Topic: Winkelvoss ETP could become THE pricing mechanism for BTC - page 7. (Read 15389 times)

Wow, I must admit I've never been referred to as a sock puppet before! 

I wonder have you had a chance to look over the original article?

Seriously, I hear that you're opposed to it, but as I already posted in the other thread where you described the very idea as "stupid" and negating the whole point of owning Bitcoins in the first place, wouldn't you consider it possible -- likely, even -- that different people might want exposure to Bitcoins for different reasons than yourself?

I'm guessing you'd happily acknowledge that, but that you have some supporting arguments in mind, lurking in the background, that you haven't shared yet; do feel free to fire away! (As the OP, I did try a few posts back to summarise the different threads that have interwoven themselves so far in the discussion, some on topic and some -- like this, perhaps -- not so much. But obviously there's plenty of room for more.)

Anyone dumb enough to invest in a gold ETF, or any "share" of gold being held by someone else, is dumber than a pile of rocks - seriously.

Just buy the fuckin gold and keep it yourself. Why put your trust in an unknown entity? I think a lot of you are still children that need someone to hold your hand for you.

I guess when you have Winklevoss money you can pay a PR firm to come here with some sock puppet accounts and try to promote this bullshit.

Absolutely, they could be!

Unfortunately, so far the Bitcoin economy as a whole hasn't yet mustered what is needed to reinvent that wheel. As I mentioned in the article on Bitcoin Derivatives, Liquidity and Counterparty Risk, which is linked from the article that kicked off this thread, the Bitcoin economy could desperately do with decent derivatives. However, existing Bitcoin exchanges haven't yet even advanced to the point of acting as counterparty to the trades they broker or providing market making services -- they're still operating as trading network style exchanges with transactions between one person and another -- let alone moving in a direction that would permit a standardized options clearinghouse to function.

If you want a shortcut to all that, the relatively easier way to make it happen is to stuff the Bitcoins into an ETF wrapper, backed by real Bitcoins, that enables all the existing market apparatus to be applied to it: introduce a Bitcoin ETF, and if there is sufficient volume, expect options on the ETF to follow.

I get that to some folks the very idea of any transaction Bitcoin-related that doesn't occur directly with real Bitcoins is anathema. However, unless real businesses handling significant sums can find a way to hedge currency exposure, I think it's going to be pretty tough to convince many of them to take Bitcoin transactions seriously.

FAIL.

There are many reasons to invest in an ETF rather than physical BTC. For example, hedge funds or pension funds may only be allowed to invest in listed assets. Investing in ETF may also fulfill the requirements of some business migration schemes. You enjoy the first class trading engine on NASDAQ, rather than the Magic the Gathering engine.

Anyone dumb enough to invest in a bitcoin ETF, or any "share" of bitcoin being held by someone else, is dumber than a pile of rocks - seriously.

Just buy the fuckin bitcoins and keep them yourself. Why put your trust in an unknown entity? I think a lot of you are still children that need someone to hold your hand for you.

I must confess that there are some investors that I wouldn't mind seeing lose their money by buying worthless paper. Certain institutional investors, for example. I strongly suspect that large public sector pension funds like those managed by CALPERS created the shareholder pressure to strip mine the US tech manufacturing base in the 2000s (start with a profitable company, lay off R&D and customer support, divert all funds to marketing to pump the share price, when it falls apart ship everything to China).

apart from the danger of "them" "pulling a GLD" on us by making the WTF THE pricing mechanism for BTC and then in some sort of colluded half-secrecy pulling levers to convert it into an "orderly market" (i.e. keeping it down using printable collateral), isn't there another possible negative effect: the redirection of demand from bitcoin to the WTF. Holding a share of WTF is by no means the same as holding a Bitcoin (privacy, third-party risk, transactability) and I'd hate to see people want to join Bitcoin and then be sold some paper by their bank.

In general: even if this is an evil plan to keep bitcoin small, I somehow doubt it will work. Bitcoin is not gold and it already has low transaction and storage cost and can be transacted electronically. There is no need for a substitute in my mind. The "advanced" financial instruments that might be desired by some big players/investors can surely be built on top of the underlying directly somehow, no?

