This concerns identical twin brothers called the Winklevosses. Some like to refer to them as the Winkelvii. They went to Harvard at the same time as Mark Zuckerburg (the Facebook fellow) who they famously ended up suing for copying their invention. Eventually they came to a settlement with Zuckerburg and got a big pile of money. These boys are fit and healthy as well, they competed in the 2008 Olympics in rowing.
So what we have are two very wealthy, Ivy league educated, handsome, strapping young Olympian fellows with a strange name up to something nobody really understands. Hang on! Is this the beginning of the next James Bond movie? Sure does sound like it, doesn't it? All that’s missing is Daniel Craig coming to the rescue beating up the Winkelvii, shagging their lady (I bet they share) and driving into the sunset in his Aston Martin.
If and when the James Bond franchise decide to use my plot idea I want royalties! But I digress.
With the pile of money that the brothers received on account of the Facebook case, they started getting into all kinds of businesses and one of them is bitcoin. They’ve got loads of them as well apparently, and now they have filed with the SEC to set up the first exchange traded fund whose value will be determined based on the price of bitcoin.
For those who aren’t aware what an ETF is the principle is quite simple. They are investment funds traded on a stock exchange just like a stock. Their value is derived from whatever it is the fund is mandated to invest in. For example there are gold ETFs. If you have an extra few thousand, instead of buying gold coins with that money, you can just log into your brokerage account and buy the equivalent amount of gold ETFs with a touch of the button. No need to go buy the real stuff and store it somewhere. With an ETF it’s all in your portfolio. It’s the lovely ease of it all and the sheer simplicity that make ETFs so popular.
So back to the Winklevosses. The announcement was met with much derision and jocularity in the financial sector. Everyone giggled and laughed at the brothers in a “Haahaa aren’t these guys a joke. Look they’re clowns and we are so smart, because we are bankers and we’ve made the world a better place” sort of way. My suspicion is that behind this there is an ample dose of jealousy, since it is the Winklevosses who came up with this plan and went straight ahead with it.
Because let’s face it. It’s a great idea. When I say great idea, I mean for the brothers, not so much for the people who might end up investing in the thing.
The ETF would make money from a management fee, it would also be able to make money from trading; the buying and selling of bitcoins. They would probably have some kind of agreement in which the end client would end up paying for the storage of the bitcoins which in all likelihood would be an entity owned by the brothers. Then there’s the currency. Bitcoins can be bought with several currencies in addition to the US Dollar. I’m sure the fund would need to do this from time to time. This involves a currency transaction, which is a great way to hide a fee into the mix that doesn’t show anywhere. This is all pure speculation on my part, but that’s how I’d set it up. Multiple small slices along the way make for a very nice cheese sandwich. So all in all, a lovely little moneymaker.
The attractiveness for the investor here is that the average Schmo has no idea how to get involved with bitcoins. It all does seem a little strange, scary and maybe a bit (pun intended) exciting. If however you could buy some bitcoins just like you bought those shares into your 401k then perhaps you might just have a dabble. The whole bitcoin ETF idea is the investing equivalent of a lap dance: Not the real thing, a little seedy and at the end of it you’ve lost your money with no ultimate reward.
So why will it lose you money? The risks have already been widely reported, but I will mention the ones that worry me most:
- Counterparty Risk
- Market Maker
The ETF derives its value from the value of bitcoin. Since the market in bitcoins is not regulated, it’s one big unknown space. What happens when the bitcoins in storage are stolen? Has happened before. What about when they are bought into the fund but the other party doesn’t deliver them?
Then there are taxes. Bitcoins are so new that they aren’t taxed. Does anyone think this state of affairs will last long? I have no idea how they will be legislated in the future, but I am certain they will be. Whenever government pokes its legislative fingers in, you can be guaranteed that it will affect the value of whatever is getting poked.
Every ETF has to have a market maker. It assures the liquidity of the ETF. The market maker has to provide a purchase and sell price at all times for the ETF. Waaay to complicated to get into in this post. (If you are interested the GLD prospectus is a good place to start to understand how it would work in this case). Suffice to say, that good luck finding a market maker to take this project on.
So all in all: It’s a great idea, if they don’t get to do it then someone will, a Bitcoin ETF is definitely coming. It will be a great money maker for whoever gets to build it and it will eventually end in tears, with the investors paying for the ride.
So that just leaves one thing. The name of the ETF. The Winklevoss brothers have called their ETF The Winklevoss Bitcoin Trust but that just doesn’t have the kind of oomph and energy to get the punters interested. With the material they have, they could have done so much better. There’s such a multitude of possibilities here. Perhaps I can suggest a few: The WinklyBits ETF, The TrustyWinkle ETF, WinkliesTrustyBits ETF, TrustMyWinkle ETF.
Any other suggestions?