough fiat, and if such an ETF becomes the primary mechanism for price discovery then... yes.

They could only suppress the price until the fund ran out of BTC to sell on the spot market.  The fund would settle for fiat a the bottom and then BTC would revaluate higher.

These same games could supposedly be played out on current BTC exchanges?

So what is the difference?

That appears to be the Winklevoss's opinion, yes, and likely their best and most lucrative market.  
There may be other ways too, but this one has a clear model, and I am hoping along with many that the cure is not worse than the disease and that they succeed.  
If its otherwise, not much we could do about it, right?

With an ETF, some brokers would allow clients to short sell with USD collateral.  Currently, you can only do this if someone is willing to lend you BTC.

If the problem is that people will be able to do what they can with any other currency, then that is not a problem.

Or the opposite of this.

The fund Trustee has some discretion, it is not required to sell anything on the spot market, or it might sell for other reasons than sale of shares....  

This is what derivatives are for though, not ETFs.  And this is true, they aren't managing volatility so much as avoiding it altogether, but it serves the same purpose really.

It might present some challenges even if you presume that everything currencies do is not an insurmountable problem for Bitcoin.  Is it not a problem because no one loses currency wars?  Or not a problem because whipsawing a currency to shake the value out of an economy is the law of the jungle and if Bitcoin isn't the fittest it ought not survive?  Or not a problem because an economy with less than a billion USD in aggregate value can easily fend of leveraged attacks from central banks that add multiples of that to the money supply each because it is just better by design?

Bitcoin is a good experiment, this is another variable.  I'm looking forward to what might come next.

Similar, but not the same.  Sure they could use a derivative too, but that is regulated differently and also accomplishes it a different way which may or may not be what they want.

A company may just rather do the math themselves and take a measured amount of risk that suits them rather than a fixed amount that suits their payment vendor. 
 

I never said there was a problem.  You asked what the difference was and I explained it.

But regardless, this funds ability to cause the actual bitcoin spot price to fall is limited by the bitcoins it has to sell.

At the end of the day Bitcoin is 100% voluntary it's value is derived from the protocol and what we are prepared to pay to be governed by it.

I'm looking forward too.

The maths mentioned earlier is hard to sallow when you're a big fish, as the cost to play by the rules is high especially when you are the first or part of the late majority.

No.   It isn't
Bitcoins may be collateralized by the fund, or by its participants.  So it depends on what you consider to be the source of the spot price.  
The thread postulated that the ETF could itself become the pricing mechanism rather than the exchange as it stands today.

Sure... if the ETF became the pricing mechanism.  But as other have pointed out, bitcoin already has a widely established spot market and large holders are unlikely to give up the freedom of coin possession for more risk plus a fee.

This assumes that "the price" is discovered on the spot market. The danger is that the ETF will take over price discovery... then we might have a huge problem.

I'm not sure whether this will be helpful or not -- so if it isn't, just skip this post entirely -- but as the OP, I feel some obligation to try and summarize a few of the various threads that have emerged here so far...

To recap the original article (Winklevoss Bitcoin Trust May Become THE Price Discovery Mechanism for Bitcoin (http://psychologicalinvestor.com/lib/real-markets/winklevoss-bitcoin-price-160/)), if the Winkelvoss trust is approved, there are strong arguments for believing it could wind up becoming the principal price discovery mechanism for Bitcoin, supplanting existing exchanges. In addition, much of the speculative and investment volume currently on existing exchanges could wind up migrating to trade in the trust. The article outlines several reasons why the inadequacies of existing exchanges, combined with the advantages offered by an ETF, could bring this about. The article used gold ETFs as an historical example; representing around 6.5% of global gold demand, gold ETFs do not set the price of gold, but they do exert significant influence.

The original article does not address any questions at all about price manipulation or potential malfeasance on the part of the fund issuer or how it might all be exploited by central banks to harm Bitcoin. The original article's focus was on arguments about price discovery in the first instance; the article also touched on the relevance of the ETF for the eventual introduction of standardized options, and it touched on the primitive nature of trading network-style exchanges as compared to 'real' exchanges with an identifiable counterparty. If there was any speculation in the article, it was focused on that last issue, and the idea that the ETF may incentivize someone to step up and create a 'real' exchange.

Through the course of the thread, we've covered the area of share basket creation and redemption via Authorized Participants and revisited the fact that the trust will be backed by real live Bitcoins; we've also covered why individual investors won't be cashing in their shares and getting Bitcoins in return, and why that isn't a problem.

We've touched on what differentiates the Winkelvoss trust from the Exante fund, and also from the recently announced 'Bitcoin Fund', and touched on the distinction between a hedge fund and a currency fund.

'NewLiberty' in particular has introduced the idea that the ETF could provide an efficient means for central banks or other potential enemies of Bitcoin to cause problems, and if I have followed the thinking correctly, has also suggested that there could be some way for the ETF to break the link between shares being traded and the underlying entity backing those shares.

So, I think that's roughly where we are now.

In the latest few posts, if I've understood correctly, 'notme' has wondered about shorting the ETF with USD collateral, 'halfawake' has commented about derivatives as distinct from ETFs themselves for risk management, and both 'molecular' and 'notme' have brought us right back to the original topic again and wondered whether the ETF really could become the principal price discovery mechanism anyway.

For my part, my thoughts on all of those last bits are closely connected. As I see it, a great advantage of an ETF would be that it opens up buying and selling and short selling to a vastly wider audience, and it provides an underlying security suitable for the introduction of standardized derivatives. (It makes little difference what is used as collateral in ordinary short selling, by the way: collateral is merely what you are putting up to show you have the resources to buy back the share when the time comes, and the share still has be borrowed from someone before it can be sold. I.e., the share being sold short is not the collateral. Even in the relatively rare case of naked short selling, someone still has to be pay the piper at the end of the day; analogously, you can write naked calls all day if you want, too, but you will still be forced either to buy them back or to cough up the underlying should that call expire in-the-money.) And assuming that standardized options eventually became available on the ETF -- as tends to happen for anything with significant volume -- the Bitcoin economy would immediately gain hedging mechanisms far surpassing the capabilities of anything we currently have available.

ok, now you've made me use your tip jar ;) This doesn't happen often.

Oh, hey -- that's great (and entirely unexpected), many many thanks for that!  ;D

(Like many folks, I generally use any given receiving address only once, so off I go to swap in a new one...)

To close that gap, here is an article on how gold ETFs may be used to manipulate prices.
http://www.bizforum.org/Journal/www_journalJVP010.htm
No malfeasance is required on the part of the fund issuer or anyone else.  Currency manipulation is legal when done by states, though there may be political repercussions or potential action by international entities such as the WTO or IMF.  Being legal does not make it a good thing, merely not easily punishable.


Lets refer to "the underlying entity backing those shares" as "Bitcoins" to simplify this at the start, even though this is not perfectly accurate.  The link-breaking comes through what is called collateralization.  The collateral for the ETF starts as Bitcoin, but may be swapped for other collateral under discretionary terms between the "Authorized Participant" (50K share basket buyers), the Sponsor (Math-Based Asset Services LLC - Cameron is CEO, Tyler is CFO) and the as yet unnamed trustee.   The collateral used is at the discretion of these three.  So in the case where the "Authorized Participant" is extremely highly liquid, (such as a reserve bank) non-bitcoin collateral may well be used.  This might be done to sell short (selling borrowed value) or arbitraging or for other reasons.  

The ETF is ostensibly meant to track the value of the Bitcoin, in fact what it does is track the net asset value (NAV) of the trust, which is primarily expected to be Bitcoins minus expenses, so it starts out pretty close.  To track the NAV, a trust primarily collateralized by Bitcoin must have the value of Bitcoin assessed.  At day 1 of the ETF, this value is derived from the existing Bitcoin exchanges in what is called the "Blended Bitcoin Price". ( S-1 p 4,12) http://www.sec.gov/Archives/edgar/data/1579346/000119312513279830/d562329ds1.htm (http://www.sec.gov/Archives/edgar/data/1579346/000119312513279830/d562329ds1.htm)

Dr Greg postulates that over time, and with increased use, the ETF value may supplant the Bitcoin exchanges in determining the Bitcoin price.  This may happen.  The result would then be a bit recursive with the ETF's Bitcoin value determination heavily influenced by the the price of the ETF.

This circumstance is more or less where we are today with gold and silver, so for the sake of discussion let us move forward into the future some years and assume this happens.

We can set aside whom this advantages for now, though I will offer that the advantage is not mine or likely most of the readers of this forum.


Here is a place where we diverge more strongly, so I will slow down a bit.  I would claim that the collateral does matter because it invariably introduces "counter-party" risk in all cases where the collateral is not Bitcoins.  The Sponsors, Trustee, and Authorized Participant may agree that the risk is small enough, but in any case this happens out of the sight of the trading public, and the public must blindly trust this trinity's judgement on the matter.  
We can get more into that part of the discussion, if anyone else is interested.


Relative to the average trade, naked short selling may be rare, but the SEC calls it "Prevalent" in this recent case:
http://online.wsj.com/article/SB10001424127887324904004578537692730996164.html


You refer to expiring call options here, but we don't have to add derivatives to the mix to show where it becomes pernicious to Bitcoin.
Simple collateralized short selling of the ETF has the same, or even stronger effect.  It drives the price of the ETF down.  Remember, now we are in our future where this ETF is the means of price discovery for Bitcoin?  This devaluing of Bitcoin by collateralized shorting will also devalue the vaulted Bitcoins supporting the ETF.  Since everyone is watching the ETF price to know how much their Bitcoins are worth, the Bitcoins out in the world also lose value and this happens without any Bitcoins being sold.

