Winkelvoss ETP could become THE pricing mechanism for BTC

[molecular]

...The "advanced" financial instruments that might be desired by some big players/investors can surely be built on top of the underlying directly somehow, no?

Absolutely, they could be!

Unfortunately, so far the Bitcoin economy as a whole hasn't yet mustered what is needed to reinvent that wheel. As I mentioned in the article on Bitcoin Derivatives, Liquidity and Counterparty Risk, which is linked from the article that kicked off this thread, the Bitcoin economy could desperately do with decent derivatives. However, existing Bitcoin exchanges haven't yet even advanced to the point of acting as counterparty to the trades they broker or providing market making services -- they're still operating as trading network style exchanges with transactions between one person and another -- let alone moving in a direction that would permit a standardized options clearinghouse to function.

If you want a shortcut to all that, the relatively easier way to make it happen is to stuff the Bitcoins into an ETF wrapper, backed by real Bitcoins, that enables all the existing market apparatus to be applied to it: introduce a Bitcoin ETF, and if there is sufficient volume, expect options on the ETF to follow.

I get that to some folks the very idea of any transaction Bitcoin-related that doesn't occur directly with real Bitcoins is anathema. However, unless real businesses handling significant sums can find a way to hedge currency exposure, I think it's going to be pretty tough to convince many of them to take Bitcoin transactions seriously.

It seems we have arrived again at the "great divide"... some want to integrate cryptocurrency into the existing (proven) structures in order for it to be able to grow into something serious and game-changing... a new kind of money. Some want to just fuck away with all the shit, hang the banksters and their masters and start over "System D"-style.

I can understand both approaches. The rebel in me tends to prefer the latter "solution" and suspects evildoing from advocates of the former approach. At this point I was initially going to write about the part in me that preferred the former approach of integration, but quite frankly, I am failing to come up with a convincing story... to be continued.

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[felente]

I guess when you have Winklevoss money you can pay a PR firm to come here with some sock puppet accounts and try to promote this bullshit.

Let's give Dr. Greg the benefit of the doubt, please. There's no gain for anyone in destroying the friendly atmosphere.

+1 @ molecular
here is way more important issues discussed than it could appear, if not MOST important for the bitcoin's future. And in a friendly way.
must say i'm not much into investments, further i'm not english native at all, but this is one of the most interesting threads i've came across in a last time.
watching with big interest...

[molecular]

...The "advanced" financial instruments that might be desired by some big players/investors can surely be built on top of the underlying directly somehow, no?

Absolutely, they could be!

Unfortunately, so far the Bitcoin economy as a whole hasn't yet mustered what is needed to reinvent that wheel. As I mentioned in the article on Bitcoin Derivatives, Liquidity and Counterparty Risk, which is linked from the article that kicked off this thread, the Bitcoin economy could desperately do with decent derivatives.

I finally read your article. You fail to mention mpex.co, which offers futures and options. I don't know how counter-party risk is handled and the operator seems to be perceived by many as an asshole, but isn't mpex at least worth mentioning?

[DrGregMulhauser]

I finally read your article. You fail to mention mpex.co, which offers futures and options. I don't know how counter-party risk is handled and the operator seems to be perceived by many as an asshole, but isn't mpex at least worth mentioning?

Yes, certainly worth...mentioning. I generally avoid saying much about MPEx. I'm not aware of anything about the exchange that would change the general points of the derivatives article, including those on market makers, counterparties, and liquidity.

[DrGregMulhauser]

I can understand both approaches. The rebel in me tends to prefer the latter "solution" and suspects evildoing from advocates of the former approach. At this point I was initially going to write about the part in me that preferred the former approach of integration, but quite frankly, I am failing to come up with a convincing story... to be continued.

Which is exactly the sort of tension that -- to me, anyway -- makes this topic especially interesting!

