Bitcoin ETF Plan Alive And Well

[pdawg]

"The Winklevoss Trust updated its regulatory filing on the bitcoin ETF this week, disclosing that the fund will be listed on the Nasdaq."

http://www.etf.com/sections/features/22067-bitcoin-etf-plan-alive-and-well.html

[1714771984]

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[1714771984]

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[franky1]

just remember guys.

the people that invest are putting FIAT into a COMPANY that holds bitcoin (their stocks)

these investors are not BITCOIN purchasers. they are buying shares of a company which will profit or loss de to the value of their stockholdings.

EG if the winks only hold 200,000 bitcoins for the next 100 years. no more no less. then the fiat investors are gambling on the bitcoin price,

these fiat investors will not hold, purchase or sell any bitcoins. thus the EFT will not directly affect our bitcoin exchange markets.

what will happen though is if there is demand from FIAT investors to want winkle investment shares. then the winkles can increase their holdings (add more stock). and that is the only time they(the winkles) will buy more actual bitcoins

[Peter R]

just remember guys.

the people that invest are putting FIAT into a COMPANY that holds bitcoin (their stocks)

these investors are not BITCOIN purchasers. they are buying shares of a company which will profit or loss de to the value of their stockholdings.

EG if the winks only hold 200,000 bitcoins for the next 100 years. no more no less. then the fiat investors are gambling on the bitcoin price,

these fiat investors will not hold, purchase or sell any bitcoins. thus the EFT will not directly affect our bitcoin exchange markets.

what will happen though is if there is demand from FIAT investors to want winkle investment shares. then the winkles can increase their holdings (add more stock). and that is the only time they(the winkles) will buy more actual bitcoins

The bitcoin ETF will function very similarly to the SPDR Gold Trust (ticker symbol: GLD).  It will have a direct and significant impact on bitcoin market dynamics.  

Here's how it works:  

For simplicity sake assume there are 1000 bitcoin ETF shares held by investors and assume the trust holds 1000 bitcoins.  If an investor holds 1 share, he owns 0.1% of the bitcoins held by the trust.  

Now imagine bitcoin is trading at $500 on BitStamp, but the ETF shares are trading at $550 on NASDAQ.  Since 1 share = 1 bitcoin (in our example), there is an arbitrage opportunity.  Someone can short-sell 10 ETF shares for $5500 and take $5000 from the proceeds and buy 10 bitcoins from BitStamp.  So now this person has $500 cash, a debt of 10 ETF shares and 10 extra bitcoins.  He then calls up the bitcoin ETF and says "as an authorized participant, I want to execute my right to swap these 10 bitcoins for 10 newly-issued ETF shares."  The ETF is obliged to take the bitcoins and issue him new shares in return.  The arbitrager then uses these 10 new shares to close his short position, profiting by $500.  

The net result was that the ETF's bitcoin holdings increased by 10 BTC and the arbitrager earned a risk-free $500 profit.    

The same thing can also happen in reverse: if the ETF price is lower than the BitStamp price, arbitragers will do the opposite thing and coins will flow out of the ETF.  

A bitcoin ETF trading on the NASDAQ would have a significant effect on the bitcoin market.

http://thismatter.com/money/mutual-funds/etf.htm  

[DeathAndTaxes]

just remember guys.

the people that invest are putting FIAT into a COMPANY that holds bitcoin (their stocks)

these investors are not BITCOIN purchasers. they are buying shares of a company which will profit or loss de to the value of their stockholdings.

EG if the winks only hold 200,000 bitcoins for the next 100 years. no more no less. then the fiat investors are gambling on the bitcoin price,

these fiat investors will not hold, purchase or sell any bitcoins. thus the EFT will not directly affect our bitcoin exchange markets.

what will happen though is if there is demand from FIAT investors to want winkle investment shares. then the winkles can increase their holdings (add more stock). and that is the only time they(the winkles) will buy more actual bitcoins

None of that is correct.  The shareholders don't own any of the company they only own a portion of the trust which holds the Bitcoins.  Institutional investors (authorized participants) have the ability to issue new shares for bitcoins and redeem shares for bitcoins.  This is how any ETF works.  The ability for institutional investors to perform these operations is what balances the ETF.  