But wait... while that sinks in, let us go further into this future...

As indicated in the SEC case above, there are some rules governing Naked Short Sells.  Some jurisdictions even ban it altogether.  Recognize however that these rules do not apply to central banks!  Take the USA, neither the SEC, nor the CFTC, nor the IRS, nor anyone else is ever going to investigate, much less get an Atn.Gen. to bring a case against the Federal Reserve for doing their job.  As agents of the Federal government, they have the role of defending the currency from "disorderly conditions" wherever they may find them.  The Federal reserve banks may do with patriotic impunity what an American citizen may not do.  In the same way that government holds the monopoly on the right to imprison/kill... since 1913 it may also do this with threats to the Federal Reserve Note.
There is an existing structure for the Fed to do this called the System Open Market Account (http://www.newyorkfed.org/aboutthefed/fedpoint/fed27.html) which as of October 26, 2011 had US$2,635 Billion which could be used as collateral, including $849 Billion in Mortgage Backed Securities bought from TARP.

Now...Personally, I have no politics at all.  It just isn't my thing.  I am not for or against the Federal Reserve or any of the other central banks of BASEL. They are not my enemy.  Such matters are far beyond anything I could hope to influence even if I wanted to.  My role here is just to point out the pieces on the game board and what rules those pieces follow as they move about in response to the questions asked from our friends here.  My hope is just for the success of people including the Winklevoss, and for helping folks to understand these complex financial interactions in simple terms providing illumination for easy reference to the publicly available source material.

Maybe in time, the Winkelvoss ETP could become THE pricing mechanism for BTC.  If it happens, maybe we will get to see how it all works out.  Perhaps I'm just less eager than some to discover how it does.



Yes... immediately gain hedging mechanisms far surpassing the capabilities of anything we currently have available.   Yes.  Yes it would.

As I described at length in the separate derivatives article (http://psychologicalinvestor.com/lib/real-markets/bitcoin-derivatives-liquidity-counterparty-risk-134/) that was linked from the original article, businesses currently do not have any particularly effective ways of hedging Bitcoin currency risk. Let me go right out on a limb here and assert that pretty much any businessperson who wants to deal with any serious volume of Bitcoins is going to appreciate a more robust hedging mechanism than the BTC/USD futures traded on ICBIT.

As I explained in that separately linked article on derivatives and counterparty risk, at the moment this is a huge gaping hole in the Bitcoin landscape, and it acts as a strong disincentive for real businesses to do much of anything involving Bitcoins as an actual currency.

thank you.

I'm still scratching my head here... Let's ignore "counter-party" risk for a second (I couldn't care less if the lender of the bitcoins doesn't see his coins because of borrower (short-seller) collateral somehow turns out to be insufficient to buy back the bitcoins. It is then as if the borrower had sold the bitcoins himself... a big problem for him (he wanted to lend, not sell), but for outstanders this doesn't make much difference, does it? In other words: this may be a risk for certain participants, but not Bitcoin itself.

Now, Greg says the share still has to be borrowed from someone (and I don't think NewLiberty contradicted this?). As I understand shares cannot come into existance without equal amount of bitcoins being depositet, right? This in turn means that potential short-selling is limited to the amount of bitcoins in the coffers of the trust. Noone can ever sell 21 million and 1 bitcoin.

Just as the ECB (and probably all other central banks) is worried about inflation of the money supply under their managment (by others than themselves), I am naturally worried about inflation of the Bitcoin money supply (other than by miners in predetermined way). I seem to oszillate between believing this ETF could become a danger in this regard and thinking it cannot. Currently I think it cannot (simply because every sell is subject to the existance of a share and every share has an associated bitcoin in the vault).

The danger is less that the trust exists and more that it might become the pricing mechanism for Bitcoin.

Some points that may clarify it.
1) At inception every share has .2 shares in the vault rather than 1.
2) New baskets of 50K shares may be created by sending the trust 10K bitcoin.
3) When shares are sold, bitcoin are not necessarily sold at any external exchange.
4) Shares can be sold short, through the use of collateral.
5) The Collateral need not be bitcoin (it likely rarely or never will be).
6) There is no firm linkage between shares value and bitcoin value (share value is somewhat linked to Audited Net Asset Value of the trust, not to value of bitcoins held in the trust).
7) Redemption of shares may not give you Bitcoin, the debt may be settled through fiat, redemption may not be honored for legal reason, or logistical reason.
8. No bitcoins are need to be borrowed from anyone for the selling short of ETF shares (ETF shares are lent not bitcoin).
9) The problems I mention may occur when folks confuse ETF shares with Bitcoin and equate their value (as is likely to be common given the content of this thread).
10) Short selling of ETF shares is not so much limited by the amount of bitcoin in the vault of the trust as it is limited by the ability of short sellers to post adequate collateral (in say, Euros, US Dollars, Mortgage Backed Securities, or whatever is accepted).  

I don't oppose the creation of the ETF (nor would it likely matter much if I or anyone here did).  If the ETF can be said to inflate the money supply, it isn't M1.  I also do not believe that the existence of the ETF poses any existential threat to Bitcoin, and it may be good for Bitcoin, though the ETF does present some new challenges along with the opportunities and these challenges ought not be ignored.  If someday in the future, if the ETF becomes the primary pricing mechanism for Bitcoin value this (in my humble opinion) is not such a wonderful outcome.  Then the ETF share price can be driven to up or down highly without increasing or decrementing the bitcoins available to the market from the trust.  That outcome could pose problems for a commercial bitcoin economy in the same way that gold and silver ETF have posed difficulties for the gold and silver bullion trade (and by contrast, these are only rarely used as in commercial economic exchange in the way that Bitcoin is intended to be used as a medium of exchange).  

Weirdly...If Bitcoin does have government enemies, then Bitcoiner opposition to the ETF could perversely make it easier for it to pass regulatory approvals... so by folks pointing out these challenges now during this process...

A couple more clarifications of the clarifications, for clarifications' sake... ;)


The same is true of all ETPs: shares can be traded back and forth between different holders all day long, sometimes adding up to a significant percentage of the total shares outstanding. That need not have any impact at all on the circulation of the underlying entity in the broader economy. Likewise, you and I could trade 1 Bitcoin back and forth between ourselves all day long if we wanted.

Is there a potential confusion here between shares being sold (traded from one holder to another) and shares being redeemed (converted from shares into Bitcoins)?


I wonder whether there might be some confusion created by two completely different uses of the word 'collateral'? In the case of collateral for shorting, the word refers to nothing more than something of value which the short seller provides to the entity who is providing whatever it is they are short selling. The short seller provides the collateral to secure their commitment to later cough up the cash to re-purchase whatever it is they bought to sell short and return it to the entity which provided it in the first place. It would make no sense at all for the collateral ever to be identical to the thing which is being sold short, because if the short seller already had it, they could just sell it, not short sell it.

In the fiat world, collateral is normally the rest of the investor's equity portfolio plus cash.

But this use of the word 'collateral' has nothing at all to do with what backs the ETF itself. If I want to short sell some Google, and my portfolio has sufficient value to collateralise my short sale, nobody complains that I am not putting up some Google before I short Google, and nobody suggests that my short sale is somehow going to leak Googleness out of Google or break the link between Google shares and underlying Google.


Hmm, here again, I wonder whether some readers could find this confusing...

If, by "share value", you mean "the value of a share as set by the market" (i.e., price), then generally speaking there is never any such linkage except that which is enforced by arbitrageurs. (Provided that can be done; in the case of closed end funds, the price may vary by quite a bit relative to net asset value.)

If, however, you mean "the value of the underlying Bitcoins held by the trust", then the share value is, by definition, the net asset value of those Bitcoins per share.


On the contrary, redemption of shares by Authorized Participants always yields Bitcoins delivered to the AP by the trust. The passage in the S-1 which you've referred to previously is describing the process which will be followed if the AP fails to deliver a basket of shares to be redeemed by 9:00 a.m. on a particular day of the week, not the other way around. In other words, the passage about collateralization of that commitment, etc., etc., has nothing to do with failure by the trust to redeem shares in Bitcoin, it has to do with failure of the AP to deliver shares when redeeming for Bitcoin.


Naturally, no Bitcoins need to be borrowed from anyone prior to short selling ETF shares, since the requirement is for ETF shares to be borrowed.


The short selling of ETF shares is very precisely limited by the number of ETF shares available to be shorted.

If what you're referring to is actually the practice of naked short selling -- selling something that you have not first borrowed -- then clearly that has nothing to do with collateral, or Bitcoins, or anything else that is specific to this example. Naked short selling is a broader issue, and abusive naked short selling in particular brings with it a whole raft of legal considerations.


If the problem you're getting at is just that, like any other commodity ETF, the trust must hold some of the underlying entity (in this case, Bitcoins) in order to exist at all, then that seems to me an entirely different discussion than all of the above about collateral and redemption and the difference between trading and redeeming.

I am trying to reduce confusion rather than add it.  And to simplify using easy common language words without reducing meaning.  Many readers are not reading this in their native language or aren't investing experts.

Share value here means the market value of a share (of the WBT).

