Edgar: Winklevoss Bitcoin trust registers 1 million shares

[Bobabouey]

This seems like pretty bullish news. The trust is going to buy bitcoins equal to the value of the securities it issues, less some reserve for administrative costs.

So any money invested in the trust will be invested in real bitcoins.

From the Edgar filing: "The Trust expects to create and redeem Shares from time to time but only in Baskets (a Basket equals a block of [50,000] Shares). The number of outstanding Shares is expected to increase and decrease from time to time as a result of the creation and redemption of Baskets. The creation and redemption of Baskets requires the delivery to the Trust, or the distribution by the Trust, of the number of Bitcoins represented by the Baskets being created or redeemed."

And this: "The Trust’s assets will consist solely of Bitcoins. Each Share will represent a proportional interest, based on the total number of Shares outstanding, in the Bitcoins held by the Trust, less the Trust’s liabilities (which include accrued but unpaid fees and expenses)."

And I like this too: "The Trust has no fixed termination date."

Full filing here:  http://www.sec.gov/Archives/edgar/data/1579346/000119312513279830/d562329ds1.htm

[scarletham]

Yes - it is a Bitcoin ETF that will be listed on the NASDAQ. Regular investors, retirement funds, etc will be able to invest, albeit somewhat indirectly, in bitcoins.

[BreadPirateIchigo]

wish it wasn't them, but it's a good sign indeed.

[scarletham]

Something rather important to note here is that it's possible for a fund to hold either physical or "paper" assets. I'm not entirely sure what the plan is with this, but security will be an interesting concern.

[Bobabouey]

Yes - it is a Bitcoin ETF that will be listed on the NASDAQ. Regular investors, retirement funds, etc will be able to invest, albeit somewhat indirectly, in bitcoins.

It is not clear to me from the current filing that it is an ETF, which would be publicly traded.  Currently, it just seems to be a trust.  Initial shares are only being sold in baskets of 50,000 shares, and they expect one share to equal roughly .2 BTC, so each basket will comprise 10,000 BTC.

It does not seem like they will be facilitating trading of individual shares, just the baskets. In fact they note that if brokers "break" a basket to sell smaller lots of shares, it is the broker that would be deemed the underwriter, and thus has various security law obligations.

So it seems to me that for now, this is for institutions / wealthy.  However, I guess it is possible the trust is the first step, and then they separately create a publicly traded vehicle.

[scarletham]

Yes - it is a Bitcoin ETF that will be listed on the NASDAQ. Regular investors, retirement funds, etc will be able to invest, albeit somewhat indirectly, in bitcoins.

It is not clear to me from the current filing that it is an ETF, which would be publicly traded.  Currently, it just seems to be a trust.  Initial shares are only being sold in baskets of 50,000 shares, and they expect one share to equal roughly .2 BTC, so each basket will comprise 10,000 BTC.

It does not seem like they will be facilitating trading of individual shares, just the baskets. In fact they note that if brokers "break" a basket to sell smaller lots of shares, it is the broker that would be deemed the underwriter, and thus has various security law obligations.

So it seems to me that for now, this is for institutions / wealthy.  However, I guess it is possible the trust is the first step, and then they separately create a publicly traded vehicle.

Straight from the S-1:

Exchange Traded and Transparent. The Shares will trade on the [EXCHANGE], providing investors with an efficient means to implement various investment strategies. Upon effectiveness of the registration statement of which this prospectus is a part, the Shares will be eligible for margin accounts and will be backed by the assets of the Trust. The Trust will not hold or employ any derivative securities. Furthermore, the value of the Trust’s holdings will be reported each day on www.[    ].com, the Trust’s website.

[Bobabouey]

Thanks.  I guess the basket is part of the initial issuance, and thereafter individual shares will trade.   

[scarletham]

Thanks.  I guess the basket is part of the initial issuance, and thereafter individual shares will trade.   

