Topic: Winkelvoss ETP could become THE pricing mechanism for BTC - page 8. (Read 15389 times)

To close that gap, here is an article on how gold ETFs may be used to manipulate prices.
http://www.bizforum.org/Journal/www_journalJVP010.htm
No malfeasance is required on the part of the fund issuer or anyone else.  Currency manipulation is legal when done by states, though there may be political repercussions or potential action by international entities such as the WTO or IMF.  Being legal does not make it a good thing, merely not easily punishable.


Lets refer to "the underlying entity backing those shares" as "Bitcoins" to simplify this at the start, even though this is not perfectly accurate.  The link-breaking comes through what is called collateralization.  The collateral for the ETF starts as Bitcoin, but may be swapped for other collateral under discretionary terms between the "Authorized Participant" (50K share basket buyers), the Sponsor (Math-Based Asset Services LLC - Cameron is CEO, Tyler is CFO) and the as yet unnamed trustee.   The collateral used is at the discretion of these three.  So in the case where the "Authorized Participant" is extremely highly liquid, (such as a reserve bank) non-bitcoin collateral may well be used.  This might be done to sell short (selling borrowed value) or arbitraging or for other reasons.  

The ETF is ostensibly meant to track the value of the Bitcoin, in fact what it does is track the net asset value (NAV) of the trust, which is primarily expected to be Bitcoins minus expenses, so it starts out pretty close.  To track the NAV, a trust primarily collateralized by Bitcoin must have the value of Bitcoin assessed.  At day 1 of the ETF, this value is derived from the existing Bitcoin exchanges in what is called the "Blended Bitcoin Price". ( S-1 p 4,12) http://www.sec.gov/Archives/edgar/data/1579346/000119312513279830/d562329ds1.htm

Dr Greg postulates that over time, and with increased use, the ETF value may supplant the Bitcoin exchanges in determining the Bitcoin price.  This may happen.  The result would then be a bit recursive with the ETF's Bitcoin value determination heavily influenced by the the price of the ETF.

This circumstance is more or less where we are today with gold and silver, so for the sake of discussion let us move forward into the future some years and assume this happens.

We can set aside whom this advantages for now, though I will offer that the advantage is not mine or likely most of the readers of this forum.


Here is a place where we diverge more strongly, so I will slow down a bit.  I would claim that the collateral does matter because it invariably introduces "counter-party" risk in all cases where the collateral is not Bitcoins.  The Sponsors, Trustee, and Authorized Participant may agree that the risk is small enough, but in any case this happens out of the sight of the trading public, and the public must blindly trust this trinity's judgement on the matter.  
We can get more into that part of the discussion, if anyone else is interested.


Relative to the average trade, naked short selling may be rare, but the SEC calls it "Prevalent" in this recent case:
http://online.wsj.com/article/SB10001424127887324904004578537692730996164.html


You refer to expiring call options here, but we don't have to add derivatives to the mix to show where it becomes pernicious to Bitcoin.
Simple collateralized short selling of the ETF has the same, or even stronger effect.  It drives the price of the ETF down.  Remember, now we are in our future where this ETF is the means of price discovery for Bitcoin?  This devaluing of Bitcoin by collateralized shorting will also devalue the vaulted Bitcoins supporting the ETF.  Since everyone is watching the ETF price to know how much their Bitcoins are worth, the Bitcoins out in the world also lose value and this happens without any Bitcoins being sold.

But wait... while that sinks in, let us go further into this future...

As indicated in the SEC case above, there are some rules governing Naked Short Sells.  Some jurisdictions even ban it altogether.  Recognize however that these rules do not apply to central banks!  Take the USA, neither the SEC, nor the CFTC, nor the IRS, nor anyone else is ever going to investigate, much less get an Atn.Gen. to bring a case against the Federal Reserve for doing their job.  As agents of the Federal government, they have the role of defending the currency from "disorderly conditions" wherever they may find them.  The Federal reserve banks may do with patriotic impunity what an American citizen may not do.  In the same way that government holds the monopoly on the right to imprison/kill... since 1913 it may also do this with threats to the Federal Reserve Note.
There is an existing structure for the Fed to do this called the System Open Market Account (http://www.newyorkfed.org/aboutthefed/fedpoint/fed27.html) which as of October 26, 2011 had US$2,635 Billion which could be used as collateral, including $849 Billion in Mortgage Backed Securities bought from TARP.

