Winkelvoss ETP could become THE pricing mechanism for BTC

[BitDreams]

Lawyer for Winkelvoss Twins’ Bitcoin ETF Says SEC Review Going Smoothly
http://blogs.wsj.com/moneybeat/2014/01/17/lawyer-for-winkelvoss-twins-bitcoin-etf-says-sec-review-going-smoothly/

Very nice observation Greg, however do You think that such fund could be opened on any other reputable exchange and have similar effect or ETF-like investing is predominantly US style?

Loads of ETPs in London, this much I know.

There are exchange traded funds (ETF's) on many exchanges around the world.  Most are traded on the American Stock Exchange or the New York Stock exchange.  My guess is if and when this ETF gets approved, it will stabilize the price, but it'll also be "over priced" vs. the real price of a Bitcoin. 

Since they will be first to the market on an easy access way to trade Bitcoins (yes, arguments on other "easy" ways to own/trade), I think it'll trade above its net asset value (NAV), especially in the beginning.  Many ETF's trade above their NAV and its not all that uncommon.

That would be interesting if the price on the ETF is overpriced! Gold in an ETF runs below the price of cash gold. It seems to me that a managed account would be more expensive. There's been many challenges about there really being gold in the gold ETF though. Is inventory really just swaps and leases instead? I guess the same will be done with Bitcoin through derivatives and I'm sure with obfuscation techniques we'll never really be able to tell all the leverage associated with the Bitcoin... make me wonder. Could a leverage protocol be designed?

[Praeconium]

Manipulating storage is big business and we can see it from Goldman

http://www.nakedcapitalism.com/2013/07/how-goldman-made-5-billion-by-manipulating-aluminum-inventories-and-copper-is-up-next.html

I agree with general view that BitCoin ETF must trade at premium, I don't see how it would trade at discount unless there is fear of what is actually in inventory?

[Lloydie]

Manipulating storage is big business and we can see it from Goldman

http://www.nakedcapitalism.com/2013/07/how-goldman-made-5-billion-by-manipulating-aluminum-inventories-and-copper-is-up-next.html

I agree with general view that BitCoin ETF must trade at premium, I don't see how it would trade at discount unless there is fear of what is actually in inventory?

Manipulation of physical inventory is differentiated by the fact that bitcoin is not physical and can be divided to 8 decimals. Ie if you drive up the price of btcs, you do not create scarcity. You increase the purchasing power of existing holders of Btc, thus they go on a spending spree if they were so inclined.

So I say to Goldman - please manipulate Btcs. This would do everyone a big favour.

[skivrmt]

Manipulating storage is big business and we can see it from Goldman

http://www.nakedcapitalism.com/2013/07/how-goldman-made-5-billion-by-manipulating-aluminum-inventories-and-copper-is-up-next.html

I agree with general view that BitCoin ETF must trade at premium, I don't see how it would trade at discount unless there is fear of what is actually in inventory?

Manipulation of physical inventory is differentiated by the fact that bitcoin is not physical and can be divided to 8 decimals. Ie if you drive up the price of btcs, you do not create scarcity. You increase the purchasing power of existing holders of Btc, thus they go on a spending spree if they were so inclined.

So I say to Goldman - please manipulate Btcs. This would do everyone a big favour.

Exactly this.  I mean, what are they going to do, hoard BTC?  Buy up all the "inventory"?  A physical asset is much different.  Aluminum is needed by companies to make things.  Gold and Bitcoin are not.  If a company hoards, they will drive up the price.  Ok, so how is that bad?

[aminorex]

If a company hoards, they will drive up the price.  Ok, so how is that bad?

I can't get them cheap.  Is bad, very very bad.

[NewLiberty]

If a company hoards, they will drive up the price.  Ok, so how is that bad?

I can't get them cheap.  Is bad, very very bad.

There really isn't such a thing as cheap coins. 
They are worth whatever they are worth when you use them.  If you never use them it never matters what they are worth.  So from your perspective, if they are worth more when you use then than when you acquired them, you got them cheap.


The ETF slowly bleeds out coins in the form of fees and costs (most of which go to other Winklevoss family companies), so it is not entirely a bitcoin black hole investment vehicle.  There is continuous residual dilution of coins in the EFT and as new purchases are apportioned by the assets held in the fund, this dilution never reverses and forms a type of constant debasement of the per share value over time.
That this small continuous dilution is expected to be more than offset by the improvement in value of the bitcoin held is assumed by most anyone and certainly by all who would invest in it.

