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?
> 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.
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.
"the whole public BTC order book on MtGox can be had right now for under $2mm USD"
No it cannot. Some people have placed sell orders at $1000, $10k, $100k, etc. To the point it would take trillion and trillion of dollars to buy up all BTC.
But you can be sure that if you tried to do this, a lot of other sell orders would pop up, making it effectively impossible to buy up all bitcoins.
> But you can be sure that if you tried to do this, a lot of other sell orders would pop up, making it effectively impossible to buy up all bitcoins.
Yes, at entirely reasonable prices, right? :D A substantially higher cost basis starts to cut into fund profits...
Also, a minor correction to your comment: the depth of the MtGox order book is public, and it was accurate at the time of my comment. It's up to $2.2mm USD to buy the whole thing now.
Whatever site you are using to see the order book does not show it in its entirety. It really is a lot deeper than $2.2M. I know for a fact because there has always been sell orders at ridiculous amounts such as 1 BTC at 1 trillion dollar.
For example bitcoincharts.com now truncates the order book (2 or 3 months ago it was showing everything, on the sell side at least).
Does the order book show all the "dark pool" trades? It surely cannot show all those who sit and wait (or have bots) for the price to change so they can move their ask price up.
The order book would show people who are sitting on either side of the market, so if they have a bot that's adjusting their quote it would still show it - unless I'm misunderstanding your question?
I think we're talking about parties who don't actually have an order in. Rather they have automated a process to enter orders in response to certain conditions. Depending on what those conditions are, you won't be able to rely on a continuous price trajectory.
Admittedly, I don't see how this is different for BTC than it would be for any other asset.
Those are not providing liquidity in a useful sense right now. Usually the measure is people prepared to trade at current bid or offer ie a very narrow measure. If you want to buy at 1% down that's not useful now.
I expect we'd see more liquidity on MtGox if they figured out how to write a matching engine. I would never add liquidity on a venue that routinely takes hours to process orders and cancels.
Yup. They claimed they owned "1% of all BTC", without specifying if it was 1% of 11M (current amount) or 21M (max theoretical amount). But if it is 1% of the latter, then it matches perfectly with the number of bitcoins needed to back this ETF (1M shares * 0.2 BTC/share = 200k BTC).
The price of ETF and the price of underlying are simply correlated as a result of market forces. There's no "tracking" between the two. The only "tracking" happens to the Net Asset Value of the ETF, which the quantitative fund manager must aim to follow the underlying as much as possible. In this case, by holding 100% of asset in Bitcoin in this trust, the NAV tracking can be assumed to be perfect.
The liquidity doesn't matter if the ETF has a fixed pool (with regular creation and redemption). The volume of the ETF can exceed the volumes of all Bitcoin exchanges combined, because the investors are actually trading paper - certificates that represents some units of the trust, which holds Bitcoin.
If creation needs to happen, the investor needs to give the underlying to the trust in exchange for units. In this case, only BTC changes hands.
If redemption needs to happen, the investor will receive the underlying from the trust. In this case, only BTC changes hands.
So, at the trust's side, it's entirely possible to eliminate all fiat transactions after the ETF is issued. All future changes in units will happen with the underlying only, which is Bitcoin. This is similar to and consistent with most of the stock indices ETFs out there in the market.
An analogy: The liquidity of gold ETFs can obviously exceed the liquidity of physical gold. Actually it already does (for retail investors).
Low transparency tends to lead to high transaction costs, low liquidity, and high volatility in a market -- which is pretty much what's going on with BTC right now. There's also very limited commercial exchange volume, from what anyone can tell, further hindering liquidity. Seems like it'd be pretty hard to earn a decent return from this ETF.
I'll be watching this one from the sidelines. Definitely not participating.
"Someone on one of Team Macro Man's chats recently described this ETF as a Rorschach test of what people think of digital currencies. That is utterly wrong: it's an IQ test. Bitcoin is anonymous, untaxed (for now) and quite liquid in and of its own right despite all the complexities of a cryptocurrency. A bitcoin ETF is taxed, has fees, may or may not be liquid at all. So, this is really a test: do you want to facilitate the exit of the Winkelvii from an investment at inflated levels which they will soon be taxed upon or do you want to sit this hand out? "
If the ETF grows in size and its net asset value must assume a large fraction of the outstanding bitcoin stash or towers over the daily trade volume, we could have some issues here...
I didn't read the SEC filling. But there are 2 major kinds of ETFs: those which trying to accurately track the index and those which tracking daily movements (usually leveraged). Many ETFs tracking commodities are of the second type, so buy&hold investors will lose money by buying them.
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."
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.
Nothing says "future hack victim" like "proprietary security system". These are the guys so notorious for their failure to supervise subcontractors that Hollywood made a movie about it, and now we trust a high-value high-visibility system they just developed?
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.
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.
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.
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.
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.
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.)
If the price of the ETF is too low... you can buy the ETF, take it to the ETF sponsor, they will convert it into the underlying, you can then sell the underlying.
Ability to short = ability to borrow. If you can borrow Bitcoins from someone, you can sell them, and then you're short. While there may not be an active lending market, in principle no reason it couldn't be done.