I also can appreciate both perspectives, and I get that there's a long tradition in the Bitcoin community leaning toward the rebel side. What fascinates me is the possibility of the two coexisting, the idea that some of the pre-existing, already well cooked apparatus could, in a sense, be permitted into the Bitcoin system, on the system's own terms, without Bitcoin winding up simply being railroaded or ridden over rough-shod. How often does the little guy get to deal with the big kahunas without ultimately being crushed? Bitcoin could change that dynamic. Now that's what I find cool.

OK, it's way past my bedtime in this part of the world, and I'm probably not even thinking clearly.

[NewLiberty]

When the price of BTC can be manipulated with no actual BTC trading hands and by using fiat collateral instead through trading ETF shares instead, we have the pernicious effect.

It doesn't seem to me that you have shown how collateral is in any way relevant: it is fiat in both cases, and in both cases either Bitcoins or ETF shares backed by Bitcoins must be borrowed.

I find it almost incomprehensible that the implications of the difference between borrowing actual Bitcoins, and borrowing ETF shares backed by Bitcoins is not clear in light of the April 12,15 activities in the GLD ETF, in a market where the ETF is the pricing mechanism (as it largely is for gold).

When market participants (including those that are not beholden to anti-manipulation rules, such as the central banks) can move the market price of a commodity without ever having to go to the market and acquire any of that commodity through the use of an ETF which acts as the price setting mechanisms, and can do so by securing their trades collateralized with fiat instruments that they can create at will...

What part of this is confusing?

If these market participants had to go to the market to acquire bitcoin in order to sell ETF shares, there would be a buyer for each seller in the price setting mechanism of actual Bitcoin which would limit the effect as actual Bitcoin owners could decide to sell or not at whatever the price may be.

When you don't need to borrow any bitcoin, and only need to borrow ETF shares (and where no bitcoin need be bought at market to support the short selling) such market participants can change the market price of bitcoin at will with relative ease in whatever way they like.

An ETF (such as the WBT) acting as THE pricing mechanism for BTC enables this.  It resets the price of bitcoin with no bitcoins being traded, and does it through a small fraction of the bitcoin market (just those held in the trust).

Can I get a show of hands that DO understand this issue?  I feel that I am getting a bit repetitive here, and I don't want to belabor the point if it is not needed.

[notme]

@NewLiberty

I believe in such a scenario, the ETF would cease to be THE pricing mechanism.  People will buy on the spot market as they become undervalued, decoupling the ETF rate from the "physical" rate.  Unlike gold or any other asset, the barrier to actually move the bitcoins is relatively small.

[NewLiberty]

@NewLiberty
I believe in such a scenario, the ETF would cease to be THE pricing mechanism.  People will buy on the spot market as they become undervalued, decoupling the ETF rate from the "physical" rate.  Unlike gold or any other asset, the barrier to actually move the bitcoins is relatively small.

Moving gold has been done for centuries, it isn't so hard or mysterious.
Nevertheless, I am inclined to agree, and I would hope that the de-coupling would happen faster with Bitcoin than it is with gold and silver, but it is guaranteed to not be instant.  To some extent this decoupling is beginning to happen with gold and silver as the time to acquire "good delivery bars" lengthens.

As much joy as I get from having my raw material costs being so cheap right now, the frustrations I have to deal with in getting delivery almost balance it out.  I've had some suppliers decide to stop selling claiming to be "sold out".  I don't blame them, but what good is a low price if there is not sufficient availability to back it?  Many that were using ETF to get delivery via redemption have been thwarted with fiat.  This is not so much a theoretical risk, as one that has been exercised by market participants.

Frankly, I am of the opinion that the Winkelvoss ETP will be very unlikely to become THE pricing mechanism for BTC, but since the issue was raised, and there is apparently both confusion and disbelief about the risks of that occurring, it seemed important to explain it in some detail to the community at large.