Also: I don't necessarily want an orderly market, I primarily want a free market.

I expect you're right -- where there's an opportunity and clear value to be provided, someone will probably step in and make it happen. If much wider trade in Bitcoins does become available, in my view that will be a great thing for the Bitcoin economy. (Although many would disagree with me, some vociferously -- see NewLiberty's thoughts above.)

If the ETF does wind up being approved and options on the ETF eventually appear, as has been the case with other commodity ETF, then at last Bitcoin businesses will have a viable means of hedging their exposure to the currency. (IMHO, existing Bitcoin derivatives leave much to be desired.)

Just like gold, in future bitcoin ETF will be traded in different stock exchange like London, Hong Kong, Tokyo. It seems someone is trying to setup one in Zurich

It doesn't seem to me that you have shown how collateral is in any way relevant: it is fiat in both cases, and in both cases either Bitcoins or ETF shares backed by Bitcoins must be borrowed.


This doesn't seem to me very much different from saying "shorting gold is qualitatively different than shorting a gold ETF", which on the face of it doesn't seem very convincing.


Except that 0) this is extrapolating from a speculated explanation about events surrounding an existing ETF to a hypothetical future in which an unrelated ETF is retrospectively altered to work in a fashion contrary to how it is currently set to work, 1) "folks" are not redeeming gold from their ETF, only APs ever redeem gold from their ETF, 2) to the extent that some unknown entity out there did actually try to redeem gold and instead got that nasty fiat stuff, of course they will have received the current spot price, which they could immediately have turned around and converted right back to gold if they so desired, and 3) if you really want to turn this into an actual argument about leaking assets out of an ETF, you need to demonstrate that the quantity of physical gold per share outstanding in fact changed -- not just temporarily, while someone was holding this or that as temporary collateral to keep the market functioning in an orderly fashion, but permanently.


If you'll forgive me a brief moment of barbed levity to let a bit of steam out of my frustration pot -- we're still among friends, right   -- my bias here is not toward optimism, but away from argument by repetition or argument by reference to converging irrelevancies. Either my understanding of what you have actually said is entirely inadequate -- and I accept entirely that I may simply not be keeping up -- or what you have said does not embody any sound arguments to support your conclusions. I'm guessing that we'll need to disagree on the topic.

You are speculating about the future.  Whether the "Winkelvoss ETP could become THE pricing mechanism for BTC".
My quote was from the current text of the S-1, which says they can amend to redeem in fiat, without notice.

The issue may be more obvious to you when you look at the difference between shorting bitcoin on an exchange (where you must borrow bitcoin), and shorting shares of the WBT where you are borrowing shares of the WBT ETF, when you consider the topic of your thread here.  The use of the WBT as THE pricing mechanism for BTC.

When the price of BTC can be manipulated with no actual BTC trading hands and by using fiat collateral instead through trading ETF shares instead, we have the pernicious effect. 
Read some news about April 12,15 2003 gold ETF pricing?  I do some trade in physical gold and silver.  The market disruption from the ETF pricing to the extent that they also affect the physical market pricing is a "big issue" in the same way that folks using bitcoin as a medium of exchange may discover a "big issue" if/when the WBT becomes THE pricing mechanism for BTC.

It is a change in kind as well as quantity, as noted above (and as you parenthetically note here).  Shorting BTC is qualitatively different than shorting an ETF, and becomes pernicious when the ETF is used to price the asset upon which it is based, namely Bitcoin.

You may notice the coordinated efforts from regulatory authorities to limit the liquidity and velocity of the exchanges.  This adds to the risky possibility of the WBT becoming the pricing mechanism.

On a Friday in April, in a few massive block trades totaling more than 13 million ounces of paper ETF gold, the bullion banks set in motion a mechanism to capture the physical assets.  This was done with a small fraction of the total gold worth, and no actual gold traded hands to do this.  Folks trying to redeem their gold from their ETF can get paid out in fiat currency (at the now lower price because the gold price is based on the ETF not on what it costs to get the physical in good delivery).  Subsequently, the good delivery price also fell.

