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Making Cents Of The Bitcoin ETF

By
Paul Baiocchi
July 08, 2013
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What happens when you mix a disruptive currency technology with two of the most polarizing movie characters of the past 20 years? Madness. Pure Madness.

 

The ink on the filing documents for the Winklevoss twins’ bitcoin ETF barely even had a chance to dry and we here at IndexUniverse had already exchanged nearly 50 emails on the subject. The following morning we had a near-20-minute debate about the merits of the product.

Suffice it to say, this thing has captured our imaginations.

While that type of hype may be a public relations firm’s dream, it will eventually pass, and what the market will be left with is the nuts and bolts of a product that has no precedent.

Sure, the Winklevoss twins may point in interviews to the gold fund SPDR Gold Shares (NYSEArca: GLD) and its physically backed structure as a template, but the reality is that gold and bitcoins are about as similar as a manatee and a peregrine falcon.

To be fair, the Winklevoss twins, who were part of the Harvard beginnings of Facebook, seem to be doing and saying all of the right things with regard to their planned product. They have meticulously mapped out a list of risks—18 in all—and hired perhaps the most famous ETF lawyer around: Kathleen Moriarty.

Anyone with any knowledge of the ETF industry knows Moriarty as “SPDR Woman” thanks to her role in writing the prospectus to the first and still largest ETF: the SPDR S&P 500 ETF (NYSEArca: SPY).

Despite what seems like an honest commitment to getting this filing and a possible launch right, I’m left wondering exactly what this product seeks to achieve. Heck, I’m not even sure most people know what the attraction of bitcoin is moving forward.

First, a little background for the uninitiated: Bitcoin was created in 2008 as a virtual currency whose inflation rate and issuance are dictated not by fat-cat central bankers or central planners, but by a complex algorithm.

The goal is to decrease issuance every year until 2140, when the amount of bitcoins in circulation will reach 21 million. At that point, the currency will be subject entirely to the ebbs and flows of demand for the currency.

While the currency has attracted a tremendous amount of attention in the past five years, not all of that coverage has been positive. The virtual currency’s exchange rate has fluctuated—sometimes wildly—and there’s always the looming threat of some kind of intervention by the U.S. Treasury Department.

Both of these concerns are relevant, and both of them cause me to wonder just how likely it is that this ETF will come to market.

Ultimately, the question I’ve been asking anyone who will listen is, What is a bitcoin supposed to be, a currency or a store of wealth?

Beware Of Treasury

If it’s intended to be a currency, then I have little doubt the Treasury Department will eventually shut it down.

Sure there are other currencies than the U.S. dollar in circulation, but those are issued by foreign governments. Bitcoins, on the other hand, have no country of issuance and are designed to be used for e-commerce.

While the government has made it clear that users of the currency do not have anything to worry about from a legal standpoint, the Treasury has made it clear that it does have jurisdiction over domestic bitcoin “miners” and exchanges.

This may not mean bitcoins will be put out of business directly by the Treasury, but it does mean that the existence of the exchanges and providers hinges on their compliance with the complex and onerous regulations of being money transmitters.

In short, the Treasury is going to ensure that any nefarious users of bitcoins will have to navigate the same treacherous waters that someone dealing in greenbacks would.

None of this is to say that the Treasury won’t decide one day that bitcoins are a competing currency and should be shut down. It’s not like you have to go back that far to find a useful—albeit imperfect—precedent: the U.S. Liberty dollar whose creator was charged with “making, possessing, and selling his own currency.” That sure sounds familiar.

In his recent interview with Financial News, Tyler Winklevoss said he believed regulators are looking to bring “healthy and reasonable” regulations. He sure seems confident that the Treasury will exercise patience with bitcoins, but it remains to be seen if that confidence winds up being naivete instead.

 

ETF DAILY DATA

Massive inflows into U.S. equity funds on Monday, Dec. 22, propelled total ETF assets to a new record.

'SPY' raked in more than $12 billion Monday, Dec. 22, pacing State Street's issuer-leading inflows on the day, as total U.S.-listed ETF assets jumped to $2.005 trillion.

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