Yes this is similar to any ETF, but to your second interpretation, share value is not by definition, the net asset value of those Bitcoins per share, as the trust also has liabilities which modify the NAV...  and as I will reiterate below, this can also be perniciously affected by the market value of a WBT share, and further the bitcoin-per-share is not something that should be expected to stay the same over time, by design it will decrease (below 0.2 BTC).

Bitcoins are also over time trickled out of the WBT to the sponsors (Winklevoss) and others to pay them, but that is another issue entirely.


No.  Remember that we are discussing the future here and so should expect that this WBT will follow the patterns of other ETF.

Don't forget that the Trustee and Sponsor (Winklevoss) may amend any provisions of the Trust Agreement without the consent of any Shareholder. Any amendment that imposes or increases any fees or charges (other than taxes and other governmental charges, registration fees or other such expenses), or that otherwise prejudices any substantial existing right of the Shareholders will not become effective as to outstanding Shares until 30 days after notice of such amendment is given to the Shareholders. Amendments to allow redemption for quantities of Bitcoins smaller or larger than a Basket or to allow for the sale of Bitcoins to pay cash proceeds upon redemption shall not require notice pursuant to the preceding sentence. (S-1 p. 66) http://www.sec.gov/Archives/edgar/data/1579346/000119312513279830/d562329ds1.htm#tx562329_14 (http://www.sec.gov/Archives/edgar/data/1579346/000119312513279830/d562329ds1.htm#tx562329_14)

This practice has played out with gold and silver ETF as well.  Settlement may be in fiat, not the asset.  The sale of Bitcoin to pay that cash redemption need not be via a public Exchange and may be private.  Redemption of share basket does not necessarily cause Bitcoin to become available.


Yes thank you for helping to make this clear, selling ETF shares short does not free any Bitcoin in the vault.

The effect of this is that shorting ETF shares will effect the ETF pricing...  And if the bitcoin price is deemed to be determined by the ETF price, this will reduce the value of bitcoin in and out of the trust.  This effect is the pernicious risk of using the ETF to determine market value of bitcoin.  Market participants, can short the ETF by posting non-bitcoin collateral (and they don't even have to do it naked), to affect the bitcoin pricing.


Not really no.  That would be a very weird "problem". :)
I am not claiming that the WBT is uniquely weird.  Rather I am claiming the opposite, that the WBT could pose the same sort of issues that have been problems for other commodity (and emerging market currency) ETF with respect to the underlying asset (Bitcoin).  

The ETF share price can be driven to up or down highly without increasing or decrementing the bitcoins available to the open market from the trust.  This is different from the simple exchange-based price discovery which does not allow for collateralized shorting, derivatives, or other complicated market operations.  For the sake of those less well versed in the potential effects of these, the entry of the WBT into the market of everyone with a trading account (rather than a bitcoin wallet) may have profound effects on bitcoin valuation.  Ceding to it the control of bitcoin pricing may not be (and probably isn't) in the interests of a thriving bitcoin economy.
On the other hand, a thriving bitcoin economy may vary well improve the value of the WBT.

Net asset value means the value of assets net of liabilities. Of course NAV changes over time: unlike the 'Bitcoin Fund' which appeared briefly earlier in this thread, and which charges an up front load rather than tapping into the fund's assets, how else would this trust fund itself?


I wasn't trying to speculate about how the agreement's provisions might change in the future, I was trying to clarify what it actually says right now, which is that shares may be redeemed only in whole baskets, and that whole baskets will be redeemed for Bitcoin.


I'm afraid I'm not seeing the big issue here. Shorting anything in volume may cause its price to fall. You can short Bitcoin right now if you want: open up a Bitfinex account, deposit some collateral, and place your sell order.

As to the ETF being "deemed" to be determined by the ETF, the original premise of the article was merely that it would likely become the principal price discovery mechanism, not that anyone would need to deem it that way in order for it to be so.


The Bitcoin market already allows both 'collateralized' shorting and derivatives on BTC/USD. The impact of a broadly available ETF might change this in quantity, but not in kind (except to the extent that options will be vastly better than futures, IMHO, but hopefully you still get my point).


I agree that it may have a profound effect on Bitcoin valuation, but I do not see any actual argument to the effect that a larger, more liquid, more efficient market with the potential for derivatives vastly superior to what we have now would be other than good news for the Bitcoin economy. In other words, I hear what you're saying, I'm just not grasping any argument along with it.

You are speculating about the future.  Whether the "Winkelvoss ETP could become THE pricing mechanism for BTC".
My quote was from the current text of the S-1, which says they can amend to redeem in fiat, without notice.

The issue may be more obvious to you when you look at the difference between shorting bitcoin on an exchange (where you must borrow bitcoin), and shorting shares of the WBT where you are borrowing shares of the WBT ETF, when you consider the topic of your thread here.  The use of the WBT as THE pricing mechanism for BTC.

When the price of BTC can be manipulated with no actual BTC trading hands and by using fiat collateral instead through trading ETF shares instead, we have the pernicious effect. 
Read some news about April 12,15 2003 gold ETF pricing?  I do some trade in physical gold and silver.  The market disruption from the ETF pricing to the extent that they also affect the physical market pricing is a "big issue" in the same way that folks using bitcoin as a medium of exchange may discover a "big issue" if/when the WBT becomes THE pricing mechanism for BTC.

It is a change in kind as well as quantity, as noted above (and as you parenthetically note here).  Shorting BTC is qualitatively different than shorting an ETF, and becomes pernicious when the ETF is used to price the asset upon which it is based, namely Bitcoin.

You may notice the coordinated efforts from regulatory authorities to limit the liquidity and velocity of the exchanges.  This adds to the risky possibility of the WBT becoming the pricing mechanism.

On a Friday in April, in a few massive block trades totaling more than 13 million ounces of paper ETF gold, the bullion banks set in motion a mechanism to capture the physical assets.  This was done with a small fraction of the total gold worth, and no actual gold traded hands to do this.  Folks trying to redeem their gold from their ETF can get paid out in fiat currency (at the now lower price because the gold price is based on the ETF not on what it costs to get the physical in good delivery).  Subsequently, the good delivery price also fell.

What this means to Bitcoin folks is that the merchantability of their Bitcoins in their wallet may suffer a similar fate, but it would be orders of magnitude easier to do with Bitcoin than with gold due to the relative market size, if what you contemplate comes to pass, and the WBT becomes THE pricing mechanism for BTC.


I added a few more handles here to make grasping it more easy.  I am not yet suggesting that the existence of the WBT is good or bad, only that using it as THE pricing mechanism for BTC has an important risk, made more important by the fulfillment of that risk in the marketplace a few short months ago.  I remain pleased that the Winklevoss brothers have found a use for their Bitcoins, and wish them every success.

But to your newly raised point here, there are a variety of other ways that it could be "other than good news for the Bitcoin economy".  There is certainly some good things about it for the Bitcoin economy, there are also some which are not good.  Please be wary of optimism bias.

It doesn't seem to me that you have shown how collateral is in any way relevant: it is fiat in both cases, and in both cases either Bitcoins or ETF shares backed by Bitcoins must be borrowed.


This doesn't seem to me very much different from saying "shorting gold is qualitatively different than shorting a gold ETF", which on the face of it doesn't seem very convincing.


Except that 0) this is extrapolating from a speculated explanation about events surrounding an existing ETF to a hypothetical future in which an unrelated ETF is retrospectively altered to work in a fashion contrary to how it is currently set to work, 1) "folks" are not redeeming gold from their ETF, only APs ever redeem gold from their ETF, 2) to the extent that some unknown entity out there did actually try to redeem gold and instead got that nasty fiat stuff, of course they will have received the current spot price, which they could immediately have turned around and converted right back to gold if they so desired, and 3) if you really want to turn this into an actual argument about leaking assets out of an ETF, you need to demonstrate that the quantity of physical gold per share outstanding in fact changed -- not just temporarily, while someone was holding this or that as temporary collateral to keep the market functioning in an orderly fashion, but permanently.


If you'll forgive me a brief moment of barbed levity to let a bit of steam out of my frustration pot -- we're still among friends, right  ;) -- my bias here is not toward optimism, but away from argument by repetition or argument by reference to converging irrelevancies. Either my understanding of what you have actually said is entirely inadequate -- and I accept entirely that I may simply not be keeping up -- or what you have said does not embody any sound arguments to support your conclusions. I'm guessing that we'll need to disagree on the topic.

Just like gold, in future bitcoin ETF will be traded in different stock exchange like London, Hong Kong, Tokyo. It seems someone is trying to setup one in Zurich

I expect you're right -- where there's an opportunity and clear value to be provided, someone will probably step in and make it happen. If much wider trade in Bitcoins does become available, in my view that will be a great thing for the Bitcoin economy. (Although many would disagree with me, some vociferously -- see NewLiberty's thoughts above.)

If the ETF does wind up being approved and options on the ETF eventually appear, as has been the case with other commodity ETF, then at last Bitcoin businesses will have a viable means of hedging their exposure to the currency. (IMHO, existing Bitcoin derivatives leave much to be desired.)

apart from the danger of "them" "pulling a GLD" on us by making the WTF THE pricing mechanism for BTC and then in some sort of colluded half-secrecy pulling levers to convert it into an "orderly market" (i.e. keeping it down using printable collateral), isn't there another possible negative effect: the redirection of demand from bitcoin to the WTF. Holding a share of WTF is by no means the same as holding a Bitcoin (privacy, third-party risk, transactability) and I'd hate to see people want to join Bitcoin and then be sold some paper by their bank.

