Thanks for these clarifications, Dr. Mulhauser.
You're very welcome -- just 'Greg' is fine by me, though.
Does this mean - theoretically - I could take a bunch of Bitcoin and become an accredited intermediary in the Winklevoss ETP, deposit the coins into their "vault" and then just simply have a bunch of shares I can place sell orders for on the exchange?
The S-1 doesn't specify who the Authorized Participants might be, or what requirements might be in place for becoming one, but in theory, the answer to your question seems to be yes, given this from page 4 of the S-1:
"The creation and redemption of Baskets require the delivery to the Trust, or the distribution by the Trust, of the number of Bitcoins represented by the Baskets being created or redeemed, the amount of which will be based on the combined NAV of the number of Shares included in the Baskets being created or redeemed. The initial number of Bitcoins required for deposit with the Trust to create Shares is [10,000] per Basket."
Sort of like I deposited some bitcoins as collateral and was then given Difficulty future shares (for example CoinBr.iDiff-E on Bitfunder) by the issuer and was then a "market maker" for the futures and able to freely trade my shares.
Without peeking at the specific futures contract you mentioned, I can't say whether the analogy holds, but I can say that this creation and redemption mechanic is exactly what makes the intermediaries well positioned to provide market making services and to engage in arbitrage that ensures the price of Bitcoins via shares closely tracks Bitcoins purchased directly via the same currency as the shares. It's the job of the Authorized Participants to gauge market demand and create or redeem accordingly, and it's very much in their interests to keep everything operating smoothly and efficiently. Far from being a
bad thing, as some folks might infer due to their privileged role in being able to swap shares for the underlying entity, their involvement is actually what make the whole thing possible.
As long as things are setup in a way that ensures that 1 share floating in the market always has 1 associated bitcoin in the "vault", I think I see no danger here. Let them build all the derivatives they want on the ETP as long as they are forced to cover their shorts or whatever and deal with the consequences of their actions.
Yep, I agree -- although there might be plenty of risks associated with the whole thing, I don't think the
design itself is flawed in such a way that it would contribute to those risks. In other words, yes, there might be all kinds of problems and all kinds of unforeseen consequences, but those won't be the result of someone's having just set it up crazily in the first place.