Winklevoss bitcoin ETF a nervy wager

Comment from Singapore

Bits, the units of information that underlie any digital currency, have only two values: zero or one. Perhaps it’s time investors were reminded that buying bitcoin is a similarly binary wager.

The virtual asset is trading at a record, shrugging off a campaign by the People’s Bank of China to control trading. Underpinning its rise is the hope U.S. entrepreneurs Cameron and Tyler Winklevoss will succeed in creating the first bitcoin exchangetraded fund.

On March 11, the twins are expected to receive a final decision from the U.S. SEC on whether they can list their ETF. A favourable outcome would create a precedent. There are two more funds seeking a review from the regulator and talk abounds of many more.

Investors who have driven bitcoin’s price above its 2013 high of US$1,137 are betting the advent of bitcoin ETFs will spur demand for an asset class with limited supply and cause prices to extend their climb.

What they may be missing is the possibility that the Winklevoss twins will fail. A contract created by Bitcoin Mercantile Exchange, a cryptocurrency derivatives trading platform, to bet on the possibility of approval of the Winklevoss ETF, showed favourable odds of only 34 per cent on Monday.

In spite of employing lawyer Kathleen Moriarty, a legend in the ETF world, the Winklevosses have been forced to wait since July, 2013, as the regulator takes its time to determine whether the digital currency can be considered an asset class. Even the lawyers working for the twins initially didn’t want to take the case because they thought bitcoin might be a Ponzi scheme.

All the while, the twins have been amending their filing. The latest bull run started shortly after their most recent addendum, registered on Jan. 20, which among other things requested a larger initial issue size for the fund.

Along the way, they’ve added settlement systems in order to establish the bitcoin price and determine the net asset value of the ETF at the end of every day. (Conveniently, that process will happen on the Gemini exchange, owned by the Winklevosses.) They’ve also added insurance, so potential hacks shouldn’t be an issue.

Yet they have yet to win an endorsement from the regulator, which still operates mostly on legislation enacted in 1933. The U.S. government simply may not be ready to give the stamp of approval to bitcoin.

In the more likely outcome of an SEC rejection, bitcoin could quickly drop back to the sub-US$800 levels tested after China’s latest crackdown in January. That would be a drop of about a third from the current price.

Put simply, the downside for bitcoin is potentially much bigger than the upside — at least in the short term. The digital currency’s future has never been this binary. Unlike with programming code, though, one of the two alternatives isn’t zero: It’s a deeply negative number.