In general: even if this is an evil plan to keep bitcoin small, I somehow doubt it will work. Bitcoin is not gold and it already has low transaction and storage cost and can be transacted electronically. There is no need for a substitute in my mind. The "advanced" financial instruments that might be desired by some big players/investors can surely be built on top of the underlying directly somehow, no?

Also: I don't necessarily want an orderly market, I primarily want a free market.

I must confess that there are some investors that I wouldn't mind seeing lose their money by buying worthless paper. Certain institutional investors, for example. I strongly suspect that large public sector pension funds like those managed by CALPERS created the shareholder pressure to strip mine the US tech manufacturing base in the 2000s (start with a profitable company, lay off R&D and customer support, divert all funds to marketing to pump the share price, when it falls apart ship everything to China).

Anyone dumb enough to invest in a bitcoin ETF, or any "share" of bitcoin being held by someone else, is dumber than a pile of rocks - seriously.

Just buy the fuckin bitcoins and keep them yourself. Why put your trust in an unknown entity? I think a lot of you are still children that need someone to hold your hand for you.

There are many reasons to invest in an ETF rather than physical BTC. For example, hedge funds or pension funds may only be allowed to invest in listed assets. Investing in ETF may also fulfill the requirements of some business migration schemes. You enjoy the first class trading engine on NASDAQ, rather than the Magic the Gathering engine.

FAIL.

Absolutely, they could be!

Unfortunately, so far the Bitcoin economy as a whole hasn't yet mustered what is needed to reinvent that wheel. As I mentioned in the article on Bitcoin Derivatives, Liquidity and Counterparty Risk (http://psychologicalinvestor.com/lib/real-markets/bitcoin-derivatives-liquidity-counterparty-risk-134/), which is linked from the article that kicked off this thread, the Bitcoin economy could desperately do with decent derivatives. However, existing Bitcoin exchanges haven't yet even advanced to the point of acting as counterparty to the trades they broker or providing market making services -- they're still operating as trading network style exchanges with transactions between one person and another -- let alone moving in a direction that would permit a standardized options clearinghouse to function.

If you want a shortcut to all that, the relatively easier way to make it happen is to stuff the Bitcoins into an ETF wrapper, backed by real Bitcoins, that enables all the existing market apparatus to be applied to it: introduce a Bitcoin ETF, and if there is sufficient volume, expect options on the ETF to follow.

I get that to some folks the very idea of any transaction Bitcoin-related that doesn't occur directly with real Bitcoins is anathema. However, unless real businesses handling significant sums can find a way to hedge currency exposure, I think it's going to be pretty tough to convince many of them to take Bitcoin transactions seriously.

I guess when you have Winklevoss money you can pay a PR firm to come here with some sock puppet accounts and try to promote this bullshit.

Anyone dumb enough to invest in a gold ETF, or any "share" of gold being held by someone else, is dumber than a pile of rocks - seriously.

Just buy the fuckin gold and keep it yourself. Why put your trust in an unknown entity? I think a lot of you are still children that need someone to hold your hand for you.

Wow, I must admit I've never been referred to as a sock puppet before!  ::)

I wonder have you had a chance to look over the original article?

Seriously, I hear that you're opposed to it, but as I already posted in the other thread where you described the very idea as "stupid" and negating the whole point of owning Bitcoins in the first place, wouldn't you consider it possible -- likely, even -- that different people might want exposure to Bitcoins for different reasons than yourself?

I'm guessing you'd happily acknowledge that, but that you have some supporting arguments in mind, lurking in the background, that you haven't shared yet; do feel free to fire away! (As the OP, I did try a few posts back to summarise the different threads that have interwoven themselves so far in the discussion, some on topic and some -- like this, perhaps -- not so much. But obviously there's plenty of room for more.)

Let's give Dr. Greg the benefit of the doubt, please. There's no gain for anyone in destroying the friendly atmosphere.

It seems we have arrived again at the "great divide"... some want to integrate cryptocurrency into the existing (proven) structures in order for it to be able to grow into something serious and game-changing... a new kind of money. Some want to just fuck away with all the shit, hang the banksters and their masters and start over "System D"-style.

I can understand both approaches. The rebel (https://bitcointalk.org/index.php?topic=162130.0) in me tends to prefer the latter "solution" and suspects evildoing from advocates of the former approach. At this point I was initially going to write about the part in me that preferred the former approach of integration, but quite frankly, I am failing to come up with a convincing story... to be continued.

+1 @ molecular
here is way more important issues discussed than it could appear, if not MOST important for the bitcoin's future. And in a friendly way.
must say i'm not much into investments, further i'm not english native at all, but this is one of the most interesting threads i've came across in a last time.
watching with big interest...

I finally read your article. You fail to mention mpex.co, which offers futures and options. I don't know how counter-party risk is handled and the operator seems to be perceived by many as an asshole, but isn't mpex at least worth mentioning?

Yes, certainly worth...mentioning. I generally avoid saying much about MPEx. I'm not aware of anything about the exchange that would change the general points of the derivatives article, including those on market makers, counterparties, and liquidity.

Which is exactly the sort of tension that -- to me, anyway -- makes this topic especially interesting!

I also can appreciate both perspectives, and I get that there's a long tradition in the Bitcoin community leaning toward the rebel side. What fascinates me is the possibility of the two coexisting, the idea that some of the pre-existing, already well cooked apparatus could, in a sense, be permitted into the Bitcoin system, on the system's own terms, without Bitcoin winding up simply being railroaded or ridden over rough-shod. How often does the little guy get to deal with the big kahunas without ultimately being crushed? Bitcoin could change that dynamic. Now that's what I find cool.

OK, it's way past my bedtime in this part of the world, and I'm probably not even thinking clearly.

I find it almost incomprehensible that the implications of the difference between borrowing actual Bitcoins, and borrowing ETF shares backed by Bitcoins is not clear in light of the April 12,15 activities in the GLD ETF, in a market where the ETF is the pricing mechanism (as it largely is for gold).

When market participants (including those that are not beholden to anti-manipulation rules, such as the central banks) can move the market price of a commodity without ever having to go to the market and acquire any of that commodity through the use of an ETF which acts as the price setting mechanisms, and can do so by securing their trades collateralized with fiat instruments that they can create at will...

What part of this is confusing?

If these market participants had to go to the market to acquire bitcoin in order to sell ETF shares, there would be a buyer for each seller in the price setting mechanism of actual Bitcoin which would limit the effect as actual Bitcoin owners could decide to sell or not at whatever the price may be.

When you don't need to borrow any bitcoin, and only need to borrow ETF shares (and where no bitcoin need be bought at market to support the short selling) such market participants can change the market price of bitcoin at will with relative ease in whatever way they like.

An ETF (such as the WBT) acting as THE pricing mechanism for BTC enables this.  It resets the price of bitcoin with no bitcoins being traded, and does it through a small fraction of the bitcoin market (just those held in the trust).

Can I get a show of hands that DO understand this issue?  I feel that I am getting a bit repetitive here, and I don't want to belabor the point if it is not needed.

@NewLiberty

I believe in such a scenario, the ETF would cease to be THE pricing mechanism.  People will buy on the spot market as they become undervalued, decoupling the ETF rate from the "physical" rate.  Unlike gold or any other asset, the barrier to actually move the bitcoins is relatively small.

Moving gold has been done for centuries, it isn't so hard or mysterious.
Nevertheless, I am inclined to agree, and I would hope that the de-coupling would happen faster with Bitcoin than it is with gold and silver, but it is guaranteed to not be instant.  To some extent this decoupling is beginning to happen with gold and silver as the time to acquire "good delivery bars" lengthens.

As much joy as I get from having my raw material costs being so cheap right now, the frustrations I have to deal with in getting delivery almost balance it out.  I've had some suppliers decide to stop selling claiming to be "sold out".  I don't blame them, but what good is a low price if there is not sufficient availability to back it?  Many that were using ETF to get delivery via redemption have been thwarted with fiat.  This is not so much a theoretical risk, as one that has been exercised by market participants.

Frankly, I am of the opinion that the Winkelvoss ETP will be very unlikely to become THE pricing mechanism for BTC, but since the issue was raised, and there is apparently both confusion and disbelief about the risks of that occurring, it seemed important to explain it in some detail to the community at large.

As an aside...
Some countries (Germany, Mexico, Ecudor, Netherlands, Switzerland, etc) were asking for their national gold vaulted in the US to be returned a few months before the GLD shenanigans.  These are the big players who deal in tons not ounces. They have been told to wait (for years).  Driving the price down in advance of the delivery of the goods might be fuel for conspiracy experts.
http://www.forbes.com/sites/afontevecchia/2013/01/16/germany-repatriating-gold-from-ny-paris-in-case-of-a-currency-crisis/
http://gizadeathstar.com/2013/03/mexico-joins-gold-repatriation-bandwagon/

Yeah, you act like it would be hard for them to buy bitcoins. If they want to buy them, they can just PM me.

I wouldn't recommend posting your pic btw, you look like an asshole.

Yea, go pm some guy on the forums... that's how real business gets done ::)

I wouldn't recommend opening your mouth btw, you sound like an asshole.

Indeed, I can imagine buying and securing Bitcoins to be hard for anyone, especially for official organs needing to comply with regulations.

Come on, worst case it's not useful, there can be no harm in its existance.

I AM an asshole. I'm also right. You're an asshole too - there;s nothing wrong with buying bitcoins from me. You think buying "shares" of bitcoins from some inbred douches is more legit than getting the actual thing from me? You're an idiot to boot.