On edit:  I see Peter beat me to it.

[franky1]

the investors dont have proper ownership of the actual bitcoins held in trust. not in the true bitcoin definition meaning they can use a privkey to move bitcoins!!
they own a share of the companies holdings. basically a share thats VALUED at x bitcoins.. they do not actually own bitcoins

now you understand that part,. now understand this next part.

the investors are putting FIAT into winklevosses bank account.. not bitstamp, not coinbase, not btc-e, not kraken... they are putting FIAT into winklevoss account.

with me so far?? hope so.

so these investors are putting FIAT into winklevoss account and are given shares of a trust that is valued at X bitcoins. investors are not buying bitcoins from the winklevoss they are buying shares.. understanding this part?

well now to summarise. imagine an investor that wants to invest $1million if he invests in the winklevoss, those funds are buying shares of holdings the winkles ALREADY have. and thus not one single buy order will happen on bitcoin exchanges to raise the price of bitcoin. and i mean ACTUAL bitcoin. it will only raise the amount of dollars the winkles have in their bank accounts.

imagine the seller wants to sell his shares of the winklevoss holdings. he has to find another investor willing to buy into winklevoss. which again is not a sell order on any ACTUAL bitcoin exchanges. it is just a transfer of ownership of shares where the winle's make profit not only by keeping the initial share buy in but transaction fee's of each share ownership change.

again not affecting ACTUAL bitcoins one bit

this means that while investors gamble using winklevoss, they are not in anyway directly causing a price rise or fall of actual bitcoin value

it is purely speculating using a FIAT system separate from actual bitcoin markets. thus it is not proactively affecting bitcoin value, but more so reactive, where the winklevoss value changes due to bitcoin changes.

even if the winklevosses wanted to offer more shares, by adding more holdings. they have admitted they source bitcoins from private individuals and many sources. not only exchanges. so lets say they bought 10k more coins to add to their holdings and offer more shares. you will not see a whole 10k buy-up frenzy on bitcoin exchanges.

what you may find is stuff like bitpay sell their coins to the winkles instead of on an exchange, or a miner selling their coins privately to winkle's. and this would indirectly mean there is less sell orders on an exchange. but as i just said it will not be a big buy-up frenzy.

these EFT's are not bitcoin specific. they can be used to gamble gold, commodities or lots of other things. without the investor ever truly owning the item. they are not bitcoin investors or gold investors. they are EFT investors.

so the winkevoss EFT is not something to get excited about. and more of us should be getting excited about actual investment in the purchase of bitcoins on actual bitcoin exchanges.. not throwing FIAT at winklevoss bank accounts.

[tuneman1980]

just remember guys.

the people that invest are putting FIAT into a COMPANY that holds bitcoin (their stocks)

these investors are not BITCOIN purchasers. they are buying shares of a company which will profit or loss de to the value of their stockholdings.

EG if the winks only hold 200,000 bitcoins for the next 100 years. no more no less. then the fiat investors are gambling on the bitcoin price,

these fiat investors will not hold, purchase or sell any bitcoins. thus the EFT will not directly affect our bitcoin exchange markets.

what will happen though is if there is demand from FIAT investors to want winkle investment shares. then the winkles can increase their holdings (add more stock). and that is the only time they(the winkles) will buy more actual bitcoins

None of that is correct.  The shareholders don't own any of the company they only own a portion of the trust which holds the Bitcoins.  Institutional investors (authorized participants) have the ability to issue new shares for bitcoins and redeem shares for bitcoins.  This is how any ETF works.  The ability for institutional investors to perform these operations is what balances the ETF.  

On edit:  I see Peter beat me to it.

Correct.  The trust has to be able to cover the deposits of it's investors.  If an investor purchases $1,000 of the trust and the price of Bitcoin goes to $10,000 and the investor sells, then the trust must hold the "underlying securities" to cover the rise in value.  The only debatable option is whether or not the ETF is a RIC or Grantor and whether or not the investors own the Bitcoins that they have purchased via the trust or not.

