It comes basically down to the question if they're only selling Bitcoin they actually do have. Is that even allowed to sell more Bitcoin than they actually own in this case?
Someone correct me if I'm wrong but I beleive that they are only able to offer as much as they own. This is why I made the point about how they aren't going to be putting up their own coins so all etf coins will have to be bought from the general market.
The trust is going to hold bitcoin equal to the value of the ETF securities it issues, less expenses.
The way the trust will do this is there will be "Authorized Participants" who will interact with the trust. The trust will offer ETF securities to the Authorized participants in exchange for bitcoin. The minimum transaction is a "basket" equal to 10,000 bitcoin and 50,000 ETF shares. So each ETF share will be worth .2 bitcoin.
There will be "Seed Baskets" whereby one or more Authorized Participants will commit to exchanging bitcoin for ETF shares at a certain amount. This is essentially the "IPO" of the ETF. The Authorized Participants will then make those ETF shares available for trading on the Nasdaq.
Pursuant to the Agreement, the bitcoin the trust receives may only be: "(1) held by the Trust, (2) transferred to Authorized Participants in connection with the redemption of Baskets; (3) transferred to pay the Sponsor’s Fee; or (4) transferred as needed to pay the Trust’s expenses not assumed by the Sponsor."
http://www.sec.gov/Archives/edgar/data/1579346/000119312514257706/d721187ds1a.htmSo other than expenses, and (2) above, the trust will hold the bitcoin.
What is (2) above? (2) is a reference to another way the Authorized Participants are different than retail investors in the ETF. In addition to "creating" new ETF shares by tendering bitcoin, they may tender ETF shares (again, with same minimum basket size) to the fund in exchange for bitcoin.
The ability of Authorized Participants to create and redeem ETF shares, in exchange for bitcoin is what manages the supply and demand of shares after the initial transaction. The goal is that the ETF share price is relatively close to the Net Asset Value ("NAV") per share of ETF (equal to the the value of bitcoin held less expenses). If the ETF price is above the NAV, then Authorized Participants will sell more bitcoin to the trust, and more ETF shares will be issued, which will increase the supply and push the price back close to the NAV. And vice versa if NAV is above the ETF. Or at least that is the goal.
This is the same process for many ETFs that are backed by an asset, including gold. However, not all asset-based ETFs are backed by the asset, others may be based on derivatives designed to track gold prices. And then, of course, there are many other derivative transactions related to gold or other assets that may or may not be backed by gold. This is why the total notional value of gold ETFs and other securities may exceed the total value of gold in existence.
TLDR: Winklevoss fund will be backed by bitcoin. Many asset based ETF, including gold ones, are also back by the asset. Others aren't, which is why the total notional "paper" amount of gold that is traded may exceed the amount of physical gold in existence.