Well if this fund takes off then we might see a Bitcoin appreciate like gold did when the GLD ETF opened up. This is why:
If the SEC approves the Winklevoss' request each share of their ETF
would be worth one-fifth of a bitcoin. It would operate like a
conventional ETF. For example, the SPDR Gold Shares ETF (GLD)
tracks the price of gold bullion and holds physical gold based on the
amount of deposits. The Winklevoss twins would back each share sold by
acquiring the underlying asset. In other words, for every five shares of
a Bitcoin ETF sold, the Winklevoss Bitcoin Trust would be forced to purchase one bitcoin.
In other words the more shares sold the higher the Bitcoin price would go up. Supposedly there is a cap on the amount of Bitcoins in circulation (they are generated through some sort of computer program that "mines" them) so as the ETF becomes more popular the price of Bitcoins might go up due to scarcity.
Supposedly this is quite a bit like the gold market was run up when their ETF was introduced according to this:
SPDR Gold Shares, with a recent $50 billion in assets, has
contributed a significant portion of overall gold demand in recent
years. The World Gold Council, the trade group of gold miners that
sponsors the fund for marketing agent State Street Global Advisors,
estimates that about $236 billion of gold was purchased in 2012. It says
roughly 6% of that demand came from ETFs, of which SPDR Gold Shares is
by far the largest. (The next largest, iShares Gold Trust,
has assets of about $10 billion.)
Near the height of the gold
bull market, in 2009 and 2010, ETFs accounted for roughly 13% of gold
demand, according to the council.
That is all demand generated out of thin air just to satisfy the ETF. If there was no GLD then that 13% of the demand would not have been created at all. Also the ETFs accounts for quite a bit of the trading in physical gold itself. Most physical buyers are long term holders and can't and won't flip coins every few days. The other buyers are jewelry makers who just barely increase their demand year to year. So these people very rarely trade gold. However, the mere existence of the ETF created quite a bit of physical buying.
For seven years after its launch, the fund grew exponentially, becoming
not only one of the biggest buyers of gold but also at one point the
second-largest ETF of any kind. The more gold prices rose, the more
popular the fund became and the higher Wall Street brokers raised their
price targets for the metal.
This might happen with the Bitcoin. As the Bitcoin goes higher more and more money might pour into the ETF and create a virtuous circle. If this ETF becomes very popular then it might act similar to gold did during this period talked about above. However, Bitcoins are not gold. The whole idea of Bitcoins seems very shady and it is hard to tell who owns them and who is "mining" them.
The bottom line is that the Winklevoss twins are trying to create an ETF
that makes money by charging investors for the right to have fractional
ownership of an imaginary currency controlled by one or more people no
one has ever met.
I did think of one factor that might help Bitcoins though. If they can be accepted as legal tender for goods and services then their value would be assured. I know some stores accept Bitcoin but nearly every other one does not. If the Bitcoin becomes an actual currency (like Amazon accepts them or something like that) their value will take off. This is something that gold does not have going for it. You can buy physical gold but you cannot use a gold bar to buy a TV (I mean you could but not from an actual store.)
I'm sure if this happens some sharpie at Goldman will figure a way to arbitrage the price of Bitcoins to the currency that they can be traded into (I think only the Dollar and the Yen can be traded for Bitcoins right now IIRC.) In fact there are a only a few companies trading Bitcoins for cash so here is another potential red flag:
On its website Mt.Gox describes
itself as "as one of the oldest and most established bitcoin businesses
in operation today, Mt.Gox K.K. has developed a reputation based on
reliability and stability, allowing users to trade with confidence." The
claim says more about the Wild West nature of digital currency than it
does about the stability of Mt.Gox. Though Mt.Gox recently filed with
the Treasury Department to register itself as a money services business,
questions remain about the reliability of the exchange and the identity
of the traders using it.
In any case it might be an interesting way to deploy some seriously speculative money in one's portfolio. You have to remember this fact that Bitcoins are insanely volatile and the prices fluctuate by huge amounts. From March to April this year Bitcoins went from $40 to $260. Then from April until now the Price of Bitcoins went from $260 to $90 with a stop at $60 in between. That is a traders asset if I have ever seen one. In any case I just like the idea of a currency that would not be beholden to the FED and to the other Central Banks and their funny money printing presses.
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