As an aside...
Some countries (Germany, Mexico, Ecudor, Netherlands, Switzerland, etc) were asking for their national gold vaulted in the US to be returned a few months before the GLD shenanigans.  These are the big players who deal in tons not ounces. They have been told to wait (for years).  Driving the price down in advance of the delivery of the goods might be fuel for conspiracy experts.
http://www.forbes.com/sites/afontevecchia/2013/01/16/germany-repatriating-gold-from-ny-paris-in-case-of-a-currency-crisis/
http://gizadeathstar.com/2013/03/mexico-joins-gold-repatriation-bandwagon/

[cryptoanarchist]

I guess when you have Winklevoss money you can pay a PR firm to come here with some sock puppet accounts and try to promote this bullshit.

Seriously, I hear that you're opposed to it, but as I already posted in the other thread where you described the very idea as "stupid" and negating the whole point of owning Bitcoins in the first place, wouldn't you consider it possible -- likely, even -- that different people might want exposure to Bitcoins for different reasons than yourself?

Yeah, you act like it would be hard for them to buy bitcoins. If they want to buy them, they can just PM me.

I wouldn't recommend posting your pic btw, you look like an asshole.

[notme]

I guess when you have Winklevoss money you can pay a PR firm to come here with some sock puppet accounts and try to promote this bullshit.

Seriously, I hear that you're opposed to it, but as I already posted in the other thread where you described the very idea as "stupid" and negating the whole point of owning Bitcoins in the first place, wouldn't you consider it possible -- likely, even -- that different people might want exposure to Bitcoins for different reasons than yourself?

Yeah, you act like it would be hard for them to buy bitcoins. If they want to buy them, they can just PM me.

I wouldn't recommend posting your pic btw, you look like an asshole.

Yea, go pm some guy on the forums... that's how real business gets done

I wouldn't recommend opening your mouth btw, you sound like an asshole.

[wachtwoord]

I guess when you have Winklevoss money you can pay a PR firm to come here with some sock puppet accounts and try to promote this bullshit.

Seriously, I hear that you're opposed to it, but as I already posted in the other thread where you described the very idea as "stupid" and negating the whole point of owning Bitcoins in the first place, wouldn't you consider it possible -- likely, even -- that different people might want exposure to Bitcoins for different reasons than yourself?

Yeah, you act like it would be hard for them to buy bitcoins. If they want to buy them, they can just PM me.

I wouldn't recommend posting your pic btw, you look like an asshole.

Yea, go pm some guy on the forums... that's how real business gets done

I wouldn't recommend opening your mouth btw, you sound like an asshole.

Indeed, I can imagine buying and securing Bitcoins to be hard for anyone, especially for official organs needing to comply with regulations.

Come on, worst case it's not useful, there can be no harm in its existance.

[cryptoanarchist]

I guess when you have Winklevoss money you can pay a PR firm to come here with some sock puppet accounts and try to promote this bullshit.

Seriously, I hear that you're opposed to it, but as I already posted in the other thread where you described the very idea as "stupid" and negating the whole point of owning Bitcoins in the first place, wouldn't you consider it possible -- likely, even -- that different people might want exposure to Bitcoins for different reasons than yourself?

Yeah, you act like it would be hard for them to buy bitcoins. If they want to buy them, they can just PM me.

I wouldn't recommend posting your pic btw, you look like an asshole.

Yea, go pm some guy on the forums... that's how real business gets done

I wouldn't recommend opening your mouth btw, you sound like an asshole.

I AM an asshole. I'm also right. You're an asshole too - there;s nothing wrong with buying bitcoins from me. You think buying "shares" of bitcoins from some inbred douches is more legit than getting the actual thing from me? You're an idiot to boot.

And if they don't want to buy them from me, they can post a [WTB] ad on here and there will be a bunch of members with trading reputations waiting to sell to them. Or they can buy on OTC. Or on localbitcoins. ETc, Etc....

[notme]

I guess when you have Winklevoss money you can pay a PR firm to come here with some sock puppet accounts and try to promote this bullshit.

Seriously, I hear that you're opposed to it, but as I already posted in the other thread where you described the very idea as "stupid" and negating the whole point of owning Bitcoins in the first place, wouldn't you consider it possible -- likely, even -- that different people might want exposure to Bitcoins for different reasons than yourself?