Now...Personally, I have no politics at all.  It just isn't my thing.  I am not for or against the Federal Reserve or any of the other central banks of BASEL. They are not my enemy.  Such matters are far beyond anything I could hope to influence even if I wanted to.  My role here is just to point out the pieces on the game board and what rules those pieces follow as they move about in response to the questions asked from our friends here.  My hope is just for the success of people including the Winklevoss, and for helping folks to understand these complex financial interactions in simple terms providing illumination for easy reference to the publicly available source material.

Maybe in time, the Winkelvoss ETP could become THE pricing mechanism for BTC.  If it happens, maybe we will get to see how it all works out.  Perhaps I'm just less eager than some to discover how it does.



Yes... immediately gain hedging mechanisms far surpassing the capabilities of anything we currently have available.   Yes.  Yes it would.

Oh, hey -- that's great (and entirely unexpected), many many thanks for that! 

(Like many folks, I generally use any given receiving address only once, so off I go to swap in a new one...)

ok, now you've made me use your tip jar This doesn't happen often.

I'm not sure whether this will be helpful or not -- so if it isn't, just skip this post entirely -- but as the OP, I feel some obligation to try and summarize a few of the various threads that have emerged here so far...

To recap the original article (Winklevoss Bitcoin Trust May Become THE Price Discovery Mechanism for Bitcoin), if the Winkelvoss trust is approved, there are strong arguments for believing it could wind up becoming the principal price discovery mechanism for Bitcoin, supplanting existing exchanges. In addition, much of the speculative and investment volume currently on existing exchanges could wind up migrating to trade in the trust. The article outlines several reasons why the inadequacies of existing exchanges, combined with the advantages offered by an ETF, could bring this about. The article used gold ETFs as an historical example; representing around 6.5% of global gold demand, gold ETFs do not set the price of gold, but they do exert significant influence.

The original article does not address any questions at all about price manipulation or potential malfeasance on the part of the fund issuer or how it might all be exploited by central banks to harm Bitcoin. The original article's focus was on arguments about price discovery in the first instance; the article also touched on the relevance of the ETF for the eventual introduction of standardized options, and it touched on the primitive nature of trading network-style exchanges as compared to 'real' exchanges with an identifiable counterparty. If there was any speculation in the article, it was focused on that last issue, and the idea that the ETF may incentivize someone to step up and create a 'real' exchange.

Through the course of the thread, we've covered the area of share basket creation and redemption via Authorized Participants and revisited the fact that the trust will be backed by real live Bitcoins; we've also covered why individual investors won't be cashing in their shares and getting Bitcoins in return, and why that isn't a problem.

We've touched on what differentiates the Winkelvoss trust from the Exante fund, and also from the recently announced 'Bitcoin Fund', and touched on the distinction between a hedge fund and a currency fund.

'NewLiberty' in particular has introduced the idea that the ETF could provide an efficient means for central banks or other potential enemies of Bitcoin to cause problems, and if I have followed the thinking correctly, has also suggested that there could be some way for the ETF to break the link between shares being traded and the underlying entity backing those shares.

So, I think that's roughly where we are now.

In the latest few posts, if I've understood correctly, 'notme' has wondered about shorting the ETF with USD collateral, 'halfawake' has commented about derivatives as distinct from ETFs themselves for risk management, and both 'molecular' and 'notme' have brought us right back to the original topic again and wondered whether the ETF really could become the principal price discovery mechanism anyway.

