Will The Bitcoin Investment Trust affect the price?

[User705]

Ben Franklin said those that are willing to trade liberty for a little security will get neither.  Much like customers in this Trust.

[lucasjkr]

Please embarrass me by explaining the difference between an ETF and a Trust.

The SPDR Gold ETF is, in fact, a Trust. In fact, most (if not all) ETF's are Trusts. That just means that the issuer owns the underlying shares on behalf of the trusts unit holders (ie, shareholders).

There are lots of different kinds of trusts. What I am trying to get at is what qualifies as 'trading' for the purposes of the trust. Is the trust actively trading shares of the underlying asset, or just holding them? Or is the only active trading occurring between the owners of shares in the trust?

What do you mean, "what qualifies as 'trading'?

My reading of it is that the only trading the the trust is doing is buying Bitcoins when it receives money and selling bitcoins when investors redeem. Investors in the trust aren't trading against one another, owners of a mutual fund aren't trading against one another - they share the exact same fate.

It's just a vehicle for adding Bitcoin exposure for investors who are unwilling to buy bitcoins directly.

[BTC4Victory]

OK, I may technically be violating the terms of the NDA language I clicked on when I signed up last night as an accredited investor with Second Market, but so be it.  While a healthy skepticism is entirely appropriate, and I appreciate chodpaba (and cypherdoc) for playing a skeptical role here, this isn't just some "how many angels can dance on the head of pin" type metaphysical question that we can go around and around on and never come to an agreement upon -- it's a factual question as to how the trust has structured itself, and there's a factual answer.

From pp. 7-8 of the Private Placement Memorandum, under the heading "Creation and Redemption":

The Trust creates and redeems the Shares on a continuous basis, but only upon the order of Authorized Participants and only in Baskets.  A Basket is a block of 100 Shares.  Initially, each Share represents 1/10th of a bitcoin.

The creation and redemption of Baskets requires the deliver to the Trust or the distribution by the Trust of the number of bitcoins represented by the Baskets being created or redeemed.  The number of bitcoins that will be required ("Basket Bitcoin Amount") for each creation basket ("Creation Basket") or redemption basket ("Redemption Basket") will be determined from time to time by dividing the number of bitcoins owned by the Trust at such time by the number of Shares outstanding at such time (calculated to one one-hundred-millionth of one bitcoin) and multiplying the quotient obtained by 100.  the Basket Bitcoin Amount may gradually decrease over time if the Trust's bitcoins are used to pay the Trust's expenses.  See "Bitcoin Investment Trust - Trust Expenses."  Baskets may be created or redeemed only by Authorized Participants.  Authorized Participants may create or redeem Baskets, and may act for their own account or for the account of one or more of their customers in respect of all or part of the Shares comprising a Creation Basket or Redemption Basket.

While this may seem like a convoluted and Rube-Goldberg-esque mechanism to those unfamiliar with the down-in-the-weeds details of how ETFs work, this is exactly the way the SPDR Gold ETF (or, say, the various ETFs which track the Dow 30 or the S&P Index) functions: the amount of bitcoins held by the trust can grow or shrink over time to accomodate demand for the investment vehicle.  But -- unlike an ordinary mutual fund, where shareholders can buy new shares directly from the issuer at any time for USD or cash out their existing shares at any time by selling them back to the issuer at the daily-determined net asset value (NAV) -- in the case of an ETF like SPDR GLD (or, like the BIT Trust will operate, as the Prospectus makes clear), for a run-of-the-mill normal investor my only way to get in and out is not through interactions with the issuer but instead simply by buying or selling the ETF shares on the open market (the Nasdaq or NYSE, in the case of publicly-traded ETFs; on Second Market's proprietary market (limited to accredited investors) in the case of the BIT Trust).

BUT, what ensures that the price of the ETF shares closely tracks the value of the underlying assets held by the Trust, is that specialized "Authorized Participants" have the ability to either create new ETF shares at any time by delivering a "basket" of the underlying asset (Gold, in the case of the Gold Trust, or a specified number of shares of every company in the S&P500 Index, in the case of an S&P500-tracking ETF, or bitcoins, in the case of the BIT Trust) to the ETF itself; or, alternatively, at any time the same Authorized Participants have the right to put a "basket" of shares back to the ETF to have them redeemed out in-kind for the set number of bitcoins per share.  So, if the price of the BIT Trust gets out of line one way or the other with the underlying price of Bitcoins, it's risk-free money for the Authorized Participants to either buy and contribute more bitcoins to the Trust in exchange for new shares that the AP can then sell at a profit (if the ETF is trading "too high" relative to the underlying price of Bitcoins), or can buy up ETF shares at a discount and immediately cash them in for the Bitcoins which it will sell at a profit (if the ETF is trading "too low" relative to the underlying price of Bitcoins) -- it's this built-in arbitrage opportunity which keeps the price of the ETF closely in line with the price of the underlying.