And if they don't want to buy them from me, they can post a [WTB] ad on here and there will be a bunch of members with trading reputations waiting to sell to them. Or they can buy on OTC. Or on localbitcoins. ETc, Etc....

::)

Go find someone to give you a hug.  Life is much more pleasant when you let go of your anger.

What are you, a teenager? Using the whole "U mad?" schtick? C'mon, you gotta do better than that - it's old.

I don't engage in discussions with people who can't make their point without being civil.

If you can make a comment without calling someone an idiot or inbred or an asshole or a teenager, and there is something worth replying to, maybe I will respond.  Until then, you are not worth engaging.

well, I don't know much about this stuff, but there seem to be at least standardized options and I don't know how counterparty risk is handled. Of course you're probably correct, it doesn't invalidate your points.

I'm still unclear about how this works. You said earlier the shares of the ETF have to be 20% backed by bitcoins? So if there's 50,000 BTC in the ETFs coffers, it means the would've issued 250,000 shares for the trading games into the market. While this seems bad in and of itself (inflation of bitcoin M2 or whatever you might call it if you count in the shares of the ETF) it still seems there is a limit to the malicious short-selling. This leads to another question: you said the shares have to actually be borrowed in order to short-sell. What if all shares are in the hands of Joe Normal institutional investors and they are reluctant to lend? Is their consent needed for the lending of shares or will the Winklevoss just lend shares owned by others to the short-seller?

Well. Comparing with gold again: why doesn't the physical market decouple from paper in gold? It seems the argument is that gold is hard to buy and costly to store and transact (which is not true for bitcoin). However: another reason is that big-shot institutional investors like pension funds or whatever might not be allowed to invest into gold directly. This is probably also true for bitcoin. So the case is not clear-cut.

At the risk of interjecting in a question that may have been directed at NewLiberty... The ETF is 100% backed by Bitcoins, it's just that the ratio is set up so that 1 share = .2 BTC initially. But the fund's Net Asset Value per share is always the Net Asset Value divided by the number of shares outstanding; there aren't any extras floating around that aren't backed by real Bitcoins. And yes, by definition ordinary short selling requires that shares be borrowed before they can sold. It doesn't matter whether the short seller puts up dollars for collateral, or a goat, or his great aunt; it is still shares which are being borrowed. The special situation of naked short selling is an edge case, where share have not been borrowed first. (I think it's important to distinguish those two very very distinctly, because otherwise an argument that begins talking about ordinary short selling can then wind up dipping into the properties of naked short selling before reverting to ordinary short selling again and emerging at the other end with an argument that seems plausible but which is entirely unsound.) Last but not least, an ETF itself normally isn't in a position to lend shares to anyone else; it can issue new ones in exchange for the underlying, or it can retire old ones and cough up the underlying, but it doesn't hold any that can be lent.

It might also be worth noting that in investment terms, in most situations except really exceptional ones, a significant amount of short interest (i.e., the proportion of the shares outstanding which are currently sold short) is actually a bullish indicator, since the short interest provides a 'cushion' against falls in value and tends to accelerate increases in value. The level of short interest is, in effect, latent additional demand which must at some point be met when the short sellers eventually have to cover their positions by re-purchasing whatever it is that has been sold short. When price falls significantly, some short sellers will be there to take profits and act as buyers. When the price rises significantly, some short sellers will be there to cut their losses and act as buyers (this is the 'short squeeze', when short sellers must either buy at higher prices or stomach larger and larger losses). Either way, short sellers become eventual buyers. The reason I mention this is that except for very rare cases, short selling is both entirely healthy and temporary and is not something which in and of itself is negative for the market.

I hope im understanding this correct.

If you can get all of your Bitcoin ETF´s converted to bitcoin, but there only is 20 % backing by actual bitcions. I that not a problem?

In the event that some global economic meltdown happens, and a lot of the investors (let say 30 %) deside to get real Bitcoins for the ETF´s they are holding, then we would have an equivalence of a bank run?

They're 100% backed.

In addition, one of the lubricants that keeps ETFs in general running smoothly is the 'Authorized Participant'; earlier in this thread, there's a discussion about how shares are created or redeemed via the APs, who either hand over large blocks of the underlying entity in exchange for shares, or who hand over large blocks of shares in exchange for the underlying entity. Ordinary investors trade shares, but they don't engage in the redemption or creation process.

Holy fucking christ, there sure are some naive people on here. Please read some fucking history. Or tell you what, I'll sell you shares of my bitcoins - 5% off!!

They are 100% backed.

They WBT ETF shares are not required to be 20% backed by Bitcoin and they won't be for long.  Although they start that way, over time fees and costs are paid out of the trust to the Sponsors and others so it will not remain 20%, and is never expected to reach that level after inception because no management or lending or income operation of the Bitcoin trust assets is done in this trust (SEC rules allow ETFs to lend portfolio assets to Authorized participants that want to create more shares/baskets, but the WBT ETF is not expected to do this).  It will thereafter always be less than .2 and decrease over time because the bitcoin in the trust will not be risked in order to earn anything for the trust.

So if the ETF is the pricing mechanism for bitcoin, the bitcoin price would be set by the trading of a decreasing 1% of all bitcoins.

Selling short an ETF is controlled by the "market makers" who do the buying and selling to the public (usually a large investment banking firm) not the owners of the shares.  These are the folks that lend the ETF shares to be sold short.  They do so in order to get the interest on that loan.  The market maker often also is an Authorized Participant (the Basket buyer).  There isn't much reason not to lend them.  If the market maker runs out of ETF shares to lend for short selling, they can make more shares to short sell by purchasing bitcoin (at the now discounted price due to the short sales) from the market (which is watching the ETF to know what the bitcoins are worth) and lend them for "serial short selling" depressing the price further.  

None of this is a problem at all if the WBT ETF never becomes the preferred pricing mechanism for BTC.





No uptick rule on ETF shorting

Yeah, and so are mine!

What this means, is that the investors are not going to be getting any real Bitcoins for the ETF shares they are holding, meltdown or not.  It doesn't matter how many try.

If they were Authorized Participants, they could get a fractional percentage of the bitcoin assets in the trust by paying a fee, and redeeming a basket of 50K shares.  They would get 10K bitcoins minus the amount of bitcoins the trust spends to operate apportioned across the baskets, or thereabouts.  Investors can only sell the ETF for whatever folks thing its worth.
The catch is, the trust can swap out for those bitcoins redeemed without notice for fiat, without notice at any time.  So even the AP might get no bitcoin out.
This isn't unusual, most all ETF are like this.  For most, no one would care that they get paid cash instead.  For alternative currency ETF it can defeat the purpose of the investment (currency/gold/silver/bitcoin)

From my perspective, your insistence on these kinds of points has developed to where it's no longer productive for me to debate them any further. It looks like you and I will disagree pretty strongly on matters of fact as well as on implications from those facts, but that's OK.

I've supplied support for all of them with quotes from the S-1.  If you have something to support the opposite, please share.  I'm not here to grind any axes, just to discuss this and learn if something I am looking at is not what it seems.  If it is not as I have written, I would appreciate learning otherwise.

Your insisting on a 20% backing makes it unlikely you even read the S-1

You've misread.  I never said 20% backing, just 20% pershare.  (They are 100% backed by .2 Bitcoin at the outset.)  This decreases over time under .2 as the trust pays expenses.

That is right in the table of contents / summary on Page 3:
http://www.sec.gov/Archives/edgar/data/1579346/000119312513279830/d562329ds1.htm
The Trust expects to create and redeem the Shares from time to time, but only in one or more whole Baskets (a Basket equals a block of [50,000] Shares). The creation and redemption of Baskets require the delivery to the Trust, or the distribution by the Trust, of the number of Bitcoins represented by the Baskets being created or redeemed, the amount of which will be based on the combined NAV of the number of Shares included in the Baskets being created or redeemed. The initial number of Bitcoins required for deposit with the Trust to create Shares is [10,000] per Basket. The number of Bitcoins required to create a Basket, or to be delivered upon the redemption of a Basket, will gradually decrease over time, due to the accrual of the Trust’s expenses, the transfer of the Trust’s Bitcoins to pay the Sponsor’s Fee and the transfer of the Trust’s Bitcoins to pay any Trust expenses not assumed by the Sponsor. See “Business of the Trust—Trust Expenses.”

This is further documented all through the S-1.  This should not be a point of confusion.

My understanding was never amiss on this, though I've been quoted out of context in order to make it appear that it was.
(I did maintain the "20% backing" descriptor as used by molecular without correcting it on first use to keep the response in context.)  I agree it would have been a good point to work out definitions of what "backing" means, because it looks to have led to some confusion by others further in the thread, though it seemed to be getting off the point at the time, as it does now as well.  
I trust this is better understood by everyone now?  The huge difference between 100% backing by .2 Bitcoin and 20% backing per share which merits all this recrimination?

This is why I don't get into arguments over details with these shitbags. If they want to buy "shares" of bitcoins when its easier to just buy the actual thing, I'd rather just call them out for how stupid the general concept is.

It suits my purposes.  Everyone is ignorant, just about different things.  I'm no exception.  Driven by curiosity, I read the public information about this and am using this thread to discover whether I've misunderstood something. If the WBT ETF is ultimately successfully launched, I may have something that will greatly improve it, and enhance its usefulness and marketability to a point where almost everyone here will celebrate its existence.

you have everyones attention now.