A lot of times the ETF sponsor or a related entity will participate in arbitrage to keep prices in line... they might have ability to lend to each other. In fact, that may be an important way the Winklevii expect to make money. (in addition to the fact their Bitcoin hoard is more valuable if it's more liquid and more accepted by traditional investors)
Now, if the underlying is illiquid and doesn't have good price discovery, the ETF will probably be in the same situation. In the example above, if you're not darn sure you can sell the underlying pretty quickly at a higher price than the ETF, you're not going to attempt the arb. So if the market is illiquid, the arbs don't step in until the spread is more egregious.
I'm not suggesting otherwise. I am pointing out that a genuine, fast mechanism for shorting needs to be available in order for the ETF price to track the underlying. That mechanism will take quite a while before there is enough confidence for market participants to have faith in the ability to short.
Yes, I didn't want to complicate the issue. In order to keep the admin costs low, the ETF demands that blocks of shares be redeemed at once. (for example: The gold ETF GLD requires 50K shares be created/redeemed at once, iirc.)
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.
> 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.
> If everyone called it in, there would be a lot of unhappy people holding paper instead of metal.
This actually isn't true. All the physical ETFs claiming to be holding physical gold do actually hold gold for each individual share (in fact thats the only way shares can be created!). It can get confusing because people short it which can make it seem like there are more shares outstanding than there really are. But there is actual physical gold for every true outstanding share of the ETF.
> 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.
I would like to buy bitcoin with my 401(k). I can't do that right now, but if my investment bank had access to a bitcoin ETF...
ahem... the idea that precious metal ETF shares represent more than total known world supply is crackpot. those numbers are pretty well known and not in the same ballpark, and no one would buy ETFs if they weren't pretty confident they had the assets to back them up.
It's a fund that invests in Bitcoins that trades like a stock on the stock exchange. If I'm reading this correctly, one share will represent 0.2 Bitcoin.
A normal, unleveraged, passive ETF represents an underlying investment or basket of investments, like gold or the S&P 500, or in this case, Bitcoin.
At any point, people can go to the sponsor and exchange the underlying for the ETF. So if the price gets out of whack with the underlying, people step in and buy one and sell the other, to bring prices back in line.
So it has a lot of the benefits of publicly traded stock, easy/cheap to trade, put in your brokerage account etc.
It does add a layer of fees (not specified yet as far as I see in prospectus on p. 40). You can just buy Bitcoin yourself, you avoid the fees, but investment advisors, retirees, may find it worth the usually small fee (like 0.1% for the SPY, probably not quite that low for this ETF).
ETFs, used properly, are great - liquidity, tax efficiency, ultra low cost.
However, as Gandhi said, "The greater the institution, the greater the chances of abuse."
The problem here is, if the underlying Bitcoins are illiquid, in a volatile market, the price of the ETF can diverge a lot from the price of the underlying.
Basically, unless you know what you're doing
- Stick with big sponsors, like Vanguard, iShares, State Street (SPDRs)
- Index ETFs only (not actively managed)
- No leveraged ETFs
- Liquid underlying securities, actively traded ETFs (e.g., probably doesn't apply to this ETF)
An ETF is basically a bunch of money pooled in to invest in diverse stuff such as stocks, bonds, etc.
The thing is, they can be traded like stocks and their value depends on the total value of all the stuff they're holding.
If you invest in ETF it's generally safer since your investment doesn't depend on one stock (putting eggs in one basket) but you're still affected by the market.
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"
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.
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.
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.
The non-market risks of bitcoin are a lot more substantial than you seem to think they are.
If you're just investing, why should you have to become a crypto expert just to make sure eastern European teenagers don't copy a keyfile from your computer entitling them to $500k in bitcoin?
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.
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.
>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.
As someone outside, I have the impression that buying bitcoins is a bit of a pain, plus once I have them I have to keep track of them.
Buying into the market through my already existing brokerage account is much more user friendly especially for non tech people. Bitcoin value is highly speculative at this point, and that means a lot of people will be wanting to get a piece of the action without really understanding how it works. Asking why they don't just buy some directly is kind of like asking why you'd buy a gold ETF instead of buying gold.
Small retail investors that see Bitcoin in WSJ, FT, etc. sit around and say "Hey! I want some of that," and their neighborhood financial planners don't know enough about it (and are not incentivized) to get them to directly buy Bitcoins. An ETF would give exposure to Bitcoin to these Baby Boomer retirement types, of which there are many.
Because that would allow larger, regulated funds (like pensions and university endowments) to invest in them, as they're generally restricted to securities listed on credible exchanges.
Good news for bitcoin owners, as that means more potential buyers and thus a higher price.
I am a bit worried though, about workers who may lose out because a manager got too caught up in the hype.
Buying shares on a publicly traded and regulated market (like NYSE), through your usual stock broker, would be a lot safer and more convenient for many investors than the current options available for investing into bitcoin. You don't have to worry about the unreliable exchanges, and semi-shady payment processors like Dwolla.
What about Dwolla comes across as semi-shady? I ask because I have an account with them, and so far they've treated me well - especially compared to the credit card alternatives.
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
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?
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?
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.
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.
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.
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.
"Bitcoin ETF" is an anagram of "Fiction Bet" which seems pretty apt.. 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
Well, at least the Winkelvii Bitcoin trust is consistent with their practice of being parasitic on new innovation… 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
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