[DeathAndTaxes]

the investors dont have proper ownership of the bitcoins held in trust.

not in the true bitcoin definition meaning they can use a privkey to move bitcoins!!

they own a share of the companies holdings. basically a share thats VALUED at x bitcoins.. they do not actually own bitcoins

They can redeem the shares for BTC, potentially a massive amount of BTC and sell them outside the exchange.  Your claim is that it has no effect on prices which is not true.  It isn't a company it is a trust.  The trust will be audited.  It will have to prove it has the proper number of BTC for the shares.  The shares can be redeemed for BTC and the trust will need to turn over those BTC.  Likewise an authorized participant can bring BTC acquired on exchanges (and thus affecting the price) to the trust and have the take issue shares for the BTC.

If approved it most certainly will affect the price on other exchanges.  It may even become the leading price source having liquidity and volume on a scale that massively dwarfs the existing exchanges.  To say it is just some shares in a company and won't have an effect is completely wrong.

[tuneman1980]

the investors dont have proper ownership of the bitcoins held in trust.

not in the true bitcoin definition meaning they can use a privkey to move bitcoins!!

they own a share of the companies holdings. basically a share thats VALUED at x bitcoins.. they do not actually own bitcoins

An ETF is not a share of a company's holdings.  If the ETF is classified as a grantor trust then they would actually have ownership of the underlying bitcoins of the trust.

[tuneman1980]

the investors dont have proper ownership of the bitcoins held in trust.

not in the true bitcoin definition meaning they can use a privkey to move bitcoins!!

they own a share of the companies holdings. basically a share thats VALUED at x bitcoins.. they do not actually own bitcoins

They can redeem the shares for BTC, potentially a massive amount of BTC and sell them outside the exchange.  Your claim is that it has no effect on prices which is not true.

The most important takeaway is that the trust must hold Bitcoins and must purchase additional Bitcoins if it wishes to share more shares of the trust, so this does have an effect on price.  Of course they will use the seed money to make small purchases over time as the market depth will allow as to not cause large and costly fluctuations in the price.

[DeathAndTaxes]

The most important takeaway is that the trust must hold Bitcoins and must purchase additional Bitcoins if it wishes to share more shares of the trust, so this does have an effect on price.  Of course they will use the seed money to make small purchases over time as the market depth will allow as to not cause large and costly fluctuations in the price.

If you are interested here is the S-1 filing from last summer.  Not sure if they have an updated filing or not.
http://www.sec.gov/Archives/edgar/data/1579346/000119312513279830/d562329ds1.htm

The filing would appear to indicate it is setup as a grantor trust

The Trust will be classified as a “grantor trust” for US federal income tax purposes. As a result, the Trust itself will not be subject to US federal income tax. Instead, the Trust’s income and expenses will “flow through” to the Shareholders, and the Trustee will report the Trust’s income, gains, losses and deductions to the IRS on that basis.

...

The Trustee will terminate and liquidate the Trust if one of the following events occurs:
...
the Trust fails to qualify for treatment, or ceases to be treated, as a grantor trust for US federal income tax purposes, and the Trustee receives notice from the Sponsor that the Sponsor determines that, because of that tax treatment or change in tax treatment, termination of the Trust is advisable;

[tuneman1980]

The most important takeaway is that the trust must hold Bitcoins and must purchase additional Bitcoins if it wishes to share more shares of the trust, so this does have an effect on price.  Of course they will use the seed money to make small purchases over time as the market depth will allow as to not cause large and costly fluctuations in the price.

If you are interested here is the S-1 filing from last summer.  Not sure if they have an updated filing or not.
http://www.sec.gov/Archives/edgar/data/1579346/000119312513279830/d562329ds1.htm

Thanks.  It said that they submitted a new one.  I'll be interested to read the prospectus once it's released.

