With over $1.5 trillion in assets and nearly 1,500 products, many thought that the ETF world had run out of original ideas or that it had reached its saturation point. But the beginning of July saw that theory once again shot down, as a filing rolled in for one of the more controversial ETF ideas for quite some time. The Winklevoss twins, famous for their role in creating Facebook (FB), have filed for a bitcoin product and have taken the financial world by storm [for more ETF news and analysis subscribe to our free newsletter].
What Are Bitcoins?
To sum it up, a bitcoin is a peer-to-peer digital currency that can be used for anonymous purchases online from a number of sources. People can mine for the open-source currency using their computers to mine for bitcoins by solving complex mathematical equations. Because anyone can mine for the currency and it is completely anonymous, not only has it been used with reputable dealers, but it has also become a major force in the black market world; users can purchase anything from video games to illicit substances like cocaine.
Each bitcoin amount comes anchored with a complex key, or password, that allows only the holder to spend it. Of course, should that key ever be misplaced or stolen, it would be open season on your investment [see also The Ultimate Guide To Currency ETF Trading].
Bitcoin is advertised it as the future of the currency world, as the money does not need to go through any banks or clearing houses, meaning that fees are lower, the currency can be used in any country around the world and an account cannot be frozen. Already, several currency exchanges have been set up where users can trade bitcoins in for dollars and euros, among other currencies. Finally, the company advertises its digital darling as a major advantage for small businesses as it does not does not come anchored with chargebacks or fees, and it promotes more business throughout the bitcoin world.
The proposed Winklevoss Bitcoin Trust comes rampant with risks, as it attempts to invest in the surging currency. One of the biggest problems that many have is the ability for a hacker to steal the keys for large amounts of bitcoin. In such a case, the trust would not be responsible for the losses. Sounds far fetched? In early 2011, a user lost 25,000 worth of bitcoin (about $500,000) after a hacker took down a service dubbed InstaWallet.
Below are a few of the phrases that investors have found troubling from the July 1 filing:
- “The loss or destruction of a private key required to access a Bitcoin may be irreversible. The Trust’s loss of access to its private keys or its experience of a data loss relating to the Trust’s Bitcoins could adversely affect an investment in the Share.”
- “The Bitcoin Exchanges on which Bitcoins trade are relatively new and largely unregulated and may therefore be more exposed to fraud and failure than established, regulated exchanges for other products.”
- “Since there is no limit on the number of Bitcoins that the Trust may acquire, the Trust itself, as it grows, may have an impact on the supply and demand of Bitcoins that ultimately may affect the price of the Shares in a manner unrelated to other factors affecting the global market for Bitcoins.”
To be fair, the prospectus for most investment products carries some pretty scary language, but many are especially worried given the nature of the bitcoin.
The last phrase highlighted above, especially, has many worried. More or less, the ETF has the possibility to be more liquid than bitcoins themselves, allowing the fund to lead the market as opposed to the underlying leading the market. This in itself is the exact opposite of the intentions of the ETF world, as it is supposed to offer access to an investment space, not drive its prices. But a fund of even a decent size may do just that.
“There are 11,383,350 Bitcoin in existence at a price of roughly $70. Thus, the total market cap sits at less than $800 million” writes Dan Pritch. $800 million in the ETF world is not the smallest number, but considering that the largest exchange traded product holds more than $150 billion in assets, a new fund reaching that level is certainly not out of reach. Even if the fund got up to $100 million, it would have a significant impact on the market and cause enormous volatility spikes.
Volatility Lovers Rejoice
Of course, if you do not mind the risks involved and you are looking for a quick trade, it would be safe to assume that the fund (if it ever launches) would carry a fair amount of liquidity. Anyone looking to profit from strong volatility, as many traders do, may find the bitcoin ETF to be a great option. But be warned, should this fund ever see the light of the trading floor, it will more than likely be among the most volatile currency products on the market. Trade with caution.
Follow me on Twitter @JaredCummans.
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Disclosure: No positions at time of writing.