To recap the original article (
Winklevoss Bitcoin Trust May Become THE Price Discovery Mechanism for Bitcoin), ... The article used gold ETFs as an historical example; representing around 6.5% of global gold demand, gold ETFs do not set the price of gold, but they do exert significant influence.
The original article does not address any questions at all about price manipulation or potential malfeasance on the part of the fund issuer or how it might all be exploited by central banks to harm Bitcoin. ...
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.htmNo 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.
Through the course of the thread, we've covered the area of share basket creation and redemption via Authorized Participants and revisited the fact that the trust will be backed by real live Bitcoins; we've also covered why individual investors won't be cashing in their shares and getting Bitcoins in return.
'NewLiberty' in particular has introduced the idea that the ETF could provide an efficient means for central banks or other potential enemies of Bitcoin to cause problems, and if I have followed the thinking correctly, has also suggested that there could be some way for the ETF to break the link between shares being traded and the underlying entity backing those shares.
So, I think that's roughly where we are now.
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.htmDr 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.
... As I see it, a great advantage of an ETF would be that it opens up buying and selling and short selling to a vastly wider audience, and it provides an underlying security suitable for the introduction of standardized derivatives.
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.
(It makes little difference what is used as collateral in ordinary short selling, by the way: collateral is merely what you are putting up to show you have the resources to buy back the share when the time comes, and the share still has be borrowed from someone before it can be sold. I.e., the share being sold short is not the collateral.
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.
Even in the relatively rare case of naked short selling,
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.htmlsomeone still has to be pay the piper at the end of the day; analogously, you can write naked calls all day if you want, too, but you will still be forced either to buy them back or to cough up the underlying should that call expire in-the-money.)
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.
And assuming that standardized options eventually became available on the ETF -- as tends to happen for anything with significant volume -- the Bitcoin economy would immediately gain hedging mechanisms far surpassing the capabilities of anything we currently have available.
Yes... immediately gain hedging mechanisms far surpassing the capabilities of anything we currently have available. Yes. Yes it would.