[franky1]

to all those waffling on that investors buy bitcoins and not shares in the trust/company

The Shares represent units of fractional undivided beneficial interest in and ownership of the Trust.

try reading the document file fully next time

ok as for the trust..

the winkles personally own 200,000btc under the company Winklevoss Capital Management LLC
the trust will initially start with a 'basket' of 10,000btc (50,000 shares). under the company name Winklevoss bitcoin trust.
try to keep these two companies as separate entities in your mind

if participating and authorized dealers want to offer more shares, then they need to add more 'baskets' into the trust. meaning the winklevoss capital management llc sells 10k coins to winklevoss bitcoin trust which get measures as an extra offering of 50k shares.

this means (obviously) that winklevoss Capital Management can offer 19 'baskets' (190,000btc/950,000 shares) after Winklevoss Bitcoin Trust launches.

winklevoss Bitcoin Trust. has a maximum of 1million shares. yes you guessed it the maximum shares ever under current filing = 200,000 coins.

oh wait. these coins wont be bought from the bitcoin exchanges in the future. they will be handed from one winkle entity to another winkle entity from the stash they already own

the only time that more bitcoins will be added above the 20 baskets (200,000btc) is if the winkle's file documents to be allowed to offer more shares above the 1mill share cap. and that is the only time new bitcoins will be bought in regards to the bitcoin trust. and as i said before they will most probably buy these from bitpay or miners privately, not to effect the bitcoin exchanges directly.

now read the document filing again.. and have a good day

[DeathAndTaxes]

Your reading comprehension is bad.

First trusts are not companies, so stop calling them that to cover your original mistake.  Second what do you believe is the meaning of "beneficial interest in" a grantor trust?  

this means (obviously) that winklevoss Capital Management OR ANY OTHER AUTHORIZED PARTICIPANT can offer 19 'baskets' (190,000btc/950,000 shares) after Winklevoss Bitcoin Trust launches.

Any authorized participant can add a basket to the trust not just the winkle twins or their holding company.    This will happen any time there is an arbitrage opportunity (ETF trades at more than the NAV) simply because dealers love something for nothing.  Where will these authorized participants acquire coins?  Well unless they are already holding 10,000 BTC they will need to buy them.

Of course they can also affect the price in the reverse.   If the exchange is trading at below the NAV an authorized dealer can profit by buying the shares, redeeming a basket and selling the BTC on open market to end up with more USD than they bought the shares for.   If the the ETF is popular and then popularity wanes it could pull down BTC prices on exchanges as well.

and as i said before they will most probably by these from bitpay or miners privately

simplistic thinking.  all demand is demand, all supply is supply.  If there wasn't a dealer buying 10,000 BTC from say bitpay where do you think bitpay would be selling those 10,000 BTC?  Oh yeah somewhere else, probably on an exchange.   The idea that just because dealers are snapping up tens of thousands of coins it can't affect the price unless it happens on an exchange is kinda silly don't you think?

[franky1]

Your reading comprehension is bad.

First trusts are not companies, so stop calling them that to cover your original mistake.  Second what do you believe is the meaning of "beneficial interest in" a grantor trust?  

As for adding shares,  ANY authorized participant can add a basket to the trust not just the winkle twins or their holding company.    This will happen any time there is an arbitrage opportunity (ETF trades at less than the NAV) simply because dealers love something for nothing.  Where will these authorized participants acquire coins ... well unless they already have 10,000 BTC they will need to buy them.

2 separate entitles.
winklevoss bitcoin trust winklevoss capital management llc
winklevoss bitcoin trust start with 1 basket originating from winklevoss capital management llc

authorised participants of winklevoss bitcoin trust have the authority to add more baskets by getting them from winklevoss capital management llc.

winklevoss bitcoin trust is only allowed a maximum of 20 baskets
winklevoss capital management llc has a total of 20 baskets to offer

winklevoss bitcoin trust cannot go over the 20 basket limit without filing further documents to the SEC

simplistic thinking.  all demand is demand, all supply is supply.  If there wasn't a dealer buying 10,000 BTC from say bitpay where do you think bitpay would be selling those 10,000 BTC?  Oh yeah somewhere else, probably on an exchange.   The idea that just because dealers are snapping up tens of thousands of coins it can't affect the price unless it happens on an exchange is kinda silly don't you think?

not simplistic at all. as your under the presumption that all 12,750,000 coins are traded on an exchange. yet id say only a max of maybe 1 million coins exist on exchanges.. and that the winklevoss can get hold of bitcoins PRIVATELY using contacts who privately trade the other 11million that are not on exchanges.

