Topic: Winkelvoss ETP could become THE pricing mechanism for BTC - page 9. (Read 15389 times)

It seems that if we want big business to start accepting bitcoin, we need an ETF for them to manage risk - at least while the currency is so volatile.

For my part, I would have imagined that folks concerned about market manipulators would be more concerned about the relatively low volume exchanges we have at the moment, where just a few million dollars here or there can exert quite an influence on exchange rates. Generally speaking, I think boosting volume and increasing market breadth makes it harder, not easier, to fiddle with free markets.

Anything in particular?

yes. Coinbase and Bitpay service function in an automatic way rather than managed, in short they aren't ETFs.  When you are looking at large merchants, there are even better options than what Coinbase and Bitpay type services do.  This is one of the things that ETFs and commodity futures products were designed for, to manage volatility in your supply chain.  If you want to manage risk (as it take some measurable and flexible risk and get the reward of that) but not lose flexibility, you can hedge against your risk with an ETF to as much extent as you please rather than being in a fixed percentage with automatic conversion to fiat.  Coinbase and Bitpay have the Small-Medium Enterprise (SME) as their sweet spot for marketability.

Hmm, I'm pretty sure I wouldn't agree with all those agrees...but we can at least agree to disagree on that. 

As far as I'm aware, the existing ways of managing volatility are pretty weak -- and lack the liquidity necessary for hedging any kind of larger position. I took a look at this awhile back in an article called Bitcoin Derivatives, Liquidity and Counterparty Risk and concluded that the situation at the time was severely limited. But I'd be very happy -- eager, in fact -- to learn of some new addition to the fray.

(The last I knew, when the likes of Coinbase or BitPay referred to "managing volatility", what they meant was "avoid volatility by not holding Bitcoins any longer than necessary".)

The eventual availability of options on something like the proposed Bitcoin ETF would be an absolute godsend in this respect.

Why would they bother with this when there are already tools that let merchants manage (or even eliminate) volatility?  Coinbase and bitpay already have functionality that can do this for merchants.

If the brothers took the coins from under the trust, they would certainly make it look like they "mysteriously disappeared" and it'd be hard to catch them.


I don't quite understand how this is any different from the "paper games" being played with gold and silver in order to suppress them. So could this ETF be the instrument the enemies of bitcoin could use to suppress its price or not? I still can't answer this question even with this detailed info you guys here are distilling from the document.

There is another customer that could deeply benefit from ETF use: large merchants.

If, to pick a name out of a hat: Amazon wanted to accept Bitcoin, they may need to use the swift liquidity of the ETF to manage volatility risk.  In this way, it could be a tool to GREATLY expand the Bitcoin merchant economy.

We agree that we are prematurely speculating.  This is a conversation about the future, in all its nebulosity.  We are prematurely speculating on what the ETF could become, pricing mechanism and all the rest of what might or might not someday be.  Speculation and hedging are normal for ETFs.

We also agree that the proviso is carefully worded to sound like a mechanism intended to promote the orderly operation of the fund, as it should be.
We also agree that the back door for market manipulation is not disguised.  Indeed, it would be difficult to disguise it.  ETFs are famous for being the vehicle of choice for such mechanisms.  It does not need to be intentional on the part of the Fund creators, it comes along on the ride as an unintended (but predictable) consequence.  I am alleging no mal-intention at all.  The kind, deeply litigious, gracious and wise founders of this ETP clearly only have the best of intentions.  

We also agree that an arbitrager might short the ETF and buy on the spot market.  They also might not be arbitraging and be simply selling short and not buying Bitcoin anywhere.  They can do this by posting sufficient collateral in fiat.  There are some entities with a whole heck of a lot of fiat legal tender and the ability to print more at will.
Again all of this is purely premature speculation on the future.  The document is less than a month old, everything can change before any of this becomes real.  Further, that the risks are out in the open is good for the Fund creators, as it shows that the fund investors are accepting of them in order to receive the benefit of fund ownership, and it is in that spirit that this is offered.

Yes, I'm sure you're right on this: this is not aimed primarily at the folks who are already buying and selling Bitcoins anyway (and who would not want to hand over a fee to someone else for the privilege!).

Just to clarify first: the proposed ETF provides an initial ratio of 5 shares to 1 Bitcoin, and this ratio will change very slowly over time, as the fund's fees are deducted from the Bitcoins it holds.


Since the S-1 -- remember, it is only an S-1 -- specifies just that the AP, Sponsor and Trustee must agree on appropriate collateralization, it seems to me premature to speculate on the nature of the collateral they might agree upon. Possibly more to the point, though, is that to my mind, this proviso sounds more like a mechanism intended to promote the orderly operation of the fund -- and to prevent it becoming bogged down by Trustee nitpicking over the precise time of day or day of the week that a Basket of shares is to be delivered -- than a mechanism intended to provide a disguised back door for market manipulation. What we're talking about here is the AP promising to deliver the shares even if they may wind up being late, and the Trustee being willing to remove Bitcoins from the trust and discharge them to the AP on the understanding that the corresponding shares will in fact be delivered to it. As far as I can tell, qualitatively speaking, this is little different from an arbitrageur shorting the shares of any ETF while buying the underlying on the spot market.

yes


Sort of...there are audits (pp 39,48,64 et al), but the requirement is for bitcoin or sufficient collateral, and the auditor is not yet named.  

There are other risks identified in the S-1 as well which might be interesting on Page 18.  The bitcoins can be lost, and "The Trust will not insure its Bitcoins."  They will have some insurance for their custodial activities, but there is no guarantee that you will get Bitcoins out.  If insurance is paid out, it is almost guaranteed that it will be paid in fiat legal tender.  Your statement about the brothers selling them out from under the trust is not going to happen, that would be fraud.  But if somehow the Bitcoin mysteriously disappeared and no one could figure out how or where they went... and the insurance kicks in...  you get the same result.

Essentially, we Bitcoin folks are very likely NOT the intended customers for this ETF.  We can already buy sell trade our Bitcoins with little economic friction or risk.  This is for the investor marketplace.  Folks that DO need this are those don't have / don't want Bitcoin wallets, the speculators, and ... financial institutions up to and including central banking agents.  If they want to go short on Bitcoin, without ever owning a Bitcoin, this is a way to do it.  

Another fundamental problem arises when and if there is ever a serious economic event that causes major currency collapse.  You won't have any bitcoin, you will have ETF shares which may or may not be redeemable.

In pursuit of a friendly athmosphere I first thank NewLiberty for his insightful post.

Now some questions: "settlement of redemption in collateral" means "give USD instead of bitcoins", right?

But then the brothers could just sell coins from the vault on the physical market (no audit, right?) and the bitcoin money supply (physical + ETF holdings) would get inflated (nooooo!).

Did I get that roughly right?

If not, could someone sketch a scenario how this could go wrong (for bitcoin)?

And many thanks for promoting such a friendly environment on the forum -- I appreciate it! 

Adding my gratitude to Greg for investing his time here and sharing the details on the mechanics of the ETP.

The basket, market-maker, and non-connectivity of micro-trades vs. exchanges was enlightening. 

Thanks again, Greg, for the info. I'm seeing quite a bit clearer now how this works.

Eager to see how this plays out, but I guess there'll be a long wait now for the SEC.

You're very welcome -- just 'Greg' is fine by me, though. 


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."


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.


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.