What this means to Bitcoin folks is that the merchantability of their Bitcoins in their wallet may suffer a similar fate, but it would be orders of magnitude easier to do with Bitcoin than with gold due to the relative market size, if what you contemplate comes to pass, and the WBT becomes THE pricing mechanism for BTC.


I added a few more handles here to make grasping it more easy.  I am not yet suggesting that the existence of the WBT is good or bad, only that using it as THE pricing mechanism for BTC has an important risk, made more important by the fulfillment of that risk in the marketplace a few short months ago.  I remain pleased that the Winklevoss brothers have found a use for their Bitcoins, and wish them every success.

But to your newly raised point here, there are a variety of other ways that it could be "other than good news for the Bitcoin economy".  There is certainly some good things about it for the Bitcoin economy, there are also some which are not good.  Please be wary of optimism bias.

Net asset value means the value of assets net of liabilities. Of course NAV changes over time: unlike the 'Bitcoin Fund' which appeared briefly earlier in this thread, and which charges an up front load rather than tapping into the fund's assets, how else would this trust fund itself?


I wasn't trying to speculate about how the agreement's provisions might change in the future, I was trying to clarify what it actually says right now, which is that shares may be redeemed only in whole baskets, and that whole baskets will be redeemed for Bitcoin.


I'm afraid I'm not seeing the big issue here. Shorting anything in volume may cause its price to fall. You can short Bitcoin right now if you want: open up a Bitfinex account, deposit some collateral, and place your sell order.

As to the ETF being "deemed" to be determined by the ETF, the original premise of the article was merely that it would likely become the principal price discovery mechanism, not that anyone would need to deem it that way in order for it to be so.


The Bitcoin market already allows both 'collateralized' shorting and derivatives on BTC/USD. The impact of a broadly available ETF might change this in quantity, but not in kind (except to the extent that options will be vastly better than futures, IMHO, but hopefully you still get my point).


I agree that it may have a profound effect on Bitcoin valuation, but I do not see any actual argument to the effect that a larger, more liquid, more efficient market with the potential for derivatives vastly superior to what we have now would be other than good news for the Bitcoin economy. In other words, I hear what you're saying, I'm just not grasping any argument along with it.

I am trying to reduce confusion rather than add it.  And to simplify using easy common language words without reducing meaning.  Many readers are not reading this in their native language or aren't investing experts.

Share value here means the market value of a share (of the WBT).

Yes this is similar to any ETF, but to your second interpretation, share value is not by definition, the net asset value of those Bitcoins per share, as the trust also has liabilities which modify the NAV...  and as I will reiterate below, this can also be perniciously affected by the market value of a WBT share, and further the bitcoin-per-share is not something that should be expected to stay the same over time, by design it will decrease (below 0.2 BTC).

Bitcoins are also over time trickled out of the WBT to the sponsors (Winklevoss) and others to pay them, but that is another issue entirely.


No.  Remember that we are discussing the future here and so should expect that this WBT will follow the patterns of other ETF.

Don't forget that the Trustee and Sponsor (Winklevoss) may amend any provisions of the Trust Agreement without the consent of any Shareholder. Any amendment that imposes or increases any fees or charges (other than taxes and other governmental charges, registration fees or other such expenses), or that otherwise prejudices any substantial existing right of the Shareholders will not become effective as to outstanding Shares until 30 days after notice of such amendment is given to the Shareholders. Amendments to allow redemption for quantities of Bitcoins smaller or larger than a Basket or to allow for the sale of Bitcoins to pay cash proceeds upon redemption shall not require notice pursuant to the preceding sentence. (S-1 p. 66) http://www.sec.gov/Archives/edgar/data/1579346/000119312513279830/d562329ds1.htm#tx562329_14

This practice has played out with gold and silver ETF as well.  Settlement may be in fiat, not the asset.  The sale of Bitcoin to pay that cash redemption need not be via a public Exchange and may be private.  Redemption of share basket does not necessarily cause Bitcoin to become available.


Yes thank you for helping to make this clear, selling ETF shares short does not free any Bitcoin in the vault.