In other words, the BIT Trust is not limited to holding the 17,800 BTC it holds today -- it will likely end up holding a lot more (assuming sufficient investor interest), although in theory it could end up holding less -- and the total amount of BTC it holds will fluctuate over time, but what will stay constant* is the number of BTC held by the trust per number of shares outstanding.  (*Well, constant, except for the slow erosion over time as BTC are sold to pay the rather-steep 2% annual maintenance fee.)

[lucasjkr]

To the person i was writing to earlier, an ETF is just a nomenclature. But the person who provided information from the PPM explained it perfectly, which is that it's an ETF (meaning, a Trust that holds Bitcoins).

And to BTC for Victory, yes, the trust could hold far more than 17,800 Bitcoins. But it will also have more shares outstanding. Each share should always trade close to in-line with the value of 1/10th of a Bitcoin (less accumulated fees and expenses). In otherwords, if you bought shares next week while the Trust owns 17,800 BTC, hold them, and a year later the Trust owns 200,000 BTC, that second number won't be of any concern to you - 2 million or so additional shares would have also been issued, so you're investment will be worth the same 1/10th of a BTC (less 1 years fees) that it was when you bought it.

That's what it means when it says it's an "Open Ended". This is just a passive investment vehicle, not an actively managed fund conducting all sorts of trading for its own acccount).

[Tirapon]

Thank you BTC4Victory for clearing that up! I've been following this thread and trying to figure out exactly how this fund will operate, but the information provided on their site didn't make it very clear.

[User705]

Silver and gold ETF have clauses that absolve them of all liability in case the metals turn out to be fake or the supplier or custodian defaults on a delivery.  It wouldn't surprise me if this trust does as well.  Can you post the whole agreement?

[ProfMac]

What is different from the Vinklevoss SEC filing?

[rolling]

What is different from the Vinklevoss SEC filing?

Publicly traded or privately traded.

Private "Accredited Investors" only on this one.

http://www.sec.gov/answers/accred.htm

[Herp]

What is different from the Vinklevoss SEC filing?

Straight from the horse's mouth http://video.cnbc.com/gallery/?video=3000201609&startTime=0&endTime=404

[wachtwoord]

  (*Well, constant, except for the slow erosion over time as BTC are sold to pay the rather-steep 2% annual maintenance fee.)

Rather steep? I consider any fee above 0.1% for an ETF to be very high and I really don't understand that people buy these. With this ETF there is even an added fee for investing AND divesting.

[Odalv]

where the hell is the prospectus?

You can read the investor presentation here: http://www.bitcointrust.co/

based on that it looks to me like Chodpaba is correct in assuming there will not be an ongoing purchase of BTC.

But it makes no sense.
1 share = 0.1 BTC

look at Investor Presentation page 9/14

[TERA]

Doesn't holding assets on a trust or etf defeat the entire purpose/advantage of having a bit coin investment? Your investment is supposed to be untouchable and on an unbreakable decentralized system where you and only you have access. Using a trust/etc now you're regressing and trusting people on a centralized system and losing all of those advantages. now you're vulnerable to the organization, people, the government, the sec, laws hackers, banksters, and all the bs bit coin is trying to get away from.

[Herp]

Doesn't holding assets on a trust or etf defeat the entire purpose/advantage of having a bit coin investment? Your investment is supposed to be untouchable and on an unbreakable decentralized system. Using a trust/etc now you're regressing and trusting people on a centralized system and losing all of those advantages.

Yes, you're right in a way. But idea here is to provide big retail investors and rich folks with easy entry into bitcoin as investment, should they want to bet on the growth of bitcoin, same as betting on the Chinese yuan for example or on gold.

[bobdude17]

Is this Bitcoin Trust what we saw on the leaked photos of Bitcoin on the Bloomberg Terminal?

Do you think this means that Bloomberg will be making their bitcoin ticker public soon?

[cypherdoc]

well then, that's great news.

since BIT is able to increase BTC held over the upcoming years to meet share demand, this most assuredly will increase the price.

UP.

[600watt]

"Barry Silbert has been obsessed with Bitcoin. Obsessed. His priorities in life, he says, are ordered as such: his wife, his company, and Bitcoin. The crypo-currency is the first thing he has seen like it since the Internet.

Silbert has invested plenty of his own money into actual Bitcoins, which he’s purchased on Bitcoin exchange Mt. Gox. He’s also invested in 10 Bitcoin-related startups (and one fund) through his aptly named fund, The Bitcoin Opportunity Fund.

As of today, he’s taken it a step further, merging his second and third priorities. Today, he announced that his company, SecondMarket, which allows investors to buy and sell shares in private companies, will now allow investors to buy and sell shares in a Bitcoin trust.

Bitcoin Investment Trust launches as an open-ended private trust that invests exclusively in Bitcoin. The private fund is currently raising capital, and SecondMarket has kicked things off with a $2 million allocation. The Trust will operate as a subsidiary of SecondMarket.