Not everybody has the same technical skills, motivations, and ideology as you.  That doesn't make them shitbags or stupid.

And no, I won't be selling my bitcoin to buy shares.  But I am able to step outside of my little world and see how it might be useful for many people for many different reasons.  The fact that you are unwilling or unable to see any of these as anything but stupid shows just how narrow minded you are.

People like you give anarchy a bad name.  You are trying to act like an authority when you say your way is the only way.

NewLiberty is talking here about facts and possibilities, which really could happen to the bitcoin.

the fact is, that bitcoin is a thread to an established system (investment=>banking=>government, or whatever you name it), and there will be not approved anything, what makes bitcoin (&co) even more powerful against existing apparatus, so to say.
almost sure at some point the situation will be exactly the opposite - nothing good for bitcoin, if not fatal.
this is very simple logic.

in my opinion such legal ETFs and further integration of bitcoin in existing system is (almost) the only way to control it. then there will be no need to shut down the network, which actually is impossible to shut down. the bitcoin (or any successor of it) just will be controlled in a very decent way, that's all.

we should do not even dream that all subjects for who bitcoin is a pain in the ass, are complete brainless dicks, right?

Anonymity allows for free speech. Privacy affords liberation from coercion/blackmail.

Each are valuable.

I advocated for anonymous student evaluations back in the early '70s.  What we have found is that anonymity allows irresponsible evaluations.  Anyone who has been divorced and had anonymous child abuse complaints made understands this process as well.

Confidentiality, which would mean the professor doesn't know who wrote the evaluation, but someone does, gives a much better balance of rights.

I agree with what you're saying and I have some thoughts.

Evaluation isn't merely speech, but requires discernment and judgment. If you're going to make a qualitative judgment then it is more like voting and I agree that should not be completely anonymous. The way it should be is that the professor in question shouldn't know which student voted which way, but the *computer system* itself could know. Access controls could be put in place so that the professor does not know. In fact no specific person would have to know until there is a dispute and a valid reason for access, but the *computer system* should always know.

For example if you look at it like pulling scrambled identities out of a hat and seeing which way each one voted, I think this is completely fair. You could get the polling information, and it could be pseud-anonymous in that only the computer would know, but there would also be accountability because if something goes wrong it could be unscrambled rather easily. I don't think the professor needs to know how each specific student voted. I don't think a human being has to constantly monitor it, but only act as an arbitrator. In a dispute the arbitrator should be given access to the identities.

I understand also that complaints should not be truly anonymous. A complaint is once again something which is a qualitative judgment which has a cost/risk to the individual being judged. I do think that the person being judged doesn't always have to know they are being evaluated, but I also think that if they are evaluated the people who evaluated them must be known by a third party. So I don't advocate a black box, I advocate a grey box where you can put your vote into it and have the ability to voice your concerns. without your boss, professor, or whomever knowing exactly who you are. This does not mean the computer system should not know who you are. It should always know who everyone is.

To reverse it for example let's say the professor really is corrupt and students need a way to report this corruption, there should be an pseudo-anonymous channel to allow them to report this. In this case they would be considered an anonymous-source. However this can be made pseudo-anonymous by attaching a digital signature, so that now they have an alias and are not truly anonymous but pseudo-anonymous and their reputation can now be mapped. If they give bogus reviews under their pseudo-identity then the computer would know this and since they have to be a legit student to have a pseudo-identity the computer could revoke their ability to give reviews if it is found out that they are abusing it. The professor does not have to know which student said what, the professor could dispute that the student giving that bad review is biased and the computer system can look up a history of reviews to find out if the student is biased or not.

It's really no different from Ebay or Amazon. The reviewer should be reviewed by the system and held accountable, and the people being reviewed should be reviewed by the system and held accountable. Unreliable pseudo-anonymous sources will be flagged and labeled as such. Reliable pseudo-anonymous sources will be flagged and labeled as such.

If I'm the professor being reviewed I just want to know I'm reviewed by people who are honest, competent, reliable and as unbiased as possible. Anyone can smear me pseudo-anonymously, but it's a lot less likely that people who don't have a history of doing that will choose me out to smear, and if that did happen there would still be patterns which could reveal sub terranean network organization. If I'm a reviewer I don't see why my reviews could not also be pseudo-anonymously peer reviewed.

Thank you for your post. You've made me think.

must say here that anonymity only allows free speech in a distorted society, but FREEDOM allows free speech in general.


good point.
unfortunately both anonymity AND confidentiality are under the threat these days

There isn't enough freedom for truly free speech which is why people have to settle for anonymous speech. Anonymous speech is valuable in a certain context, I don't have to know exactly who holds certain views to find it valuable to know a lot of people hold certain views. If we don't have free speech then it's less likely we can know the true views of anyone, and without anonymity at least on the Internet we would not have any way of holding certain conversations on certain topics because it would be impossible for people to have an honest and open discussion.

For this reason we still need anonymous discussion. That is not the same thing as anonymous complaints. Discussion is the ability of people to share their thoughts without consequence (we need this), but complaints which can cost a person their career or send people to jail is free speech with consequences. Direct consequences should bring direct accountability to whoever made the complaint in some form or another even if just to let us determine that their evidence is bogus and their facts are false. Pseudo-anonymous gives us an alias or ID to allow us to do that.

agree, to be short.
longer version: i agreed, that each of anonymity and privacy are valuable, just added freedom to the list and forgotten to exclude anarchy :)

btw, this grows as a huge off-topic here...
if on the forum is some art of philosophical board or such, we will be welcome there :)

Just in case folks from this topic might be interested, I've created a separate topic over in the general Bitcoin discussion section on a separate article from the beginning of this month called In the Bitcoin Economy, Anonymity and Privacy are Not the Same Thing (http://psychologicalinvestor.com/lib/real-markets/bitcoin-anonymity-privacy-154/). It suggests that there are important differences between the two, and that it's wrong to think that if you take care of the anonymity, the privacy will take care of itself. I'd welcome any comments, thoughts, etc.

https://bitcointalk.org/index.php?topic=257734

Also, on the whole "backed by Bitcoin" issue, as it relates to the proposed Winkelvoss trust, I wondered whether it might help to highlight one way in which commodity ETFs do not work: they do not issue shares with a face value denominated in units of the commodity. Rather, they simply issue shares which represent a proportional ownership of the commodity being held by the ETF.

In the case of the Bitcoin trust we're talking about, buying a share does not mean you're buying something initially representing .2 Bitcoins, where the trust then gradually, over time, starts magicking away little chunks of those Bitcoins and replacing them with fluffy white marshmallows. The shares represent a proportional interest in whatever the Bitcoins the trust actually holds. Of course the Bitcoins held per share will decline over time due to expenses; every investor knows this, in advance, and the Net Asset Value of such ETFs is always public knowledge. But that does not mean the shares somehow become less backed by Bitcoins: they are always and forever backed by the Bitcoins being held by the trust.

Of course the NAV, denominated in Bitcoins, is publicly known; unless the NAV of a commodity ETF is publicly known, nobody is going to want to buy it.

As for any preconditions on being the pricing mechanism for Bitcoins, it's important not to get the cart before the horse. The suggestion of the article is that the trust's becoming the principal price discovery mechanism for Bitcoin vs. the dollar will be an outcome of its introduction, not something which has to be deemed, decided, stipulated, or dictated by anyone. In other words, I'm not saying that we or anyone else should make it the principal price discovery mechanism, I'm saying that when you set up something which provides high levels of liquidity, low barriers to trading, and introduces the future likelihood of standardized options trading on the underlying ETF, it is highly likely that as a result, it will wind up becoming the principal way in which price gets discovered.

Does a mechanism exist to increase the number of bitcoins per share?

I don't imagine that something like a reverse split would be unheard of, but on the other hand it wouldn't really have any impact on a commodity ETF except to increase the price per share.

Full details on the mechanics are available from the S-1 filing (http://www.sec.gov/Archives/edgar/data/1579346/000119312513279830/d562329ds1.htm).

I have read and do review the filing.  I wish I had thought of it, but I am also like a student who has read the text and knows the words but doesn't grok it.

How can I tell my daughter why it is a good idea to buy into this when a mechanism is visible to remove value, and none is visible to increase it?

It's like any ETF: the fees are only worth paying if you place a value higher than the fees on whatever benefits the ETF might be offering. In this particular case, some people might like the liquidity, some people might like being able to hold it in a brokerage account, some people might like to hold it in a retirement account where the funds are otherwise unavailable to them, etc. For many people who are already fully capable of buying Bitcoins directly, I don't think there's much advantage at all.

My half formed idea is that the rise in the value of bitcoin will outpace the drain from the administrative fees, and that opinion leads me to consider it for a higher risk part of my retirement account.  I am assuming that this increase in bitcoin value will translate to more wealth after retirement.

Yes, it is similar to most ETF.  Many here are not your typical ETF investor and not all ETF investor are aware of how they work.  Some were surprised and shocked to learn about the decreasing amount of bitcoin per share which you now admit is normal.  Learning new knowledge is no reason to insult someone's intelligence or to accuse them of magical marshmallow thinking.  We all like to learn and there might even be some things that they know and that you don't know.  Be kind.

The declining bitcoin per share is not replaced with magic marshmallows, it is replaced with nothing.

Which I "now admit"? I reminded folks of this very fact on a separate discussion thread (here (https://bitcointalk.org/index.php?topic=248013.msg2636138#msg2636138) and here (https://bitcointalk.org/index.php?topic=248013.msg2651875#msg2651875)) over two weeks ago...