Yeah, you act like it would be hard for them to buy bitcoins. If they want to buy them, they can just PM me.

I wouldn't recommend posting your pic btw, you look like an asshole.

Yea, go pm some guy on the forums... that's how real business gets done

I wouldn't recommend opening your mouth btw, you sound like an asshole.

I AM an asshole. I'm also right. You're an asshole too - there;s nothing wrong with buying bitcoins from me. You think buying "shares" of bitcoins from some inbred douches is more legit than getting the actual thing from me? You're an idiot to boot.

And if they don't want to buy them from me, they can post a [WTB] ad on here and there will be a bunch of members with trading reputations waiting to sell to them. Or they can buy on OTC. Or on localbitcoins. ETc, Etc....

Go find someone to give you a hug.  Life is much more pleasant when you let go of your anger.

[cryptoanarchist]

Go find someone to give you a hug.  Life is much more pleasant when you let go of your anger.

What are you, a teenager? Using the whole "U mad?" schtick? C'mon, you gotta do better than that - it's old.

[notme]

Go find someone to give you a hug.  Life is much more pleasant when you let go of your anger.

What are you, a teenager? Using the whole "U mad?" schtick? C'mon, you gotta do better than that - it's old.

I don't engage in discussions with people who can't make their point without being civil.

If you can make a comment without calling someone an idiot or inbred or an asshole or a teenager, and there is something worth replying to, maybe I will respond.  Until then, you are not worth engaging.

[molecular]

I finally read your article. You fail to mention mpex.co, which offers futures and options. I don't know how counter-party risk is handled and the operator seems to be perceived by many as an asshole, but isn't mpex at least worth mentioning?

Yes, certainly worth...mentioning. I generally avoid saying much about MPEx. I'm not aware of anything about the exchange that would change the general points of the derivatives article, including those on market makers, counterparties, and liquidity.

well, I don't know much about this stuff, but there seem to be at least standardized options and I don't know how counterparty risk is handled. Of course you're probably correct, it doesn't invalidate your points.

[molecular]

When the price of BTC can be manipulated with no actual BTC trading hands and by using fiat collateral instead through trading ETF shares instead, we have the pernicious effect.

It doesn't seem to me that you have shown how collateral is in any way relevant: it is fiat in both cases, and in both cases either Bitcoins or ETF shares backed by Bitcoins must be borrowed.

I find it almost incomprehensible that the implications of the difference between borrowing actual Bitcoins, and borrowing ETF shares backed by Bitcoins is not clear in light of the April 12,15 activities in the GLD ETF, in a market where the ETF is the pricing mechanism (as it largely is for gold).

When market participants (including those that are not beholden to anti-manipulation rules, such as the central banks) can move the market price of a commodity without ever having to go to the market and acquire any of that commodity through the use of an ETF which acts as the price setting mechanisms, and can do so by securing their trades collateralized with fiat instruments that they can create at will...

What part of this is confusing?

If these market participants had to go to the market to acquire bitcoin in order to sell ETF shares, there would be a buyer for each seller in the price setting mechanism of actual Bitcoin which would limit the effect as actual Bitcoin owners could decide to sell or not at whatever the price may be.

When you don't need to borrow any bitcoin, and only need to borrow ETF shares (and where no bitcoin need be bought at market to support the short selling) such market participants can change the market price of bitcoin at will with relative ease in whatever way they like.

An ETF (such as the WBT) acting as THE pricing mechanism for BTC enables this.  It resets the price of bitcoin with no bitcoins being traded, and does it through a small fraction of the bitcoin market (just those held in the trust).

Can I get a show of hands that DO understand this issue?  I feel that I am getting a bit repetitive here, and I don't want to belabor the point if it is not needed.

