Winkelvoss ETP could become THE pricing mechanism for BTC

[DrGregMulhauser]

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...

[empoweoqwj]

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...

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 ...

[wachtwoord]

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.

[DrGregMulhauser]

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 ...

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.

[crumbs]

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.

[Adrian-x]

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. 

[DrGregMulhauser]

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.

[Albert Speer]

lol I highly doubt it.

[crumbs]

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.

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

[spiral_mind]

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.

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!

[empoweoqwj]

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.

[DrGregMulhauser]

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!

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. I'm big on privacy, but I don't necessarily think that anonymity is the best way to achieve it.)

[CIYAM]

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.

[DrGregMulhauser]

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.

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.

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.

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.)

[DrGregMulhauser]

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

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.

[CIYAM]

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.

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

[spiral_mind]

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!

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. I'm big on privacy, but I don't necessarily think that anonymity is the best way to achieve it.)

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.

[DrGregMulhauser]

So I read your article and had a few thoughts about it...

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?)

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...

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.

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)...

Touché.

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 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 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 couldn't agree more.

[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

[spiral_mind]

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).