Winklevoss Bitcoin ETF Takes Step Forward

By
Cinthia Murphy
May 09, 2014
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Updated filing reveals the bitcoin fund will list on the Nasdaq, but not much else.

The Winklevoss Trust updated its regulatory filing on the bitcoin ETF this week, disclosing that the fund will be listed on the Nasdaq. The latest filing doesn’t offer much new insight beyond that, but it represents progress for the first-of-a-kind ETF despite what has been a tough go in recent months amid so much bad publicity for the digital currency.

Indeed, bitcoins have gotten little—if any—love this year amid a slew of negative news about bitcoin exchanges going bankrupt, mismanagement of assets, investor lawsuits and a plummeting price action year-to-date.

Even U.S. regulators have stepped up to the bitcoin debate, and this week, the Securities and Exchange Commission came out with another warning outlining the various risks involved with bitcoins. The SEC specifically pointed out the potential for fraud, among other things, and the challenge of protecting investors from the “hard to resist pitch” in the unregulated market of crypto-currencies.

And yet, plans for a bitcoin ETF are moving forward. While there is no projected timeline for an actual launch—the registration process of any new security can take years—it seems the ETF market might soon welcome another first-of-a-kind to its roster of nearly 1,600 U.S.-listed funds.

The risks are clear, but so is the appeal of bitcoins—a crypto-currency that has skyrocketed to popularity amid a countermovement toward broad debasement of developed-market currencies, led by the U.S., Paul Britt, ETF.com analyst, said.

“Developed-market central banks have flooded the world with fiat money,” Britt said. “Bitcoin has no input from a central government. It’s parallel to gold in some respects along this vector.”

In a more granular way, bitcoins also appeal to die-hard traders due to the high levels of volatility in this space. Bitcoins also carry broad appeal in the developing world or wherever inflation is rampant, because individuals and business can transact in bitcoins without worrying about inflation of local currency, Britt says.

At this point, it’s still unclear whether—from an ETF portfolio construction perspective—a bitcoin ETF would fit as a currency allocation, or a commodity allocation or anything else. Depending on to whom you talk, you get a different view on what role a bitcoin ETF could fulfill in a broad portfolio.

But as an ETF investor, here are a few things you should know about the bitcoin ETF and how recent developments impact this security:

  1. As plans for a bitcoin ETF move forward, so does the cry for increased regulatory oversight in the crypto-currency space, which ironically attracts investors exactly for that lack of oversight. But some say the push for regulation has actually helped the bitcoin ETF, rather than hurt it, as it fosters confidence in the crypto-currency. Investors, by and large, would welcome regulation, some say.
  2. The Internal Revenue Service recently ruled that bitcoins would be considered a property for tax purposes, meaning they can be held as capital assets. From a bitcoin investor perspective, that means keeping track of every purchase made in an entire year in order to pay taxes on any gains in the value of bitcoins. But for the purposes of this ETF, from the get-go, the fund was designed with the idea of bitcoins being a property, making the IRS ruling another positive for the fund because it does not impact significantly its expected tax treatment. Every time the trust sells or transfer bitcoins—for example, to pay expenses—investors will recognize gain or loss, and pay taxes accordingly, the latest prospectus said.
  3. The Nasdaq is known as a facilitator of technology-focused listings, and fundamentally, the bitcoin ETF is a technology-oriented security that’s “physically” backed by investing in bitcoins. That’s why the Winklevoss Trust decided to list on the Nasdaq board.

       

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