Not everyone interested in Bitcoin is familiar with leading financial instruments, but a familiarity with ETF, exchange-traded funds, might be wise. These were initially introduced in the 90s, but have really rocketed to popularity in the last ten years or so. If you're unfamiliar with the scenery, here, we can benefit from a comparison to Index Funds.
Index Funds were premised on John C. Bogle's recognition that most fund managers were not actually able to beat the market on a consistent basis. Once their fees were taken into account, from the perspective of the financial end-consumer, the idea of beating the market was sheer folly.
Ironic, that characterization, in that Wall Street condemned this indexed approach as "Bogle's folly." Alas, Bogle's approach, creating funds that tracked the S&P 500, at minimal-to-no fees, has turned out to be a real winner.
Today's ETF represent an attempt to learn these lessons of the Index Funds lessons, supplemented by the further bonus that they were - unlike the original Indexed Funds - very inexpensive to trade. In some cases, ETF can be traded commission-free. Additionally, not being indexed, these ETF can be considerably cheaper, since the lack of ongoing management reduces considerably potential transaction costs.
There have been movements afoot to create a publicly traded Bitcoin ETF. The most famous efforts in this direction have been those of the infamous Winklevoss twins.
The Winklevoss brothers, renowned for their battle over claims upon the mega-successful social media site FaceBook, have been early adopters of Bitcoin. Some have estimated that the twins hold something in the area of $11 million in Bitcoin.
To establish a publicly traded ETF requires endorsement of the financial regulator; the twins have been pursuing this path, recently. The prospects of such ETF are already being disclaimed by hotshots of the investment funds world. For instance, Knight Capital managing director Reggie Browne has dismissed the prospect out-of-hand.
It is true, of course, with the extreme volatility of Bitcoin of late, such efforts would seem to run counter to the original Index Fund spirit of the early ETF tradition. This might though be a case of not seeing the trees for the forest (or the forest for the trees, perhaps).
First off, such trading opportunities already exist through SecondMarket's private Bitcoin Investment Trust (BIT, for short, get it?). BIT, modeled after a prominent gold ETF, with its $25k minimum investment, according to its creator and SecondMarket CEO, at the end of 2013, was holding $65 million.
Obviously, then, to claim, as Browne does, that the volatility of potential Bitcoin ETF wouldn't be attractive to potential ETF investors does seem to be assuming a bit too much. There seems to me, though, to be an even more essential point that is too easily overlooked in all of this. That point is simply this: as a currency Bitcoin's raison d'etre is to be a medium of exchange. It may provide an investment opportunity, but the outcome of such investments is ultimately irrelevant to its fate.
This is not to say that betting on (or against) anything, including a new currency, is perfectly legitimate and speculators and short selling and so on is all a necessary and valuable part of a dynamic and free market. The danger, though, of treating Bitcoin as an investment opportunity is that - unlike gold, for instance - it has been designed specifically to serve as an alternate currency.
In this regard, it is no different than any other new product on the market. Customers will try it and over time determine their own valuation of its features and benefits. The recent exchange rate volatility of Bitcoin, though, has not been a result of attitudes to its monetary virtues, but a consequence of fickle financial responses.
It could come to pass that Bitcoin triumphs, becoming a major international currency - whether sanctioned by nation-states or not: the timeline here is unclear but not especially important to my point. The other possibility of course is that after its customer trial period currency consumers conclude its benefits do not outweigh its costs in comparison to state backed fiat currencies. At that point its usage will collapse.
If the former happens, the holdings of the currency will be so extensive (and exempt from the inflationary pressures of fiat currencies) that financial hiccups will cease to cause the kinds of fluctuations recently observed. If that is the result, Bitcoin ETF will indeed become the kind of secure, indexed funds which were the original inspiration behind ETF in general.
And, if the latter case comes to be, those primarily hurt will be those who bought into the currency, not for its monetary virtues, but its anticipated financial windfalls. The main losers in effect will be the speculators. And speculation, by its very nature, is risky.
To be clear, I'm not suggesting that anyone feverishly convinced of Bitcoin's long term future should be discouraged from taking advantage of their knowledge of the product or their conviction in its viability to profit through investment in it. If however ones investment is merely an expression of excitement at rocketing exchange rates: what goes up, must come down. You know the risk you're taking.
Bitcoin ETF are an interesting prospect worth watching, but, ultimately, whatever their fortunes, they tell us little about the future prospects of Bitcoin as a currency. That story will be told, not by financial, but by monetary, and, even more importantly, by consumer markets.
