
Winklevoss twins to offer Bitcoin ETF - RockyMcNuts
http://www.sec.gov/Archives/edgar/data/1579346/000119312513279830/d562329ds1.htm
======
RockyMcNuts
Favorite snarky tweets in my feed...

"Bitcoin ETF" is an anagram of "Fiction Bet" which seems pretty apt..
[https://twitter.com/LorcanRK/status/351840221773578241](https://twitter.com/LorcanRK/status/351840221773578241)

Bitcoin ETF ticker ideas: $DCHE $LOSS $ZERO $SCAM (via @jamesvonsimson - his
idea: $SCKR)
[https://twitter.com/finansakrobat/status/351837836724551682](https://twitter.com/finansakrobat/status/351837836724551682)

Well, at least the Winkelvii Bitcoin trust is consistent with their practice
of being parasitic on new innovation…
[https://twitter.com/EpicureanDeal/status/351834917593817088](https://twitter.com/EpicureanDeal/status/351834917593817088)

The Winkelvoss Bitcoin ETF is the first of many wonderful deals brought to you
by the JOBS Act (Just Open Bucket Shops).
[https://twitter.com/ReformedBroker/status/351830441646489601](https://twitter.com/ReformedBroker/status/351830441646489601)

Imagine the call "if you got burned on the Facebook IPO, why don't you take
the Winklevoss Bitcoin Trust for a spin?"
[https://twitter.com/BarbarianCap/status/351825104147189760](https://twitter.com/BarbarianCap/status/351825104147189760)

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paulsutter
Surprise - a good idea from the Winklevii. The convenience of buying and
selling bitcoin from the comfort of an ordinary brokerage account, and making
it possible to hedge bitcoin by selling and shorting.

Anyone know how to estimate whether there's enough liquidity in existing
bitcoin exchages to support it, and allow them to track the price accurately
in the ETF?

~~~
jpdoctor
> _Anyone know how to estimate whether there 's enough liquidity in existing
> bitcoin exchages to support it, and allow them to track the price accurately
> in the ETF?_

Yes. The daily volume in the ETF must be a small fraction of the daily volume
in the underlying asset, and it must be possible to both buy & short the
underlying.

So net net: An ETF is incredibly premature. This is the Winklevii taking
serious advantage of folks who don't understand ETFs in depth.

Edit: Clarified the relative quantity.

~~~
sneak
Yeah, the whole public BTC order book on MtGox can be had right now for under
$2mm USD. The other exchanges are smaller yet.

The market is very loud, but still very tiny. This will change, and it's good
to start early, but I agree wholeheartedly that an ETF is premature.

This will not be the case in 12 months, though.

I think the biggest risk to a fund like this is data security. If you have
more than 50k bitcoin sitting around, APT doesn't even begin to describe the
measures people will take to steal your keys.

Their S1 specifically states that the fund is not holding the Sponsor company
(holding the keys) liable should their proprietary Security System fail and
the keys get hacked and the coins are stolen unless it was gross negligence.

This is going to be a bumpy ride for those who don't have a deep understanding
of security surrounding crypto. Based on some of the technical mis-
descriptions in this doc, I am tempted to speculate that they may not have the
requisite understanding to fully model the threats they face. Then again,
government paperwork takes months, and perhaps this is just an early step and
they'll source all of that in the interim. (Hey, tall dudes: I've got 15 years
of experience keeping private data away from super-determined hackers and
other bad guys, and my email address is jp@eeqj.com! Get in touch!)

The filing says nothing about the details of their proprietary Security
System.

Following that, the future of liquidity is a huge unknown void right now. I
wouldn't be surprised if at some point in the next 12 months, there are no
exchanges on which you could liquidate more than $50-$100k in bitcoin.

It's even difficult right now when everything is nominal - anyone who thinks
buying a few million dollars in bitcoin is easy or simple has never even begun
to try to do so.

~~~
jpdoctor
> _Following that, liquidity._

There needs to be an effective method of shorting in order for the ETF to be
effective. I think it will take much more than a year.

~~~
sneak
I don't follow that logic, could you explain it?

~~~
jpdoctor
[https://news.ycombinator.com/item?id=5975704](https://news.ycombinator.com/item?id=5975704)

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7Figures2Commas
A few interesting things to note:

1\. The trust sponsor is wholly-owned by Winklevoss Capital Management LLC.

2\. The sponsor is licensing intellectual property from Winklevoss IP LLC.

3\. The fee has not yet been determined. Fees are often waived for a period of
time with new issues but according to the prospectus, "Presently, the Sponsor
does not intend to waive any of its fee."

4\. The fee is paid via a transfer of bitcoin from the trust to the sponsor.

5\. "There are no regulations, rulings or other authority that address the US
federal income tax treatment of Bitcoins. Under one reasonable approach, a
Bitcoin should be treated as a capital asset (and not as "currency"). In the
absence of any future guidance by the IRS, a change in law, an administrative
determination or a judicial ruling to the contrary, the Trust intends to treat
a Bitcoin as a capital asset for US federal income tax purposes, including for
tax reporting purposes."