[aminorex]

if they are worth more when you use then than when you acquired them, you got them cheap.


The ETF slowly bleeds out coins in the form of fees and costs (most of which go to other Winklevoss family companies), so it is not entirely a bitcoin black hole investment vehicle.  There is continuous residual dilution of coins in the EFT and as new purchases are apportioned by the assets held in the fund, this dilution never reverses and forms a type of constant debasement of the per share value over time.
That this small continuous dilution is expected to be more than offset by the improvement in value of the bitcoin held is assumed by most anyone and certainly by all who would invest in it.

Cheap when I can buy them, relative to when I can use them is the issue.

The arb is to buy bitcoin and short the ETF.  Poor carry unless it's levered super cheaply.

[NewLiberty]

if they are worth more when you use then than when you acquired them, you got them cheap.


The ETF slowly bleeds out coins in the form of fees and costs (most of which go to other Winklevoss family companies), so it is not entirely a bitcoin black hole investment vehicle.  There is continuous residual dilution of coins in the EFT and as new purchases are apportioned by the assets held in the fund, this dilution never reverses and forms a type of constant debasement of the per share value over time.
That this small continuous dilution is expected to be more than offset by the improvement in value of the bitcoin held is assumed by most anyone and certainly by all who would invest in it.

Cheap when I can buy them, relative to when I can use them is the issue.

Right.
By this metric you can expect the fund to create many cheap coins.
The fund is expected to be a net-buyer for a long time even though it will be selling some continuously for fees.

The arb is to buy bitcoin and short the ETF.  Poor carry unless it's levered super cheaply.

Yes, though with the current activity in the gold ETFs, you are likely to get a better/swifter payout there.  Those are being bled out even now by redemption.

[skivrmt]

if they are worth more when you use then than when you acquired them, you got them cheap.


The ETF slowly bleeds out coins in the form of fees and costs (most of which go to other Winklevoss family companies), so it is not entirely a bitcoin black hole investment vehicle.  There is continuous residual dilution of coins in the EFT and as new purchases are apportioned by the assets held in the fund, this dilution never reverses and forms a type of constant debasement of the per share value over time.
That this small continuous dilution is expected to be more than offset by the improvement in value of the bitcoin held is assumed by most anyone and certainly by all who would invest in it.

Cheap when I can buy them, relative to when I can use them is the issue.

The arb is to buy bitcoin and short the ETF.  Poor carry unless it's levered super cheaply.

Can't see this ever being profitable.  Buy bitcoin, lets assume no fees (yes, might be some very low fees).  Shorting the ETF will incur interest.  How much price difference can the ETF really have over, say 3-6 months, over the actually price of Bitcoin assuming the ETF has an expense ratio of 1%?  With the interest for shorting, minor trading costs, I think it'll be a really tough arb play.

[aminorex]

Can't see this ever being profitable.  Buy bitcoin, lets assume no fees (yes, might be some very low fees).  Shorting the ETF will incur interest.  How much price difference can the ETF really have over, say 3-6 months, over the actually price of Bitcoin assuming the ETF has an expense ratio of 1%?  With the interest for shorting, minor trading costs, I think it'll be a really tough arb play.

Definitely.  Try to short both TAZ and TAS.  If you could do it with low carry, you'd be guaranteed an amazing return with essentially no volatility, but borrowing them both is ... beyond me, anyhow.

HOWEVER you could short them both synthetically with postive carry by making diagonal put spreads.  Vol goes up but the outcome is no less guaranteed in aggregate over time.  Similarly with BTC and Winklefloii puts.

[molecular]

So will it be easily possible to build derivatives on this ETF (options, futures,...)?

How likely is that to happen?

[skivrmt]

So will it be easily possible to build derivatives on this ETF (options, futures,...)?

How likely is that to happen?

Is it easy?  Yes.  Will it happen?  Most likely, eventually.  CBOE (Chicago Board Options Exchange) lists options for a huge amount of ETF's.  GLD ETF is a fairly active one.

http://www.cboe.com/Products/optionsOnETFs.aspx

So once this starts trading hopefully later this year, at some point down the road (3+ months), it'll probably be listed on the CBOE depending on the interest in creating options on it.