Yeah, the fund needs an initial seed value so when it IPOs there's something behind it.

[DeathAndTaxes]

Thanks.  I guess the basket is part of the initial issuance, and thereafter individual shares will trade.   

Not just initial issuance, subsequent issuance and redemption too.  This is pretty standard for any "physical" ETF.  Take a physical bullion trust.  Most people just trade existing shares but if you look at the prospectus there will be a method for institutional investors to deposit x oz of bullion and receive one basket of shares or redeem one basket of shares and take delivery of x oz of bullion.

That being said for 99.99999999999999999999999% of non-institutional investors they will simply trade shares through a brokerage.

[scarletham]

Thanks.  I guess the basket is part of the initial issuance, and thereafter individual shares will trade.  

Not just initial issuance, subsequent issuance and redemption too.  This is pretty standard for any "physical" ETF.  Take a physical bullion trust.  Most people just trade existing shares but if you look at the prospectus there will be a method for institutional investors to deposit x oz of bullion and receive one basket of shares or redeem one basket of shares and take delivery of x oz of bullion.

That being said for 99.99999999999999999999999% of non-institutional investors they will simply trade shares through a brokerage.

Institutional investors as well as market makers.

[DeathAndTaxes]

Something rather important to note here is that it's possible for a fund to hold either physical or "paper" assets. I'm not entirely sure what the plan is with this, but security will be an interesting concern.

Per the S-1, each share represents 0.2 BTC held by the trust and the trust is required to hold 0.2 BTC for each share outstanding.  While there is no such thing as a physical Bitcoin the wording of the S-1 indicates it would operate like any other physical ETF.  If the trust has 1,000,000 shares outstanding it has in its vaults the private keys controlling 200,000 BTC initially*.

* Like other physical ETF the fund costs are deducted from the assets backing the shares so over time the nominal BTC amount of each share will decline.  Once again no different than a bullion trust where initially 1 shares represents a certain amount of bullion and over time due to operating costs the amount of bullion per share will decline.

[scarletham]

Something rather important to note here is that it's possible for a fund to hold either physical or "paper" assets. I'm not entirely sure what the plan is with this, but security will be an interesting concern.

Per the S-1, each share represents 0.2 BTC held by the trust and the trust is required to hold 0.2 BTC for each share outstanding.  While there is no such thing as a physical Bitcoin the wording of the S-1 indicates it would operate like any other physical ETF.  If the trust has 1,000,000 shares outstanding it has in its vaults the private keys controlling 200,000 BTC initially*.

* Like other physical ETF the fund costs are deducted from the assets backing the shares so over time the nominal BTC amount of each share will decline.  Once again no different than a bullion trust where initially 1 shares represents a certain amount of bullion and over time due to operating costs the amount of bullion per share will decline.

Correct - although I am curious if it would consider holding something like the physical bitcoins offered by some providers. Then it could hold it in an actual vault, similar to GLD or other bullion funds.

[Bobabouey]

Thanks.  I guess the basket is part of the initial issuance, and thereafter individual shares will trade.  

Not just initial issuance, subsequent issuance and redemption too.  This is pretty standard for any "physical" ETF.  Take a physical bullion trust.  Most people just trade existing shares but if you look at the prospectus there will be a method for institutional investors to deposit x oz of bullion and receive one basket of shares or redeem one basket of shares and take delivery of x oz of bullion.

That being said for 99.99999999999999999999999% of non-institutional investors they will simply trade shares through a brokerage.

Institutional investors as well as market makers.

That all generally makes sense, thanks.  One more question since you both seem to understand ETFs fairly well.  I thought many ETFs had to rebalance their investments based on demand.  Is that where the additional baskets / redemptions might kick in?  So at some "normal" level of demand, the shares that trade are part of the initial issuance, but if demand heats up, then additional baskets may be purchased, which increases the available shares, and vice versa if the demand wanes?

