"Harmless" might be overreaching.
If someone wanted to move the Gox price, locking out as many accounts as possible on a low volume trading day just might make that even easier.

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

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.

Articles are needed because more bitcoin folks are technologists than they are finance folk. 

Here is another longish explanation of why ETF are not redeemable in the underlying asset in many cases.
https://bitcointalk.org/index.php?topic=252330.msg2715524#msg2715524

The ETF isn't for us, we can already trade, buy, sell bitcoin without difficulty, and don't need to pay fees to get a paper contract instead of the actual coins.  The ETF is for investors, large businesses, banks, institutional investors, people that want to sell bitcoin short and generally folks that won't have a wallet.  Folks in this forum are probably never going to use it.

There are so many ways around it, as well as demonstrable prior art.  The patent wont be granted and if it is, will be useless.  Why worry, just pity them.  They lost their way, the little fellows.

Hmm, I have more houses than accounts.

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.

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. 
 

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.

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....  

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?

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.

Anything in particular?

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.

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.

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.

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.

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.

http://www.spiegel.de/international/zeitgeist/going-rogue-share-traders-more-reckless-than-psychopaths-study-shows-a-788462.html

Mr Pot, meet Mr Kettle

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. 

Not sure I agree with that as a necessary precursor to the success of bitcoin, but assuming that it is for the moment, how and why does speculation accomplish that?