[aminorex]

If a CBOE member wants to make a market, then there will be options.  It's pretty well guaranteed if there is significant traffic.  And there will be traffic.  Oh yes, there will be traffic.

[DrGregMulhauser]

So will it be easily possible to build derivatives on this ETF (options, futures,...)?

How likely is that to happen?

Should the ETF go ahead, then IMHO, it's very likely that standardized options will appear -- and that, finally and at long last, will provide a credible mechanism for large Bitcoin handlers to hedge positions effectively. (No, the existing quasi options offered on "THE" exchange don't come close to offering such a credible mechanism. And the futures available on ICBIT become less and less appealing with every new change to the exchange's "rules".) Making more effective hedging possible would arguably remove one of the major roadblocks currently standing in the way of larger scale adoption of Bitcoin for real commerce.

[skivrmt]

So will it be easily possible to build derivatives on this ETF (options, futures,...)?

How likely is that to happen?

Should the ETF go ahead, then IMHO, it's very likely that standardized options will appear -- and that, finally and at long last, will provide a credible mechanism for large Bitcoin handlers to hedge positions effectively. (No, the existing quasi options offered on "THE" exchange don't come close to offering such a credible mechanism. And the futures available on ICBIT become less and less appealing with every new change to the exchange's "rules".) Making more effective hedging possible would arguably remove one of the major roadblocks currently standing in the way of larger scale adoption of Bitcoin for real commerce.

I would bet the farm on exactly this! CBOE wants to make money.  If a member wants the options, if there is demand, options will be created.  And like another posted said, there will be demand for this.  From this, all sorts of mechanisms are available for larger institutions to "hedge" their bets, in either direction.

On a total side note, interesting company, background, and product on the market Greg.  Montana to England, probably don't see many of those.  

[jtpeters]

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.

Anyone (with a brokerage account)? Are you sure about that?

[2dogs]

Can't see this ever being profitable.  Buy bitcoin, lets assume no fees (yes, might be some very low fees).  Shorting the ETF will incur interest.  How much price difference can the ETF really have over, say 3-6 months, over the actually price of Bitcoin assuming the ETF has an expense ratio of 1%?  With the interest for shorting, minor trading costs, I think it'll be a really tough arb play.

Definitely.  Try to short both TAZ and TAS.  If you could do it with low carry, you'd be guaranteed an amazing return with essentially no volatility, but borrowing them both is ... beyond me, anyhow.

HOWEVER you could short them both synthetically with postive carry by making diagonal put spreads.  Vol goes up but the outcome is no less guaranteed in aggregate over time.  Similarly with BTC and Winklefloii puts.

I was thinking the same thing.

When is this fund going to happen?

Bring it on!

[jubalix]

it may, in the short term, but I think the EFT trust risks becoming a sort of myspace (kinda ironic) because as apps get better for handeling BTC until the killer app come thought, why would you use and EFT?

Further the BTC in the EFT are always less secure as they are amenable to court orders.

[aminorex]

it may, in the short term, but I think the EFT trust risks becoming a sort of myspace (kinda ironic) because as apps get better for handeling BTC until the killer app come thought, why would you use and EFT?

Further the BTC in the EFT are always less secure as they are amenable to court orders.

Totally different use cases.  The ETF is good for institutions with rules which prevent them from holding BTC (which covers most institutional funds), and custodial accounts generally.  It's also a way to leverage high-quality financial infrastructure for derivatives. It allows one to short at low cost, to lever at low cost, and to synthetically gain exposure (in either direction) with positive carry.
90% of the people do not care about these things, but 90% of the money does.

[Lloydie]

So will it be easily possible to build derivatives on this ETF (options, futures,...)?

How likely is that to happen?

Should the ETF go ahead, then IMHO, it's very likely that standardized options will appear -- and that, finally and at long last, will provide a credible mechanism for large Bitcoin handlers to hedge positions effectively. (No, the existing quasi options offered on "THE" exchange don't come close to offering such a credible mechanism. And the futures available on ICBIT become less and less appealing with every new change to the exchange's "rules".) Making more effective hedging possible would arguably remove one of the major roadblocks currently standing in the way of larger scale adoption of Bitcoin for real commerce.

Implied yield curve on long forwards would be highly negative. I'd be interested in seeing exactly how negative.