~~~
sneak
The thing that really jumped out at me was the proprietary "Security System"
for holding keys developed by Winklevoss IP LLC and licensed to the Sponsor.

...and the fact that the Sponsor is not liable for security-related losses
except in the case of gross negligence, which I don't imagine would cover
advanced theft/hacking. (I am not a lawyer.)

Something close to 10% of all bitcoin currently in circulation have been
stolen— it's a widespread problem and there are presently zero really robust
solutions currently in use by bitcoiners. I eagerly await more data about
their proprietary setup.

~~~
clarkmoody
One would hope that an entity with enough capital invested in lawyers to draft
an SEC filing would have to good sense to properly secure a Bitcoin wallet.

~~~
sneak
The SEC filing claims that a 51% attack could somehow modify the source code.
Obvious errors like that make it seem rushed.

It can't be solved by just throwing money at the problem, either—it takes
expertise, too. Nobody in the industry is taking (IMHO) adequate steps for
protecting keys worth >$500k presently.

~~~
Nursie
Theoretically I think the 51% attack basically allows you to control the
direction of the blockchain.

At that point you could make a slightly different client run on your 51% and
do things like (for instance) change the BTC generation rates and cap. Most
likely at that point the people running the remaining 49% would find a way to
ignore you, or fork the blockchain though.

------
jpdoctor
It's clear that many folks don't understand how the price dynamics of ETFs
with underlying securities operate.

A share in an ETF is a fixed basket of securities. If the price of the ETF
differs from the basket, the ETF share creation/redemption mechanism drives
the price back to the fair-market value of the basket.

If the price of the ETF share is too high: Market participants will short the
ETF and buy the underlying. They will then take the underlying to the ETF
admin, who will then create shares thus closing out the short.

If the price of the ETF share is too low: Market participants will buy the ETF
and short the underlying. They will then take the shares to the ETF admin, who
will then redeem the ETF share for the underlying, thus closing out the short.

Without the ability to short the underlying, there is no mechanism to maintain
equilibrium in the share price of the ETF.

~~~
zhoutong
As you have said, the creation/redemption mechanism will enable fair price
discovery. The inability of shorting the underlying doesn't matter here,
because if the ETF can be redeemed freely, an investor can buy the underpriced
ETF and redeem immediately and sell in the spot market.

The only difference of this from actually shorting is the time. During the
time of this operation, there may be adverse movement in the underlying price
making the arbitrage too risky. It's true that fully efficient arbitrage may
not happen.

But saying that there's no mechanism to maintain equilibrium price of the ETF
is entirely wrong. If the ETF price is $60/BTC and the spot is $85/BTC,
there's a huge incentive for investors to buy ETF and redeem and then sell in
the spot market, even if it takes days. People who already have both BTC and
USD in their hands can also quickly increase their BTC holdings, for free!

Therefore, the ability to short underlying simply doesn't matter, as long as
ETFs can be created and redeemed fairly freely.

~~~
jpdoctor
> _if the ETF can be redeemed freely_

Not just freely, but without any substantive delay.

> _If the ETF price is $60 /BTC and the spot is $85/BTC, there's a huge
> incentive for investors to buy ETF and redeem and then sell in the spot
> market, even if it takes days._

Once you think this through, you will come to the conclusion that the mean-
squared deviation of the (spot-ETF) is related to the speed at which the
shares can be redeemed. Modern investors quickly lose faith in any derivative
that does not track the underlying.

If you want an example: Shorting of bank stocks was banned by the SEC during
the Lehman meltdown. The bank index ETFs went nuts, and the levered ones never
really recovered. (See SKF. Those of us who predicted the meltdown made a lot
less money because of it.)

------
quinndupont
Can someone offer a non-securities person a description of what an ETF is?
What is the impact on Bitcoin?

~~~
johnnyg
Overview:

An Exchange Traded Fund or ETA was originally a way to buy an index or basket
of funds.

Say you wanted to buy Standard and Poor's top 500 stocks. As an individual
investor, you'd would need a lot of money and would pay a lot of fees to buy
up all 500. Then if some stocks were added and others were removed from the
index, you would have to pay to get in and out of those.

Enter the ETF ticker symbol SPY. If you buy it, you own a single stock that
reflects the composite value of the Standard and Poor's top 500.