And my use of a metaphor doesn't seem like a particularly good rationale for insinuating that I am somehow insulting someone's intelligence -- yours or anyone else's. If I failed to anticipate how you or anyone else might take a throwaway comment as a personal insult, then my bad. However, exploiting my failure to anticipate your misinterpretation as an opportunity for a condescending restatement of the obvious -- namely, that all of us, including me, are lacking knowledge in almost all areas -- seems in remarkably poor taste.

Very sensible assumption.

There is knowledge I lack in almost all areas.  Believing one knows everything only assures one can learn nothing.  If assuming a modicum of humility in myself and others is in poor taste to you, then I can live with that.

But... in an attempt to return to the practice of discourse using assertions backed by evidence, rather than unbacked aspersions, I'll offer this bit from the WBT ETF S-1 along with a question:

"Proprietary Security System. The Sponsor has developed a proprietary security protocol for storing and safekeeping the Trust’s Bitcoins. Other ETPs may not utilize security systems that create similar redundancies and safeguards to protect against theft or loss."

It appears one of the mechanisms by which the Windlevoss IP LLC through the Sponsor (Math Based Assets) liberates the trust of its Bitcoin (below the starting .2 per share) is by seeking patent protection for methods of securing Bitcoin for which a patent license fee is extracted from the ETF.

"Winklevoss IP LLC is the owner of certain intellectual property relating to the patent-pending structure of the Trust and the Security System. Winklevoss IP LLC is licensing the use of such intellectual property to the Sponsor."

These are from page 39 of the S-1
http://www.sec.gov/Archives/edgar/data/1579346/000119312513279830/d562329ds1.htm

Is this legal protection against others attempting to similarly secure their Bitcoins a part of why the WBT ETF could become THE pricing mechanism of Bitcoin?  

Personally, I find it hard to get excited about claims to have invented a whole new way of securing Bitcoins. To my mind, this is a bit like announcing you've developed a whole new way of securing text documents that contain the letter 'G': what is it about securing Bitcoins that is any different than securing any other piece of digital information? But who knows -- maybe they've come up with something really surprising!

In any case, if you buy the view that wherever the volume goes becomes the principal price discovery mechanism, then I suppose that any contribution made by the patent to attracting volume could in turn add to the effect.

exactly THIS is the main problem.
we should not tell our daughters to buy into "this". we should teach them to deal with bitcoins directly.

trying to adopt bitcoin to be convenient as a sofa is a big mistake. then there will be no mind evolution, no financial revolution, nothing. anything stays where it is.

anyone who understands bitcoins true potential and designation, should try to go and develop "other" way, no matter how inconvenient it should be.

I would tell my parents and siblings to buy the ETF over storing the Bitcoins themselves. This is exactly why I haven't advised all but one of my friends to buy Bitcoins (and he didn't :P). The risks of them losing them are so much higher than the potential profit they might make.

With ETF's this problem doesn't exist and a Bitcoin ETF has the added benefit that the amount of Bitcoins underlying the fund can be proven at any given time preventing a discrepancy in price as with paper gold. Depending on the fees I might buy the ETF myself to insure for some total fuck up on my part :P

what do you meant under "risks" losing bitcoins (directly)?
what problem doesn't exist with ETFs?

it's you again?  :)  ::)

Both the risk of losing the private keys to your own Bitcoins and leaking the private keys to others, allowing them to take them.

Yes it's me again. Do you still not understand this is 100% backed?

I wonder about this sometimes.  I don't think everyone has to understand it, and I don't think it can ever become ubiquitous if mind evolutions are required for everyone.  That ubiquitousness will get you your financial revolutions and true potentials even if some people remain baffled about what is going on around them.  There is good value toward your goals in making things easier.
While I agree about helping our daughters deal with bitcoins directly, that is because we care about our daughters personally enough to go through that effort for them.  A lot of folks that have credit cards don't really understand those either.  There is a place in the economy for a WBT ETF.  It just may be that most of us here won't be that place, but there are those that do want it.  If I can put this ETF in a retirement account that I can't put actual bitcoins into, then that might be a really great thing.  I hope it manages to make it through the regulatory hurdles, and I suspect that it will.

im almost sure it will. im just not sure that i hope for...
hm... don't know... don't know...

One hopes it will, and that BTC stabilize at no less than $1,000 per.

Lawyer for Winkelvoss Twins’ Bitcoin ETF Says SEC Review Going Smoothly
http://blogs.wsj.com/moneybeat/2014/01/17/lawyer-for-winkelvoss-twins-bitcoin-etf-says-sec-review-going-smoothly/

Very nice observation Greg, however do You think that such fund could be opened on any other reputable exchange and have similar effect or ETF-like investing is predominantly US style?

I think it will drive interest rates on bitfinex down close to rates typical of margin lending at brokerages, because you can lever BTC via the ETP.

Loads of ETPs in London, this much I know.

Will a Bitcoin trust help to stabilize prices? I believe so.

There are exchange traded funds (ETF's) on many exchanges around the world.  Most are traded on the American Stock Exchange or the New York Stock exchange.  My guess is if and when this ETF gets approved, it will stabilize the price, but it'll also be "over priced" vs. the real price of a Bitcoin. 

Since they will be first to the market on an easy access way to trade Bitcoins (yes, arguments on other "easy" ways to own/trade), I think it'll trade above its net asset value (NAV), especially in the beginning.  Many ETF's trade above their NAV and its not all that uncommon.

This was my point exactly ETFs are found mostly in developed world, and its not that easy for people of developing countries to trade in US, although its very much possible.

But ETFs regulation present problem on their own, wouldn't there be more benefit purely for ease of transactions if a public company would have all of its assets in Bitcoin, and issue shares against it? Although this may not be allowed in US, a it may be done elsewhere and list its shares on US stock exchanges, or at least those that are easy enough to invest for US citizen.

What actual benefits would a fund bring compared to regular shares for a fixed amount of btc?

Well done, you just described an exchange traded fund...   :D

soo, thats just a parallel market with no use of the BTC involved and without the possibility of withdrawing?! im not sure whats the purpose here..  ::)

The purpose is to allow retail investors and pension funds to invest in bitcoins as an asset class and not have to worry about where to buy it, when to buy it, how to store it and when to sell it.

The WBT will probably act as a one way trapdoor for Bitcoins, driving up the value of remaining Bitcoins on the market. And that is a very, very good thing.

I would never trust such a legal monster. It's a paper market and once (if) established as a pricing mechanism for BTC, it may even present a nice attack surface for price manipulation.

If you don't have exclusive access to the key, you don't own it.

More than that the WBT will charge annual fees. As you have computer talent, you should definitely avoid the fund but for the rest of humanity, they are probably safer with the fund.

I don't see how manipulation can take place unless the WBT lends out the btcs that they own. However, it's not smart to bet against a deflationary asset. The kind of manipulation that might take place is the WBT sucking up btcs. That I really don't think any of us would mind.  :)

Considering the Winklevii hold approximately 1% of all bitcoins, they would (logically) want bitcoin's price to rise.. I assume that's their goal with the ETF. As such I'm sure they will do whatever it takes to achieve that outcome, and prevent a devaluation.

Price manipulation?  How?  An ETF established through a US Stock Exchange is an ETF, whether dividend paying stocks or Bitcoin.  GLD is a super popular Gold ETF.  If you own this ETF, gold bullion is stored for you in a vault in London.  Not going to be much different owning this bitcoin ETF.  Bitcoins will be stored for you somewhere.

at what ratio though? how many claims to one bitcoin? and if it came to it, they can always settle in cash. it's a good way to get exposure to the price of bitcoin, but it's not the same as having your own private keys.

Price manipulation, yes.  Imagine that. There are even some famous examples, but it happens daily.

Hunt Brothers?
GATA?

Here's a quick primer from Forbes:
http://www.forbes.com/sites/greatspeculations/2010/07/23/gold-etfs-and-the-manipulation-game/

True, but which does not exist anywhere as of now and does not exist as legal structure and asset class in many of developing countries ;) While stocks and bonds remain primary financial assets, at least where I live. And I don't intend on changing that due to fancy asset class.

But thank You for pointing that out.

Further, US ETFs are not accessible world wide, while they may be an ideal way of trading and I don't see how (except from regulation which is country-specific) changes the fact if share You trade is stock of a company or ETF, if underlying is the same, and other terms are similar.

This gets mentioned often, but I think it misses the point.

How is this different for general public and status quo than holding anything other than keys of Your real estate? Its always a claim, while key is held by Your broker/banker/etc.

Technically, if bank would say I dunno You, You wouldnt have access to anything. And I understand that is whole point of BitCoin but this ETF is trying to do exactly opposite, get people to invest in new asset class, just because it provides returns. Rather than because it provides You with decentralised, crypto, pseudo-privacy protocol.

These people do not intend to buy something with a share of ETF, and if and when they sell it, it will be for dollars. So they never touch BitCoins anyways.

if I am getting it right?

That would be interesting if the price on the ETF is overpriced! Gold in an ETF runs below the price of cash gold. It seems to me that a managed account would be more expensive. There's been many challenges about there really being gold in the gold ETF though. Is inventory really just swaps and leases instead? I guess the same will be done with Bitcoin through derivatives and I'm sure with obfuscation techniques we'll never really be able to tell all the leverage associated with the Bitcoin... make me wonder. Could a leverage protocol be designed?

