Too early to bet on Bitcoin
Fund observers laughed after seeing the registration papers for the Winklevoss Bitcoin Trust — a new exchange-traded product that faces a lengthy vetting process from the U.S. Securities and Exchange Commission.
If the Winklevoss name rings a bell, that means you probably know enough about the origins and founding of Facebook to know that Cameron and Tyler Winklevoss – twins who attended Harvard and rowed in the 2008 Olympic Games in Beijing – claimed that Mark Zuckerberg essentially stole their idea for the business. The twins walked away with a settlement worth $20 million in cash, and Facebook shares worth, conservatively, 10 times more.
If bitcoin rings a bell, then you are versed in what some people believe is the next great step in Internet and global commerce, a digital currency without borders or central bank, run by the people who use it. The value of bitcoins – today mostly used for anonymous online purchases – is determined by the marketplace; whatever someone will take for them is what they are worth.
The Bitcoin Trust could be looked at as just another currency fund. Gold funds are backed by hard assets. The bitcoin fund can’t do that because bitcoins are digital. But the registration papers show that the twins claim a proprietary method for storing bitcoin holdings – they’ll charge a yet-to-be-specified management fee for maintaining this virtual storage – which would, in turn, make bitcoin holdings more liquid.
Liquidity is important here because bitcoins have a volatile history. In the last year alone, they’ve traded between $13 and $266; Mt. Gox, the largest bitcoin exchange, had them trading in the $80-90 range recently.
Until you can cash them, however, that value is both speculative and ephemeral.
The Winklevoss filing noted, accurately, that bitcoins have little use in real-world retail and commercial markets compared “to relatively large use by speculators.”
If you can’t actually spend bitcoins without converting them into conventional currency, one could argue that they aren’t so much a currency as a form of scrip, a tem- porary money that has some value but that could become worthless overnight due to any number of structural, economic or market conditions.
Ultimately, if the Bitcoin Trust helps people interested in the currency access it and trade it, it’s a plus even if it’s not a commercial success. If bitcoin proves durable and lives up to the potential its supporters say it has, then the Winklevoss boys will cash in big-time and be wildly imitated.
As an investor, however, you probably don’t want to bet on that. The twins face a long, uphill battle just to get this fund to market; from there, chances are good it will still be viewed for years as a granular niche fund.