ETFs are generally cheaper than mutual funds.

Common ETFs:

DIA is the Dow Jones index, it is only the biggest/"safest" blue chips.

RUT is the Russel 2000 which is a larger number of smaller than SPY stocks.

There are now ETFs for everything. GLD for gold, SLV for silver. I'm pretty
sure if you wanted to buy cows via ETFs you could do it.

ETF Negatives:

There is a lot of debate on the precious metals ETFs because there is a LOT
more paper being traded than known world supply of Gold or Silver. If everyone
called it in, there would be a lot of unhappy people holding paper instead of
metal.

My opinion on a bitcoin ETF:

Bitcoin is bitcoin. Unless you want to say that you are starting an ETF that
represents a diverse amount of exchanges and in so doing lowers spread risk,
then there is really no technical reason for this ETF being founded.

However, if you think that the less technically savvy stock traders in the
world might not be able to buy bitcoin because they do not know how but do
know how to trade stocks, then you could act as an easier means to the value
store they wish to hold.

This is likely what they are up to, and I think it'll work for a while.

~~~
sneak
> Bitcoin is bitcoin. Unless you want to say that you are starting an ETF that
> represents a diverse amount of exchanges and in so doing lowers spread risk,
> then there is really no technical reason for this ETF being founded.

There is _tremendous_ non-market risk in ALL of buying, holding, and selling
bitcoin right now.

We're talking about the kind of risk that makes price speculating in a one-of-
a-kind virtual internet cryptocurrency look like t-bills by comparison. It
vastly outweighs the volatility inherent in the asset.

Your money can be seized by feds on the way to the exchange. The exchange
could shut down or get DDoSed. The coins could get stolen out of the exchange
before you pull them out.

Ok, dodged all that. Now you've got bitcoins. Your computer could get
compromised, rendering your encrypted USB keyfiles or QR printouts unhelpful.
Your keys could end up on the security footage of the bank's safety deposit
vault camera. Your computer could get backdoored in the months of holding,
waiting for the day you load your keys back in to send the coins back to the
exchange.

Selling time. You manage to keep your keys private and sign a transaction,
sending your bitcoins to the exchange. Maybe they get hacked, maybe they shut
down, maybe they don't presently have a partner bank in the US to send
transfers out...

There is growing demand for secure and convenient access to the bitcoin
market's growth. Right now it's terrible and insecure and fragmented and
illiquid and risky, and that's not changing anytime soon - but it will,
eventually. It must.

I don't think this ETF is that, though.

------
Phlarp
The bitcoin market cap is still only ~1.5 billion? Good thing there aren't any
eccentric billionaires out there with spare change and a good reason to want
to mess with "the Winkelvii"

------
vijayboyapati
If this works out, it'll provide a great mechanism for price discovery to
happen outside of the scope of exchanges. The ETF price will act as a proxy
for the bitcoin price. One of the worst aspects on the crackdown on MtGox has
been the hampering of price discovery and liquidity. Dollar prices, in
particular, vary greatly across exchanges and this is a sign that the market
is still deeply illiquid.

~~~
unclebucknasty
I don't understand how this would be the case. Not challenging your assertion.
I literally don't understand.

My understanding was that ETFs are usually intended to track the underlying
commodity, not the other way around. In fact, they are frequently backed by
the commodity itself of course (sometimes leveraged. Sometimes not).

So, to that extent pricing should still be pegged to Bitcoin, which would mean
that supply and demand on the exchanges should be the biggest determinants of
price/discovery. If anything, an ETF would seem to obfuscate the price given
the difficulty of tracking the underlying commodity that can occur with some
ETFs.

So, in my mind, for an ETF to even accurately track the commodity, the
liquidity, price discovery, and other market mechanisms for efficient trading
of that commodity itself must already be in place. Only then would the ETF
serve as a proxy. Otherwise, layering another abstraction would seem to add
more confusion than clarity.

------
justincormack
If you want to invest in bitcoins why not just buy some? An ETF makes no
sense...

~~~
dangrossman
Investing in bitcoins by buying bitcoins means choosing an exchange, funding
an account, holding the bitcoins, worrying about the security of the bitcoins
being held by whatever exchange you've chosen or the security of whatever
computer you're holding them on...

Investing in a bitcoin ETF means clicking a buy button in your online
brokerage account. You invest with minimal effort and minimal risk aside from
your investment losing value. Someone else -- a regulatory system and set of
agents acting on your behalf -- takes on all the responsibility for enacting
and securing your investment.

~~~
7Figures2Commas
> ...minimal risk aside from your investment losing value.