[DeathAndTaxes]

authorised participants of winklevoss bitcoin trust have the authority to add more baskets by getting them from winklevoss capital management llc or anyone else who has Bitcoins for sale.

Fixed your post to make it true.   Once again any authorized participant can have the trusteecreate additional shares for the trust by delivering the quantity of bitcoins needed for a basket of 50,000 shares (10,000 BTC) to the trustee.  The trustee is not yet named but for fiduciary reasons would never be the sponsor company.  The bitcoins can be obtained from anywhere.  The trustee simply ensures the authorized participant has delivered the required number of shares and then authorizes the creation of the new shares.   Your claim that the coins must come from the winkle twins is false and contradicted by what is actually written in the S1.  

Such an arrangement would never get approval by regulators as it would be seen as a conflict of interests, and detrimental to price discovery.  The operation of the trust will be by the trustee not the sponsor company.   The trustee (as in any trust) is obligated to follow the terms of the trust and preserve the assets of the trust for the benefit of the owners.  If someone delivers bitcoins for a basket, they create a basket and store the bitcoins.  If someone delivers a basket of shares they deliver the bitcoins and destroy the shares.

None of this is particularly surprising or novel.  You could replace Bitcoin with gold or euro and it would be very similar to existing ETFs.  The only thing novel about this ETF is the underlying asset not how it operates.  It would make sense that they would use a structures and procedures that regulators are already familiar with to increase the chance of approval.  It is a tried and true system, it works and is transparent.  This limits any rejection of the proposal to Bitcoin specific reasons.

What the S1 actually says:

On any business day, an Authorized Participant may place an order with the Trustee to create one or more Baskets. Creation and redemption orders will be accepted on “business days” the NASDAQ is open for regular trading. Settlements of such orders requiring receipt or delivery, or confirmation of receipt or delivery, of bitcoins in [    ] will occur on “business days” on which banks in New York are regularly open for business. If such banks or the bitcoins markets are not open for regular business for a full day, such a day will only be a “business day” for settlement purposes if the settlement procedures can be completed by the end of such day. Redemption settlements may be delayed longer than three, but no more than five, business days following the redemption order date. Settlement of redemptions may be delayed only in the instance of administrative or custodial delays in the process of withdrawing bitcoin from the Trust Custody Account, whether by reason of Bitcoin Network delays, mechanical or clerical error or by act of God. Settlement of orders requiring receipt or delivery, or confirmation of receipt or delivery, of Shares will occur, after confirmation of the applicable delivery of bitcoins, on “business days” when the NASDAQ is open for regular trading. Purchase orders must be placed no later than 3:59:59 p.m. on each business day the NASDAQ is open for regular trading. The day on which the Trustee accepts a valid purchase order is the purchase order date.

By placing a purchase order, an Authorized Participant agrees to deposit bitcoins with the Trust. Prior to the delivery of Baskets for a purchase order, the Authorized Participant must also have transferred to the Trustee the non-refundable Transaction Fee due for the purchase order.

Determination of required deposits
The number of whole and fractional bitcoins in the deposit required for a Basket (“Creation Basket Deposit”) is determined by dividing the number of bitcoins held by the Trust by the number of Baskets outstanding, as adjusted for the number of whole and fractional bitcoins constituting estimated accrued but unpaid fees and expenses of the Trust. Fractions of a bitcoin smaller than 0.00000001 (such hundred-millionth of a bitcoin being known as a “Satoshi”) which are included in the Creation Basket Deposit amount are disregarded in the foregoing calculation. All questions as to the composition of a Creation Basket Deposit will be conclusively determined by the Trustee. The Trustee’s determination of the Creation Basket Deposit shall be final and binding on all persons interested in the Trust.