I'm still unclear about how this works. You said earlier the shares of the ETF have to be 20% backed by bitcoins? So if there's 50,000 BTC in the ETFs coffers, it means the would've issued 250,000 shares for the trading games into the market. While this seems bad in and of itself (inflation of bitcoin M2 or whatever you might call it if you count in the shares of the ETF) it still seems there is a limit to the malicious short-selling. This leads to another question: you said the shares have to actually be borrowed in order to short-sell. What if all shares are in the hands of Joe Normal institutional investors and they are reluctant to lend? Is their consent needed for the lending of shares or will the Winklevoss just lend shares owned by others to the short-seller?

[molecular]

@NewLiberty

I believe in such a scenario, the ETF would cease to be THE pricing mechanism.  People will buy on the spot market as they become undervalued, decoupling the ETF rate from the "physical" rate.  Unlike gold or any other asset, the barrier to actually move the bitcoins is relatively small.

Well. Comparing with gold again: why doesn't the physical market decouple from paper in gold? It seems the argument is that gold is hard to buy and costly to store and transact (which is not true for bitcoin). However: another reason is that big-shot institutional investors like pension funds or whatever might not be allowed to invest into gold directly. This is probably also true for bitcoin. So the case is not clear-cut.

[DrGregMulhauser]

I'm still unclear about how this works. You said earlier the shares of the ETF have to be 20% backed by bitcoins? So if there's 50,000 BTC in the ETFs coffers, it means the would've issued 250,000 shares for the trading games into the market. While this seems bad in and of itself (inflation of bitcoin M2 or whatever you might call it if you count in the shares of the ETF) it still seems there is a limit to the malicious short-selling. This leads to another question: you said the shares have to actually be borrowed in order to short-sell. What if all shares are in the hands of Joe Normal institutional investors and they are reluctant to lend? Is their consent needed for the lending of shares or will the Winklevoss just lend shares owned by others to the short-seller?

At the risk of interjecting in a question that may have been directed at NewLiberty... The ETF is 100% backed by Bitcoins, it's just that the ratio is set up so that 1 share = .2 BTC initially. But the fund's Net Asset Value per share is always the Net Asset Value divided by the number of shares outstanding; there aren't any extras floating around that aren't backed by real Bitcoins. And yes, by definition ordinary short selling requires that shares be borrowed before they can sold. It doesn't matter whether the short seller puts up dollars for collateral, or a goat, or his great aunt; it is still shares which are being borrowed. The special situation of naked short selling is an edge case, where share have not been borrowed first. (I think it's important to distinguish those two very very distinctly, because otherwise an argument that begins talking about ordinary short selling can then wind up dipping into the properties of naked short selling before reverting to ordinary short selling again and emerging at the other end with an argument that seems plausible but which is entirely unsound.) Last but not least, an ETF itself normally isn't in a position to lend shares to anyone else; it can issue new ones in exchange for the underlying, or it can retire old ones and cough up the underlying, but it doesn't hold any that can be lent.

It might also be worth noting that in investment terms, in most situations except really exceptional ones, a significant amount of short interest (i.e., the proportion of the shares outstanding which are currently sold short) is actually a bullish indicator, since the short interest provides a 'cushion' against falls in value and tends to accelerate increases in value. The level of short interest is, in effect, latent additional demand which must at some point be met when the short sellers eventually have to cover their positions by re-purchasing whatever it is that has been sold short. When price falls significantly, some short sellers will be there to take profits and act as buyers. When the price rises significantly, some short sellers will be there to cut their losses and act as buyers (this is the 'short squeeze', when short sellers must either buy at higher prices or stomach larger and larger losses). Either way, short sellers become eventual buyers. The reason I mention this is that except for very rare cases, short selling is both entirely healthy and temporary and is not something which in and of itself is negative for the market.

[lovendahl]

I hope im understanding this correct.

If you can get all of your Bitcoin ETF´s converted to bitcoin, but there only is 20 % backing by actual bitcions. I that not a problem?

In the event that some global economic meltdown happens, and a lot of the investors (let say 30 %) deside to get real Bitcoins for the ETF´s they are holding, then we would have an equivalence of a bank run?