[scarletham]

Thanks.  I guess the basket is part of the initial issuance, and thereafter individual shares will trade.  

Not just initial issuance, subsequent issuance and redemption too.  This is pretty standard for any "physical" ETF.  Take a physical bullion trust.  Most people just trade existing shares but if you look at the prospectus there will be a method for institutional investors to deposit x oz of bullion and receive one basket of shares or redeem one basket of shares and take delivery of x oz of bullion.

That being said for 99.99999999999999999999999% of non-institutional investors they will simply trade shares through a brokerage.

Institutional investors as well as market makers.

That all generally makes sense, thanks.  One more question since you both seem to understand ETFs fairly well.  I thought many ETFs had to rebalance their investments based on demand.  Is that where the additional baskets / redemptions might kick in?  So at some "normal" level of demand, the shares that trade are part of the initial issuance, but if demand heats up, then additional baskets may be purchased, which increases the available shares, and vice versa if the demand wanes?

Sure. If the shares outstanding are no longer sufficient to maintain liquidity, APs or market makers may go and create shares (typically 50,000 or 100,000 depending on the ETF) by paying CUSize * NAV to the provider, which they will then have available to trade in the open market. The fund in turn has to go out and buy the appropriate amount of underlying (in this case BTC) to compensate for the new shares. That would be a cash creation - or, the APs could deliver the BTC to the provider and receive the shares in turn. A redemption is also possible, which is just vice versa.

[beardays]

any new avenue for people to invest is a good thing. im in thailand and my friend couldnt even wire mtgox because of her banks restrictions.. -.-"

[Bobabouey]

Thanks.  I guess the basket is part of the initial issuance, and thereafter individual shares will trade.  

Not just initial issuance, subsequent issuance and redemption too.  This is pretty standard for any "physical" ETF.  Take a physical bullion trust.  Most people just trade existing shares but if you look at the prospectus there will be a method for institutional investors to deposit x oz of bullion and receive one basket of shares or redeem one basket of shares and take delivery of x oz of bullion.

That being said for 99.99999999999999999999999% of non-institutional investors they will simply trade shares through a brokerage.

Institutional investors as well as market makers.

That all generally makes sense, thanks.  One more question since you both seem to understand ETFs fairly well.  I thought many ETFs had to rebalance their investments based on demand.  Is that where the additional baskets / redemptions might kick in?  So at some "normal" level of demand, the shares that trade are part of the initial issuance, but if demand heats up, then additional baskets may be purchased, which increases the available shares, and vice versa if the demand wanes?

Sure. If the shares outstanding are no longer sufficient to maintain liquidity, APs or market makers may go and create shares (typically 50,000 or 100,000 depending on the ETF) by paying CUSize * NAV to the provider, which they will then have available to trade in the open market. The fund in turn has to go out and buy the appropriate amount of underlying (in this case BTC) to compensate for the new shares. That would be a cash creation - or, the APs could deliver the BTC to the provider and receive the shares in turn. A redemption is also possible, which is just vice versa.

Thanks and good night.

[DeathAndTaxes]

That all generally makes sense, thanks.  One more question since you both seem to understand ETFs fairly well.  I thought many ETFs had to rebalance their investments based on demand.  Is that where the additional baskets / redemptions might kick in?  So at some "normal" level of demand, the shares that trade are part of the initial issuance, but if demand heats up, then additional baskets may be purchased, which increases the available shares, and vice versa if the demand wanes?

Simple answer yes.  Lets ignore operating fees and pretend 1 share is and always shall be 0.2 BTC.  This means the NAV of the fund will always be the USD value of 0.2 BTC.  If demand exceeds supply then the shares could trade above NAV.  When that happens the sponsor (entity overseeing the funds), or a market maker (entity pledging to simultaneously post bids and asks for the asset and maintain sufficient reserve of shares and capital to maintain liquidity and a reasonable spread) would purchase 10,000 BTC deliver them to the trustee (the trustee is a separate entity who's responsibility is to ensure the safekeeping of the assets backing the funds) and receive 50,000 newly issued shares.  This increases available supply and the price trends down towards the NAV.