Delivery of required deposits
An Authorized Participant who places a purchase order is responsible for depositing into its Authorized Participant Custody Account the required Creation Basket Deposit by the third business day in New York, New York following the purchase order date. Bitcoins deposited by an Authorized Participant into its Authorized Participant Custody Account will be available for further transfer upon the completion of the Trust’s Confirmation Protocol. Under the Confirmation Protocol, the Trustee must wait until the deposit transaction has been confirmed by six blocks before considering the deposit completed. The confirmation process should take between thirty minutes and one hour depending upon the speed with which bitcoin miners add new blocks to the public Blockchain. See “Cryptographic Security Used in the Bitcoin Network—Double-Spending and the Bitcoin Network Confirmation System,” above. An Authorized Participant shall not be deemed to have fulfilled its deposit requirement until the completion of the confirmation protocol.
Upon receipt and confirmation of the full Creation Basket Deposit into the Authorized Participant Custody Account, the Trustee, after receiving appropriate instructions from the Authorized Participant, will transfer on the third business day following the purchase order date the bitcoins deposit amount from the Authorized Participant Custody Account to the Trust Custody Account. The Trustee will transfer such bitcoins either to a temporary digital wallet (for immediate redistribution after the Confirmation Protocol) or directly to one or more digital wallets in cold storage.
Following the receipt and confirmation of the full Creation Basket Deposit into the Trust Custody Account, the Trustee will direct DTC to credit the number of Baskets ordered to the Authorized Participant’s DTC account. The expense and risk of delivery, ownership and safekeeping of bitcoins, until such bitcoins have been received by the Trust in the Trust Custody Account, shall be borne solely by the Authorized Participant.
The Trustee may accept delivery of bitcoins by such other means as the Sponsor, from time to time, may determine to be acceptable for the Trust, provided that the same is disclosed in a prospectus relating to the Trust filed with the SEC pursuant to Rule 424 under the Securities Act. If bitcoins are to be delivered other than as described above, the Sponsor is authorized to establish such procedures and to appoint such custodians and establish such custody accounts in addition to those described in this prospectus, as the Sponsor determines to be desirable. The Trustee will use commercially reasonable efforts to complete the transfer of bitcoins to the Trust Custody Account prior to the time by which the Trustee is to credit the Basket to the Authorized Participant’s DTC account.

[franky1]

reading the entire document and amendment, aswell as checking other SEC regulations..

and it seems DeathAndTaxes was concentrating on baskets after the first 1mill shares are taken. (from the winklevoss Capital holdings 200k btc)

the filings state that these 'shares' are not standard/traditional shares requiring all the filing of documents to go above the 1mill listed. after the 1mill shares are bought (early adoptor cheap stage) authorized participants can put in funds and create new baskets above the 20basket(1mill share) limit

(spending a few minutes hypothesizing the possibilities)

if popular which it could/should be due to being on nasdaq and for example promoted to pension providers and wall street, etc. there could be hundreds of baskets (multiple millions of shares) all backed by bitcoins held in trust which were obtained from different places.[1]

im kicking myself for saying this but..
so it seems DeathAndTaxes was looking beyond the scope of the 1mill share limit, and i now see my failing. so i apologize
and now see the true larger potential after the winkles have made there profits from their 1mill shares. although they will still continue to make profits from their fee's long afterwards.

the larger potential i have to now admit to is that:
the trust can hoard alot more bitcoins then 200k(20baskets/1mill shares) very easily
the hype about the winkle's long term goal/potential can cause ALOT of value to bitcoin
that buying 1 basket worth of bitcoins from bitstamp will jump the price upto $600(from todays $450) a second basket worth of bitcoins will bring it to $1000, then each basket worth of coins would cause larger price rises. which, many brokers agencies would love to get involved in, especially if there is a limited supply of bitcoin(causing limited possible baskets) [2]. though i feel they wont want brokers buying too many baskets. as it would flood the supply of individual shares, and cause too much of a price rise too soon, to keep demand for shares alive.

though... all in all im just going to hoard my coins, not buy shares as an investor. but simply let the brokers raise the price
[1] total hoarding of all 21mill bitcoins = 2100 max baskets, 105m shares
[2] total coins today 12.75mill bitcoins = 1275 current max baskets if they were able to buy EVERY bitcoin (impossible)

[matt608]

Thanks for explaining this DeathAndTaxes.

[gary08]

Hope Bitcoin investment will become mainstream one choice in future.