For my part, my thoughts on all of those last bits are closely connected. As I see it, a great advantage of an ETF would be that it opens up buying and selling and short selling to a vastly wider audience, and it provides an underlying security suitable for the introduction of standardized derivatives. (It makes little difference what is used as collateral in ordinary short selling, by the way: collateral is merely what you are putting up to show you have the resources to buy back the share when the time comes, and the share still has be borrowed from someone before it can be sold. I.e., the share being sold short is not the collateral. Even in the relatively rare case of naked short selling, someone still has to be pay the piper at the end of the day; analogously, you can write naked calls all day if you want, too, but you will still be forced either to buy them back or to cough up the underlying should that call expire in-the-money.) And assuming that standardized options eventually became available on the ETF -- as tends to happen for anything with significant volume -- the Bitcoin economy would immediately gain hedging mechanisms far surpassing the capabilities of anything we currently have available.

This assumes that "the price" is discovered on the spot market. The danger is that the ETF will take over price discovery... then we might have a huge problem.

Sure... if the ETF became the pricing mechanism.  But as other have pointed out, bitcoin already has a widely established spot market and large holders are unlikely to give up the freedom of coin possession for more risk plus a fee.

No.   It isn't
Bitcoins may be collateralized by the fund, or by its participants.  So it depends on what you consider to be the source of the spot price.  
The thread postulated that the ETF could itself become the pricing mechanism rather than the exchange as it stands today.

At the end of the day Bitcoin is 100% voluntary it's value is derived from the protocol and what we are prepared to pay to be governed by it.

I'm looking forward too.

The maths mentioned earlier is hard to sallow when you're a big fish, as the cost to play by the rules is high especially when you are the first or part of the late majority.

But regardless, this funds ability to cause the actual bitcoin spot price to fall is limited by the bitcoins it has to sell.

I never said there was a problem.  You asked what the difference was and I explained it.

Similar, but not the same.  Sure they could use a derivative too, but that is regulated differently and also accomplishes it a different way which may or may not be what they want.

A company may just rather do the math themselves and take a measured amount of risk that suits them rather than a fixed amount that suits their payment vendor. 
 

It might present some challenges even if you presume that everything currencies do is not an insurmountable problem for Bitcoin.  Is it not a problem because no one loses currency wars?  Or not a problem because whipsawing a currency to shake the value out of an economy is the law of the jungle and if Bitcoin isn't the fittest it ought not survive?  Or not a problem because an economy with less than a billion USD in aggregate value can easily fend of leveraged attacks from central banks that add multiples of that to the money supply each because it is just better by design?

Bitcoin is a good experiment, this is another variable.  I'm looking forward to what might come next.

This is what derivatives are for though, not ETFs.  And this is true, they aren't managing volatility so much as avoiding it altogether, but it serves the same purpose really.

Or the opposite of this.

The fund Trustee has some discretion, it is not required to sell anything on the spot market, or it might sell for other reasons than sale of shares....  

If the problem is that people will be able to do what they can with any other currency, then that is not a problem.

With an ETF, some brokers would allow clients to short sell with USD collateral.  Currently, you can only do this if someone is willing to lend you BTC.

That appears to be the Winklevoss's opinion, yes, and likely their best and most lucrative market.  
There may be other ways too, but this one has a clear model, and I am hoping along with many that the cure is not worse than the disease and that they succeed.  
If its otherwise, not much we could do about it, right?

These same games could supposedly be played out on current BTC exchanges?

So what is the difference?

They could only suppress the price until the fund ran out of BTC to sell on the spot market.  The fund would settle for fiat a the bottom and then BTC would revaluate higher.

TL;DR?   Yes


It isn't much different to the gold and silver paper games except in respect to time-frame.  Gold and silver ETFs in large part did become the primary mechanism for price discovery.  In part that is an artifact of how gold pricing was previously set (using a very old and non-transparent method of five bankers in London deciding what it was).  That was easily replaced by the real-time pricing of ETFs.  Bitcoin already has that real-time pricing though, so it may likely not follow the same path...

But to put out an answer...

If Bitcoin has enemies, and if they wanted to suppress the price, (or introduce volatility) and if these enemies have enough fiat, and if such an ETF becomes the primary mechanism for price discovery then... yes.