The fund will allow people to invest in Bitcoin the same way they’d invest in gold or silver. In fact, Silbert said, the trust mimics the structure of Spider Gold Trust, the exchange traded fund (ETF) which invests exclusively in gold. These commodities trusts were the catalyst to making gold an investable asset class of its own, bringing gold investing to the masses.  (....)"


http://pandodaily.com/2013/09/25/secondmarket-goes-all-in-on-bitcoin-launching-a-private-trust/

i don´t get it: this is obviously a big thing to happen to bitcoin. despite all fears of becoming outlawed, despite unstable infrastructure, despite regulators hyperventilating, despite all the fud, despite of the "crash", despite of being complicated, despite of lacking uses in the real world -- here you have a guy like barry silbert putting his reputation and with it his multi-million $ company at stake since he seem to know that bitcoin IS big for which every bitcoin enthusiast should welcome him,  this forum is full of pessimistic farts acting in a similar way as the non-bitcoin educated folks/nay sayers always do when it comes discuss bitcoin ("scam, ponzi, no use, drugs, no intrinsic value...). if you are sooooo pessimistic about obvoiusly good news why don´t you simply put your energy and time into something you believe in ?i doubt that pessimism will help bitcoin to fly. i think enthusiasm will help more. if you are mad because you sold your 10 k bitcoins last year, it was clearly not happening because you were enthusi

sry 4 rant

[lucasjkr]

  (*Well, constant, except for the slow erosion over time as BTC are sold to pay the rather-steep 2% annual maintenance fee.)

Rather steep? I consider any fee above 0.1% for an ETF to be very high and I really don't understand that people buy these. With this ETF there is even an added fee for investing AND divesting.

The "added fee" for investing or divesting is just for people who are creating of redeeming baskets; anyone else will just pay a trade commission; I don't know what Second Market's commission structure is, but once BIT moves to public markets, then you'll just looking at the same commissions as you'd pay for a stock trade;

0.1% ETF fees are fine for multi-billion dollar ETF's; but A) for starters, the market cap of this is miniscule; it needs to earn enough fees for the sponsor so that it's filings can be paid for, etc; maybe the expenses will decline as the size gets larger?

Additionally, with this and the Winklevoss ETF, fees will be one of the few differentiators for them to compete on.

Lastly; 2% isn't an absurd fee in the investment world; yes, for anyone already involved in Bitcoin, a 2% fee for having someone else hold your bitcoins might seem steep, but this ETF isn't catering to you. In addition, lots of people are paying fees like that already (US citizens wiring funds to MtGox are certainly paying $30+ each way for their international wire; supposing $60/round trip, any purchase of less than $3000 worth of coins is paying more than 2% for the purchase, PLUS gox's trading commissions, etc.

So even though i said this isnt' meant to cater to people already involved in Bitcoin, it could turn out to be a cheaper alternative for people who want to have an asset that rises in price when/if BTC goes up, and are willing to live with the risk that a heavily regulated company will be holding their coins for them (SecondMarket is already far more regulated than the majority of places that bitcoiner's have stashed their coins over the last few years).

So, all that said. I dont' see this as being bad or absurd or anything else. Sure the fee looks extreme compared to most other ETF's. But considering the size of this fund, the fees Secondmarket will incur, and the fact that most market participants will not object to their charging that size fee considering what a nonstandard asset Bitcoin is, its not by any means a deal breaker.

Heck, if Secondmarket is holding the liability bag if coins from their ETF get stolen, I would be more confident holding BTC's in the form of their ETF in a brokerage account (once it becomes salable to the general public) than any online wallet service.

[wachtwoord]

I know 2% annual rate and a 1.5% front AND backend fee (yes I checked, DOES apply) is not considered insane in the investment world. Many funds charge fees this high. I consider it insane that these fees are not considered insane however

At least Graham agrees with me 

[MoreFun]

  (*Well, constant, except for the slow erosion over time as BTC are sold to pay the rather-steep 2% annual maintenance fee.)

Rather steep? I consider any fee above 0.1% for an ETF to be very high and I really don't understand that people buy these. With this ETF there is even an added fee for investing AND divesting.

Heck, if Secondmarket is holding the liability bag if coins from their ETF get stolen, I would be more confident holding BTC's in the form of their ETF in a brokerage account (once it becomes salable to the general public) than any online wallet service.

Don't be so sure about that. Take a look at page 12 (Security).

[adamstgBit]

where the hell is the prospectus?

You can read the investor presentation here: http://www.bitcointrust.co/

based on that it looks to me like Chodpaba is correct in assuming there will not be an ongoing purchase of BTC.

But it makes no sense.
1 share = 0.1 BTC

look at Investor Presentation page 9/14

It seems pretty clear from the leaked infos (TY BTC4Victory) that it's pretty much a straight forward ETF, shares can be traded between participants, and Bitcoin can flow into and out of the fund. Holdings can increase, and they can decrease.

only its not. and so you don't have to wait years for SEC approval