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, let us recall, were the inspiration of John C. Bogle. He had observed that in reality most fund managers, most of the time, were not very successful at beating the market - which was the expressed investing ideal of the 70s. Furthermore, once the fund manager's fees were added on, the notion of beating the market for the average end user investor was sheer folly.
For those who recall those days, there is an amusing irony in describing the situation in that manner, for this is precisely how those on Wall Street condemned Bolge's indexed approach: "Bogle's folly." Yet, the truth of the matter is that this approach, which resulted in creation of funds that tracked the S&P 500, at minimal-to-no fees, has turned out to have embodied great wisdom.
Today's ETF endeavor to learn from Index Funds' best practices: avoiding the expense of high volume turnover and vastly reducing operation costs, as steady indexing eliminates labor intensive managerial fees. The one big difference, though, is that whereas Index Funds were difficult and expensive to trade, since their very purpose was to leverage long term advantage, ETF are traded much more easily and far less expensively.
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.
These twin brothers have been notorious in popular culture for their struggle with Mark Zuckerberg over control of the FaceBook social media site. Less widely known is that the Winklevoss twins have been big time early adopters of Bitcoin. Estimates on the extent of their holdings of Bitcoin have been in the area of $11 million.
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.
Certainly, it can't be denied that the tremendous recent volatility of Bitcoin runs contrary to the Index Fund sentiments which animated the original spirit of ETF. Focusing so closely on these recent developments, however, may be a case of getting the trees and the forest all mixed up together.
To begin with, trading of such funds already exists in the form of private funds. SecondMarket's private Bitcoin Investment Trust (BIT, for short, get it?) is modeled on a successful gold ETF. BIT has a $25,000 minimum investment, but, as testified by its creator, the SecondMarket CEO, at the conclusion of 2013, it held $65 million of investment.
Thus, sweeping, generalized condemnations of Bitcoin's volatility as too risky for ETF investors, such as claimed by Browne, hardly seem to be prima facie obvious. There's still a more basic matter involved here, though. It is a huge mistake to lose sight of the fact that any currency, including Bitcoin, earns its mettle (or not) as a medium of exchange, not as an investment opportunity.
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.
As with any product introduced onto the market to meet specific consumer demands, the features and benefits which will determine its fate can only be revealed by customer testing in the fullness of time. The notorious Bitcoin volatility the last while though has been a function of financial, rather than monetary, ambivalence. It seems to this author that one of two possibilities lie ahead of us.
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 we see the former possibility occur, the holdings and value of Bitcoin will be so large and high that, given its insulation from the inexorable inflationary pressures of fiat currencies, the financial hiccups which have plagued it with rate volatility in recent years will become peddles in too large a pond for its ripples to have appreciable consequences. Should this prove to be what the future holds for Bitcoin, any ETF indexed to it will indeed wind up providing just the kind of secure, long term investment opportunities that has always been the bread and butter of the ETF market.
And, should the other, less pretty, result come to pass, the truth is that the majority of those financially hurt by a collapse in the value of Bitcoin will be the speculators who bought up the currency, not on monetary merits, but rather in hope of financial windfalls. I wish such people no ill-will, but such risk is the very nature of such speculation.
In no way are these observations meant to stigmatize anyone who, persuaded of the viability of Bitcoin, chooses to invest in an ETF. Why shouldn't such people profit from their knowledge of and conviction in a great product. All financial investments, though, are risky. And anyone who is simply hoping to catch a financial wave needs to know that surfing does often enough lead to dumps in the drink.
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, let us recall, were the inspiration of John C. Bogle. He had observed that in reality most fund managers, most of the time, were not very successful at beating the market - which was the expressed investing ideal of the 70s. Furthermore, once the fund manager's fees were added on, the notion of beating the market for the average end user investor was sheer folly.
For those who recall those days, there is an amusing irony in describing the situation in that manner, for this is precisely how those on Wall Street condemned Bolge's indexed approach: "Bogle's folly." Yet, the truth of the matter is that this approach, which resulted in creation of funds that tracked the S&P 500, at minimal-to-no fees, has turned out to have embodied great wisdom.
Today's ETF endeavor to learn from Index Funds' best practices: avoiding the expense of high volume turnover and vastly reducing operation costs, as steady indexing eliminates labor intensive managerial fees. The one big difference, though, is that whereas Index Funds were difficult and expensive to trade, since their very purpose was to leverage long term advantage, ETF are traded much more easily and far less expensively.
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.
These twin brothers have been notorious in popular culture for their struggle with Mark Zuckerberg over control of the FaceBook social media site. Less widely known is that the Winklevoss twins have been big time early adopters of Bitcoin. Estimates on the extent of their holdings of Bitcoin have been in the area of $11 million.
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.
Certainly, it can't be denied that the tremendous recent volatility of Bitcoin runs contrary to the Index Fund sentiments which animated the original spirit of ETF. Focusing so closely on these recent developments, however, may be a case of getting the trees and the forest all mixed up together.
To begin with, trading of such funds already exists in the form of private funds. SecondMarket's private Bitcoin Investment Trust (BIT, for short, get it?) is modeled on a successful gold ETF. BIT has a $25,000 minimum investment, but, as testified by its creator, the SecondMarket CEO, at the conclusion of 2013, it held $65 million of investment.
Thus, sweeping, generalized condemnations of Bitcoin's volatility as too risky for ETF investors, such as claimed by Browne, hardly seem to be prima facie obvious. There's still a more basic matter involved here, though. It is a huge mistake to lose sight of the fact that any currency, including Bitcoin, earns its mettle (or not) as a medium of exchange, not as an investment opportunity.
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.
As with any product introduced onto the market to meet specific consumer demands, the features and benefits which will determine its fate can only be revealed by customer testing in the fullness of time. The notorious Bitcoin volatility the last while though has been a function of financial, rather than monetary, ambivalence. It seems to this author that one of two possibilities lie ahead of us.
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 we see the former possibility occur, the holdings and value of Bitcoin will be so large and high that, given its insulation from the inexorable inflationary pressures of fiat currencies, the financial hiccups which have plagued it with rate volatility in recent years will become peddles in too large a pond for its ripples to have appreciable consequences. Should this prove to be what the future holds for Bitcoin, any ETF indexed to it will indeed wind up providing just the kind of secure, long term investment opportunities that has always been the bread and butter of the ETF market.
And, should the other, less pretty, result come to pass, the truth is that the majority of those financially hurt by a collapse in the value of Bitcoin will be the speculators who bought up the currency, not on monetary merits, but rather in hope of financial windfalls. I wish such people no ill-will, but such risk is the very nature of such speculation.
In no way are these observations meant to stigmatize anyone who, persuaded of the viability of Bitcoin, chooses to invest in an ETF. Why shouldn't such people profit from their knowledge of and conviction in a great product. All financial investments, though, are risky. And anyone who is simply hoping to catch a financial wave needs to know that surfing does often enough lead to dumps in the drink.
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 track of the rollercoaster 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 concerning Bitcoin. His recent article explaining 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.