Index Funds were premised on John C. Bogle's recognition that most fund managers were not actually able to beat the market on a consistent basis. Once their fees were taken into account, from the perspective of the financial end-consumer, the idea of beating the market was sheer folly.
Ironic, that characterization, in that Wall Street condemned this indexed approach as "Bogle's folly." Alas, Bogle's approach, creating funds that tracked the S&P 500, at minimal-to-no fees, has turned out to be a real winner.
Today's ETF represent an attempt to learn these lessons of the Index Funds lessons, supplemented by the further bonus that they were - unlike the original Indexed Funds - very inexpensive to trade. In some cases, ETF can be traded commission-free. Additionally, not being indexed, these ETF can be considerably cheaper, since the lack of ongoing management reduces considerably potential transaction costs.
There have been movements afoot to create a publicly traded Bitcoin ETF. The most famous efforts in this direction have been those of the infamous Winklevoss twins.
The Winklevoss brothers, renowned for their battle over claims upon the mega-successful social media site FaceBook, have been early adopters of Bitcoin. Some have estimated that the twins hold something in the area of $11 million in Bitcoin.
To establish a publicly traded ETF requires endorsement of the financial regulator; the twins have been pursuing this path, recently. The prospects of such ETF are already being disclaimed by hotshots of the investment funds world. For instance, Knight Capital managing director Reggie Browne has dismissed the prospect out-of-hand.
It is true, of course, with the extreme volatility of Bitcoin of late, such efforts would seem to run counter to the original Index Fund spirit of the early ETF tradition. This might though be a case of not seeing the trees for the forest (or the forest for the trees, perhaps).
First off, such trading opportunities already exist through SecondMarket's private Bitcoin Investment Trust (BIT, for short, get it?). BIT, modeled after a prominent gold ETF, with its $25k minimum investment, according to its creator and SecondMarket CEO, at the end of 2013, was holding $65 million.
Obviously, then, to claim, as Browne does, that the volatility of potential Bitcoin ETF wouldn't be attractive to potential ETF investors does seem to be assuming a bit too much. There seems to me, though, to be an even more essential point that is too easily overlooked in all of this. That point is simply this: as a currency Bitcoin's raison d'etre is to be a medium of exchange. It may provide an investment opportunity, but the outcome of such investments is ultimately irrelevant to its fate.
This is not to say that betting on (or against) anything, including a new currency, is perfectly legitimate and speculators and short selling and so on is all a necessary and valuable part of a dynamic and free market. The danger, though, of treating Bitcoin as an investment opportunity is that - unlike gold, for instance - it has been designed specifically to serve as an alternate currency.
In this regard, it is no different than any other new product on the market. Customers will try it and over time determine their own valuation of its features and benefits. The recent exchange rate volatility of Bitcoin, though, has not been a result of attitudes to its monetary virtues, but a consequence of fickle financial responses.
It could come to pass that Bitcoin triumphs, becoming a major international currency - whether sanctioned by nation-states or not: the timeline here is unclear but not especially important to my point. The other possibility of course is that after its customer trial period currency consumers conclude its benefits do not outweigh its costs in comparison to state backed fiat currencies. At that point its usage will collapse.
If the former happens, the holdings of the currency will be so extensive (and exempt from the inflationary pressures of fiat currencies) that financial hiccups will cease to cause the kinds of fluctuations recently observed. If that is the result, Bitcoin ETF will indeed become the kind of secure, indexed funds which were the original inspiration behind ETF in general.
And, if the latter case comes to be, those primarily hurt will be those who bought into the currency, not for its monetary virtues, but its anticipated financial windfalls. The main losers in effect will be the speculators. And speculation, by its very nature, is risky.
To be clear, I'm not suggesting that anyone feverishly convinced of Bitcoin's long term future should be discouraged from taking advantage of their knowledge of the product or their conviction in its viability to profit through investment in it. If however ones investment is merely an expression of excitement at rocketing exchange rates: what goes up, must come down. You know the risk you're taking.
Bitcoin ETF are an interesting prospect worth watching, but, ultimately, whatever their fortunes, they tell us little about the future prospects of Bitcoin as a currency. That story will be told, not by financial, but by monetary, and, even more importantly, by consumer markets.
About the Author:
To keep up on the wild ride of Bitcoin, check in regularly on our Bitcoin Profit Calculator . Wallace Eddington is staff writer at our website, providing a practical and provocative treatment of monetary and financial issues related to Bitcoin. His recent article elaborating the role of Bitcoin address and private key is a must read for those who want to take advantage of the exciting new digital currency.
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