Manipulating storage is big business and we can see it from Goldman

http://www.nakedcapitalism.com/2013/07/how-goldman-made-5-billion-by-manipulating-aluminum-inventories-and-copper-is-up-next.html

I agree with general view that BitCoin ETF must trade at premium, I don't see how it would trade at discount unless there is fear of what is actually in inventory?

Manipulation of physical inventory is differentiated by the fact that bitcoin is not physical and can be divided to 8 decimals. Ie if you drive up the price of btcs, you do not create scarcity. You increase the purchasing power of existing holders of Btc, thus they go on a spending spree if they were so inclined.

So I say to Goldman - please manipulate Btcs. This would do everyone a big favour.

Exactly this.  I mean, what are they going to do, hoard BTC?  Buy up all the "inventory"?  A physical asset is much different.  Aluminum is needed by companies to make things.  Gold and Bitcoin are not.  If a company hoards, they will drive up the price.  Ok, so how is that bad?

I can't get them cheap.  Is bad, very very bad.

There really isn't such a thing as cheap coins. 
They are worth whatever they are worth when you use them.  If you never use them it never matters what they are worth.  So from your perspective, if they are worth more when you use then than when you acquired them, you got them cheap.


The ETF slowly bleeds out coins in the form of fees and costs (most of which go to other Winklevoss family companies), so it is not entirely a bitcoin black hole investment vehicle.  There is continuous residual dilution of coins in the EFT and as new purchases are apportioned by the assets held in the fund, this dilution never reverses and forms a type of constant debasement of the per share value over time.
That this small continuous dilution is expected to be more than offset by the improvement in value of the bitcoin held is assumed by most anyone and certainly by all who would invest in it.

Cheap when I can buy them, relative to when I can use them is the issue.

The arb is to buy bitcoin and short the ETF.  Poor carry unless it's levered super cheaply.

Right.
By this metric you can expect the fund to create many cheap coins.
The fund is expected to be a net-buyer for a long time even though it will be selling some continuously for fees.


Yes, though with the current activity in the gold ETFs, you are likely to get a better/swifter payout there.  Those are being bled out even now by redemption.

Can't see this ever being profitable.  Buy bitcoin, lets assume no fees (yes, might be some very low fees).  Shorting the ETF will incur interest.  How much price difference can the ETF really have over, say 3-6 months, over the actually price of Bitcoin assuming the ETF has an expense ratio of 1%?  With the interest for shorting, minor trading costs, I think it'll be a really tough arb play.

Definitely.  Try to short both TAZ and TAS.  If you could do it with low carry, you'd be guaranteed an amazing return with essentially no volatility, but borrowing them both is ... beyond me, anyhow.

HOWEVER you could short them both synthetically with postive carry by making diagonal put spreads.  Vol goes up but the outcome is no less guaranteed in aggregate over time.  Similarly with BTC and Winklefloii puts.

So will it be easily possible to build derivatives on this ETF (options, futures,...)?

How likely is that to happen?

Is it easy?  Yes.  Will it happen?  Most likely, eventually.  CBOE (Chicago Board Options Exchange) lists options for a huge amount of ETF's.  GLD ETF is a fairly active one.

http://www.cboe.com/Products/optionsOnETFs.aspx

So once this starts trading hopefully later this year, at some point down the road (3+ months), it'll probably be listed on the CBOE depending on the interest in creating options on it.

If a CBOE member wants to make a market, then there will be options.  It's pretty well guaranteed if there is significant traffic.  And there will be traffic.  Oh yes, there will be traffic.

Should the ETF go ahead, then IMHO, it's very likely that standardized options will appear -- and that, finally and at long last, will provide a credible mechanism for large Bitcoin handlers to hedge positions effectively. (No, the existing quasi options offered on "THE" exchange don't come close to offering such a credible mechanism. And the futures available on ICBIT become less and less appealing with every new change to the exchange's "rules".) Making more effective hedging possible would arguably remove one of the major roadblocks currently standing in the way of larger scale adoption of Bitcoin for real commerce.

I would bet the farm on exactly this! CBOE wants to make money.  If a member wants the options, if there is demand, options will be created.  And like another posted said, there will be demand for this.  From this, all sorts of mechanisms are available for larger institutions to "hedge" their bets, in either direction.

On a total side note, interesting company, background, and product on the market Greg.  Montana to England, probably don't see many of those. :) 

Anyone (with a brokerage account)? Are you sure about that?

I was thinking the same thing.

When is this fund going to happen?

Bring it on!

it may, in the short term, but I think the EFT trust risks becoming a sort of myspace (kinda ironic) because as apps get better for handeling BTC until the killer app come thought, why would you use and EFT?

Further the BTC in the EFT are always less secure as they are amenable to court orders.

Totally different use cases.  The ETF is good for institutions with rules which prevent them from holding BTC (which covers most institutional funds), and custodial accounts generally.  It's also a way to leverage high-quality financial infrastructure for derivatives. It allows one to short at low cost, to lever at low cost, and to synthetically gain exposure (in either direction) with positive carry.
90% of the people do not care about these things, but 90% of the money does.

Implied yield curve on long forwards would be highly negative. I'd be interested in seeing exactly how negative.

I cant think about bitcoin without think about gold too ... I think I need a lobotomy to wipe that correlation from my memory ...

http://i62.tinypic.com/eqqogl.jpg

Anyone dumb enough to invest in a bitcoin ETF, or any "share" of bitcoin being held by someone else, is dumber than a pile of rocks - seriously.
Just buy the fuckin bitcoins and keep them yourself. Why put your trust in an unknown entity? I think a lot of you are still children that need someone to hold your hand for you.

+1
This ETF is total BS.

You guys simple don't understand the benefits of having an ETF for Bitcoin.  This would be HUGE.  One, it would mean that Bitcoin has a small legal standing per the SEC since they approved the fund.  Two, it would mean having options, futures, and derivatives.  If you don't know why these are good for a "currency", do some Google research.  It means companies can hedge their bets if they hold Bitcoins.  Like airlines do for fuel so they are not subject to short term fluctuations.

That's probably why these companies already offer trading in BTC futures and options:
https://icbit.se/ (https://icbit.se/)
http://options.traderush.com/d/en/bitcoin-mining/index.html (http://options.traderush.com/d/en/bitcoin-mining/index.html)
http://lp.tradehits.net/pages/lp/lp_bitcoins.php (http://lp.tradehits.net/pages/lp/lp_bitcoins.php)

(No connection with any of these companies, but I've been following the first for a while because I'm interested in derivatives).

Until its regulated by a US authority or any sort of regulated trading authority it won't mean anything for the real money out there.  I can't seem Amazon ever using any of those sites listed.  I can see them using CBOE which is where the options would be listed for an ETF.

Well, that's something else entirely, isn't it? It's not "you don't understand why derivatives would be beneficial", it's "I believe regulation is beneficial". It's a discussion about regulation, not an assumption about how much we need to use Google. For the record, I think chasing regulatory approval to attract "real money" is not a good call - I'd rather see organic growth and no government interference.

There is money that is tied up in accounts that currently CANNOT be used to buy bitcoin until an ETF such as this is available.

Try to buy bitcoin in your 401K lately?

The difference between this and the stock market is that my 401k shares represent an actual ownership of some percentage of the company's shares.  Unless the Winkelvoss ETP would do something like let you trade in ETP shares for bitcoins, that wouldn't be the case here. 

On the other hand, there are already funds similar to this that trade in Gold and don't let people trade them in for actual gold, so maybe it won't matter.  There's a mix in those: I believe some do let traders exchange for actual gold, and some are trading in gold companies, and some are just tracking the gold market and not exchangeable for actual gold.

As with many commodity ETFs, it's only "Authorized Participants" who are able to create and redeem units, rather than we mere mortals.

I thought that was the case, but I double checked with the fund I was thinking of and found I was mistaken.  Thanks for clarifying.

An EFT bubble could be the biggest Bull run ever for BTC.

Whats the ticker?   I want to short this sucker

Its not out yet.
There is probably a long term play in shorting the ETF against a long bitcoin position just because you aren't paying anything to hold your own coins, but I wouldn't naked short this IIWY.
Consider how many billions are locked into US 401K plans that could suddenly flood into bitcoin holdings.  We should expect this to unlock new investment in bitcoin.

This is essentially what the Winkelvi are betting on.  There's a lot of big money that can't play in this small space and an ETP would really open the doors.  It's not just retirement accounts, think about all the investment brokers who will be able to recommend this to their clients.  It's much easier to tell a client to invest in something on a known exchange rather than, "hey go to this former magic the gathering card website and buy up some of this stuff."

I sell near term strangles to buy long term OTM verticals.   Little risk but little probability. But works good for shorting

At least the market has pending good news.

hum why the hell would i want those twisted tools implemented with bitcoin? Speculating with bitcoin price is one thing but i cant imagine the pile of shit whenever those financial scriptural tools get involved in bitcoin globally. Isnt the actual crisis enough already? why always this urge to meet those banksters expectations? why using their tools? why kneeling before the SEC?
people investing in ETF are going to loose everything one day when it all crash and burn.
here we go, bitcoin subprimes! :D

Why fight against choice, diversity and new businesses?
They bought the bitcoin, so who am I to say that they shouldn't do what they want with them?
Lots of folks don't like what they are doing, lots do.
I don't think it should be "THE pricing mechanism", ever, but still think what they are doing is a great thing, and they are going after it in a big way with a lot of energy and resources.  I wish them every success.  Just because we aren't their market doesn't mean that there isn't one.