The effect of this is that shorting ETF shares will effect the ETF pricing...  And if the bitcoin price is deemed to be determined by the ETF price, this will reduce the value of bitcoin in and out of the trust.  This effect is the pernicious risk of using the ETF to determine market value of bitcoin.  Market participants, can short the ETF by posting non-bitcoin collateral (and they don't even have to do it naked), to affect the bitcoin pricing.


Not really no.  That would be a very weird "problem".
I am not claiming that the WBT is uniquely weird.  Rather I am claiming the opposite, that the WBT could pose the same sort of issues that have been problems for other commodity (and emerging market currency) ETF with respect to the underlying asset (Bitcoin).  

The ETF share price can be driven to up or down highly without increasing or decrementing the bitcoins available to the open market from the trust.  This is different from the simple exchange-based price discovery which does not allow for collateralized shorting, derivatives, or other complicated market operations.  For the sake of those less well versed in the potential effects of these, the entry of the WBT into the market of everyone with a trading account (rather than a bitcoin wallet) may have profound effects on bitcoin valuation.  Ceding to it the control of bitcoin pricing may not be (and probably isn't) in the interests of a thriving bitcoin economy.
On the other hand, a thriving bitcoin economy may vary well improve the value of the WBT.

A couple more clarifications of the clarifications, for clarifications' sake...


The same is true of all ETPs: shares can be traded back and forth between different holders all day long, sometimes adding up to a significant percentage of the total shares outstanding. That need not have any impact at all on the circulation of the underlying entity in the broader economy. Likewise, you and I could trade 1 Bitcoin back and forth between ourselves all day long if we wanted.

Is there a potential confusion here between shares being sold (traded from one holder to another) and shares being redeemed (converted from shares into Bitcoins)?


I wonder whether there might be some confusion created by two completely different uses of the word 'collateral'? In the case of collateral for shorting, the word refers to nothing more than something of value which the short seller provides to the entity who is providing whatever it is they are short selling. The short seller provides the collateral to secure their commitment to later cough up the cash to re-purchase whatever it is they bought to sell short and return it to the entity which provided it in the first place. It would make no sense at all for the collateral ever to be identical to the thing which is being sold short, because if the short seller already had it, they could just sell it, not short sell it.

In the fiat world, collateral is normally the rest of the investor's equity portfolio plus cash.

But this use of the word 'collateral' has nothing at all to do with what backs the ETF itself. If I want to short sell some Google, and my portfolio has sufficient value to collateralise my short sale, nobody complains that I am not putting up some Google before I short Google, and nobody suggests that my short sale is somehow going to leak Googleness out of Google or break the link between Google shares and underlying Google.


Hmm, here again, I wonder whether some readers could find this confusing...

If, by "share value", you mean "the value of a share as set by the market" (i.e., price), then generally speaking there is never any such linkage except that which is enforced by arbitrageurs. (Provided that can be done; in the case of closed end funds, the price may vary by quite a bit relative to net asset value.)

If, however, you mean "the value of the underlying Bitcoins held by the trust", then the share value is, by definition, the net asset value of those Bitcoins per share.


On the contrary, redemption of shares by Authorized Participants always yields Bitcoins delivered to the AP by the trust. The passage in the S-1 which you've referred to previously is describing the process which will be followed if the AP fails to deliver a basket of shares to be redeemed by 9:00 a.m. on a particular day of the week, not the other way around. In other words, the passage about collateralization of that commitment, etc., etc., has nothing to do with failure by the trust to redeem shares in Bitcoin, it has to do with failure of the AP to deliver shares when redeeming for Bitcoin.


Naturally, no Bitcoins need to be borrowed from anyone prior to short selling ETF shares, since the requirement is for ETF shares to be borrowed.


The short selling of ETF shares is very precisely limited by the number of ETF shares available to be shorted.

If what you're referring to is actually the practice of naked short selling -- selling something that you have not first borrowed -- then clearly that has nothing to do with collateral, or Bitcoins, or anything else that is specific to this example. Naked short selling is a broader issue, and abusive naked short selling in particular brings with it a whole raft of legal considerations.


If the problem you're getting at is just that, like any other commodity ETF, the trust must hold some of the underlying entity (in this case, Bitcoins) in order to exist at all, then that seems to me an entirely different discussion than all of the above about collateral and redemption and the difference between trading and redeeming.