Likewise say demand wanes and price falls below the NAV.  The sponsor could buy 50,000 shares on the market, redeem them to the trustee and receive 10,000 BTC.  This soaks up excess supply and the price trends upward towards the NAV.

Most (all?) asset backed ETF are structured the same way because trying to guesstimate the lifetime investor demand for a particular asset is a fools errand.  This way the fund can always issue new shares or "destroy" shares such that demand is properly met without the fund trading significantly above or below NAV.  

The action of buying below NAV and redeeming or issuing new shares and selling above NAV, creates a for profit, no risk arbitrage.  This economic incentive keeps the price close to the NAV and the fund highly liquid under normal conditions.  Once again remember the basket size (50,000 shares = 10,000 BTC = $1M USD value).  Most investors will never issue or redeem shares, they will just trade existing shares directly through the brokerage just like they would any other stock or fund.

On edit: edited for clarity.

[Bobabouey]

That all generally makes sense, thanks.  One more question since you both seem to understand ETFs fairly well.  I thought many ETFs had to rebalance their investments based on demand.  Is that where the additional baskets / redemptions might kick in?  So at some "normal" level of demand, the shares that trade are part of the initial issuance, but if demand heats up, then additional baskets may be purchased, which increases the available shares, and vice versa if the demand wanes?

Simple answer yes.  Lets ignorre operating fees and pretend 1 share is and always shall be 0.2 BTC.  This means the NAV of the fund will always be the USD value of 0.2 BTC.  If demand exceeds supply then the shares could trade above NAV.  When that happens the  sponsor (entity overseeing the funds, which is seperate from the trustee who secures the actual assets) would purchase 10,000 BTC deliver them to the trustee and receivee 50,000 newly issued shares.  This increases available supply and the price trends down towards the NAV.

Likewise say demand wanes and price falls below the NAV.  The sponsor could buy 50,000 shares on the market, redeem them to the trustee and receive 10,000 BTC.  This soaks up excess supply and the price trends upward towards the NAV.

Most (all?) asset backed ETF are structured the same way because trying to guesstimate the lifetime investor demand for a particular asset is a fools errand.  This way if there is enough demand the fund can expand to meet it.  The INITIAL offering is for 1 mil shares (200,000 BTC) however there is no reason it couldn't be 50x that is demand warrants.  If there isn't enough demand to make this venture viable, it also provides a low cost way for the sponsor to wind down the fund.  They simply buy up all shares at or below NAV and redeem them in baskets of 50,000 shares.  I haven't read every line of the S-1 but most have a provision where the ETF will halt an liquidate if the size of the trust falls below a certain amount.

Thanks, all that clarification is very much appreciated.   So in a couple of months there could be a bitcoin ETF, amazing.

[DeathAndTaxes]

Thanks, all that clarification is very much appreciated.   So in a couple of months there could be a bitcoin ETF, amazing.

Yes just remember it could be a long time before publicly trading, it could be denied by regulators, and it could be rejected by some/all major exchanges.  The S-1 is just the first step in a long process but yes eventually you could buy shares in a "Bitcoin ETF" using your Fidelity brokerage account as easy as you would buy shares in GOOG or AAPL.  I wonder if the ticker BTC is available?

[scarletham]

Thanks, all that clarification is very much appreciated.   So in a couple of months there could be a bitcoin ETF, amazing.

Yes just remember it could be a long time before publicly trading, it could be denied by regulators, and it could be rejected by some/all major exchanges.  The S-1 is just the first step in a long process but yes eventually you could buy shares in a "Bitcoin ETF" using your Fidelity brokerage account as easy as you would buy shares in GOOG or AAPL.  I wonder if the ticker BTC is available?

It is in the US, but not in CA.