Winkelvoss ETP could become THE pricing mechanism for BTC

[NewLiberty]

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.

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.

[Scott J]

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.

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.

[btceic]

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.

[NewLiberty]

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.

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.

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.

[NewLiberty]

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.

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

[Adrian-x]

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.

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.

Or as the OP pointed out the increase in demand in the ETP will set the trading price of XBT.
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 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.

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 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.

[dominicus]

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.

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.

[DrGregMulhauser]

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.

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.

[halfawake]

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

Comments, criticisms, corrections welcome...

Have you watched the Bitcoin 2013 Conference recording about the Bitcoin Fund  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.  

[DrGregMulhauser]

Have you watched the Bitcoin 2013 Conference recording about the Bitcoin Fund  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).  

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...

[molecular]

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.

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.

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.

[molecular]

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.

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.

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.

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

[CIYAM]

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).

[NewLiberty]

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. 

[CIYAM]

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.

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).

[halfawake]

Have you watched the Bitcoin 2013 Conference recording about the Bitcoin Fund  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).  

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...

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.

[notme]

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

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.

[molecular]

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.

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).

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

*goes and reservers bata.org.

[DrGregMulhauser]

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.

[molecular]

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.