The danger is less that the trust exists and more that it might become the pricing mechanism for Bitcoin.

Some points that may clarify it.
1) At inception every share has .2 shares in the vault rather than 1.
2) New baskets of 50K shares may be created by sending the trust 10K bitcoin.
3) When shares are sold, bitcoin are not necessarily sold at any external exchange.
4) Shares can be sold short, through the use of collateral.
5) The Collateral need not be bitcoin (it likely rarely or never will be).
6) There is no firm linkage between shares value and bitcoin value (share value is somewhat linked to Audited Net Asset Value of the trust, not to value of bitcoins held in the trust).
7) Redemption of shares may not give you Bitcoin, the debt may be settled through fiat, redemption may not be honored for legal reason, or logistical reason.
8. No bitcoins are need to be borrowed from anyone for the selling short of ETF shares (ETF shares are lent not bitcoin).
9) The problems I mention may occur when folks confuse ETF shares with Bitcoin and equate their value (as is likely to be common given the content of this thread).
10) Short selling of ETF shares is not so much limited by the amount of bitcoin in the vault of the trust as it is limited by the ability of short sellers to post adequate collateral (in say, Euros, US Dollars, Mortgage Backed Securities, or whatever is accepted).  

I don't oppose the creation of the ETF (nor would it likely matter much if I or anyone here did).  If the ETF can be said to inflate the money supply, it isn't M1.  I also do not believe that the existence of the ETF poses any existential threat to Bitcoin, and it may be good for Bitcoin, though the ETF does present some new challenges along with the opportunities and these challenges ought not be ignored.  If someday in the future, if the ETF becomes the primary pricing mechanism for Bitcoin value this (in my humble opinion) is not such a wonderful outcome.  Then the ETF share price can be driven to up or down highly without increasing or decrementing the bitcoins available to the market from the trust.  That outcome could pose problems for a commercial bitcoin economy in the same way that gold and silver ETF have posed difficulties for the gold and silver bullion trade (and by contrast, these are only rarely used as in commercial economic exchange in the way that Bitcoin is intended to be used as a medium of exchange).  

Weirdly...If Bitcoin does have government enemies, then Bitcoiner opposition to the ETF could perversely make it easier for it to pass regulatory approvals... so by folks pointing out these challenges now during this process...

I'm still scratching my head here... Let's ignore "counter-party" risk for a second (I couldn't care less if the lender of the bitcoins doesn't see his coins because of borrower (short-seller) collateral somehow turns out to be insufficient to buy back the bitcoins. It is then as if the borrower had sold the bitcoins himself... a big problem for him (he wanted to lend, not sell), but for outstanders this doesn't make much difference, does it? In other words: this may be a risk for certain participants, but not Bitcoin itself.

Now, Greg says the share still has to be borrowed from someone (and I don't think NewLiberty contradicted this?). As I understand shares cannot come into existance without equal amount of bitcoins being depositet, right? This in turn means that potential short-selling is limited to the amount of bitcoins in the coffers of the trust. Noone can ever sell 21 million and 1 bitcoin.

Just as the ECB (and probably all other central banks) is worried about inflation of the money supply under their managment (by others than themselves), I am naturally worried about inflation of the Bitcoin money supply (other than by miners in predetermined way). I seem to oszillate between believing this ETF could become a danger in this regard and thinking it cannot. Currently I think it cannot (simply because every sell is subject to the existance of a share and every share has an associated bitcoin in the vault).

thank you.

As I described at length in the separate derivatives article that was linked from the original article, businesses currently do not have any particularly effective ways of hedging Bitcoin currency risk. Let me go right out on a limb here and assert that pretty much any businessperson who wants to deal with any serious volume of Bitcoins is going to appreciate a more robust hedging mechanism than the BTC/USD futures traded on ICBIT.

As I explained in that separately linked article on derivatives and counterparty risk, at the moment this is a huge gaping hole in the Bitcoin landscape, and it acts as a strong disincentive for real businesses to do much of anything involving Bitcoins as an actual currency.