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
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
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
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.
A Dicey Store Of Value
Still, some argue that bitcoins are merely a store of value in
the same way that gold has been used in recent years. If that's
true, then it's not as much a currency as an investment vehicle. In
my mind, that may be the most dangerous line of thinking yet.
Gold is a physical asset whose value over centuries has been
dictated by the laws of supply and demand-and government
intervention, of course.
Bitcoins may be a lot of things, but tangible is not one of
them. The "storage" of bitcoins has to do with servers, not vaults,
and the value of bitcoins has to do with algorithms, not
As such, anyone who's banking on bitcoins to provide a store of
wealth over the next 100 years is putting a tremendous amount of
faith in not just a complex algorithm, but a network of servers and
systems whose security is only as good as the piece of regulatory
paperwork it's written on.
Of course, that type of irony-relying on paper promises of
security for a currency whose whole rationale for being is to avoid
fiat, i.e., paper currency-is rich, even for the financial services
In the end, it will be up to the market and regulators to decide
whether a bitcoin ETF will come to market and survive. Maybe Tyler
Winklevoss is right and pension funds and fiduciaries are lining up
for "frictionless" bitcoin access.
And maybe Kathleen Moriarty, the SPDR Woman, will have another
feather in her cap when all is said and done. Maybe I will pay for
my son's college tuition in bitcoins that I redeemed from the
bitcoin ETF held in his 529 plan.
As always, time will tell. In the meantime, I hope someone can
explain to me what a bitcoin is.
At the time this article was written, the author held no
positions in the securities mentioned. Contact Paul Baiocchi at
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