Classic.

~~~
erikig
One additional advantage that hasn't been mentioned is that ETF's offer an
options market allowing owners of Bitcoins to buy puts to protect the value of
their bitcoins (or) buy calls to take advantage of future movements in the
price of Bitcoins.

In my opinion allowing Bitcoin ETF options might be the next step in allowing
widespread Bitcoin adoption because corporate entities can hedge against the
fluctuations in the bitcoin exchange rates.

~~~
7Figures2Commas
That's technically not true. Options would enable you to hedge your equity
position _in the trust_.

The trust is designed to "reflect the performance of a weighted average price
of Bitcoins." The degree to which it does this accurately is yet to be
determined; tracking error is a real problem with some ETFs.

Bitcoin has proven to be subject to extreme volatility, the trust may not
achieve its investment objective, the options market (if one becomes
available) is unlikely to have significant volume and all of the other risks
associated with options trading would apply.

If you want to hedge against the loss of value of your bitcoin holdings, your
best option today is to pare your holdings and realize gains (if you have
them). I wouldn't expect that to change for the foreseeable future even with
financial products that you can access as a retail investor.

~~~
SilasX
>The trust is designed to "reflect the performance of a weighted average price
of Bitcoins." The degree to which it does this accurately is yet to be
determined; tracking error is a real problem with some ETFs.

How so? If you guarantee (by holding the assets in trust) that [a larger
number of shares] can always be redeemed for their corresponding ETF assets,
then the possibility of arbitrage ensures that the ETF price tracks the net
asset value per share.

For example, the ETF could buy 50,000 BTC and issue 500,000 shares, with the
proviso that anyone can present 50,000 shares to the fund in exchange for for
5,000 BTC.

So I don't think tracking is the problem, but rather, just avoiding being "too
clever" with how you ensure NAV = ETF share price.

------
anizan
Lets see the benefit of ETF here Impact costs will be higher esp when Bitcoin
doesnt have traditional market depth sources like arbitrage Its wallet will be
a bigger target than yours for cyber criminals and would atleast get 10000x
more attack attempts on it both virtually and physically. Also your holdings
will no long anonymous as you're registered under the ETF with your exact
holding.

In summary makes sense if your lazy and innovation is all about letting people
be lazy

------
Techskeptic
This is a case of selling the shovels to gold miners. This is only a way for
them to unload their 11mm position in Bit coin to a greater fool. Once the
Feds determine that Bit coin is a money laundering service, all these shares
will be worthless. If you aren't smart enough to trade actual Bit coins, why
would you buy a derivative of one?

------
epoxyhockey
Interesting to see the Bitcoin value dropping after this announcement. I
wonder what is going on there..

~~~
signed0
Could also have something to do with Mt. Gox registering with the US Treasury
Dept as a money services business.

[http://www.coindesk.com/mt-gox-registers-with-fincen-as-a-
mo...](http://www.coindesk.com/mt-gox-registers-with-fincen-as-a-money-
services-business/)

------
eblume
What will this mean for bitcoin? Will the ETF be investing the bitcoins it
purchases? Or will this just mean more transfers that steadily increase the
value of accounts that never make any debits?

~~~
wmf
It's difficult to invest Bitcoins since the expected rate of return of holding
them exceeds the rate of return of almost all legitimate businesses. Although
I haven't read the registration document, the idea of an ETF is to simply hold
the underlying asset and pass through its appreciation to investors.

------
trotsky
What exchange is going to list a fund that trades an unregulated market? The
potential for manipulation is off the charts.

~~~
scarletham
GLD, the largest gold based ETF, holds bullion. Gold bullion trades in the
unregulated OTC markets.

~~~
trotsky
There are plenty of US regulations that apply to gold: purity, weight
standards, futures regulations, security standards, etc. And i'd be pretty
surprised if they didn't trade through COMEX or use them or someone similar
for clearance or bonded storage.

------
mathattack
Seems like this would flood the market, and perhaps do good things for the
values of the Bitcoins in the Winkelvii personal account, no?

------
drivebyacct2
This creates an interesting point of failure. What happens when the private
key is stolen or hacked? Because the ETF holders are holding cash with the
expectations of assurances and insurances that cash comes with. But uh, that's
not how Bitcoins work.

~~~
sirsar
If the Winklevii own "1% of all Bitcoins," I would hope that they know how to
do split key sharing and store their Bitcoins on paper.

I would hope.

~~~
jessaustin
If they've owned this sum for any amount of time, that is actually some
argument for their having the proper security skills to run something like
this.

------
BallinBige
How did this make the Front page of Hacker News?!

~~~
speeder
Why not? I found it particularly interesting, a new step toward making Bitcoin
more official of sorts.

