Idiot Idea Du Jour: A Winklevoss BitCoin ETF

Tyler Durden's picture

That a BitCoin-based ETF is a horrible idea for those who believe in what BitCoin stands for, i.e., a status-quo regime-remote monetary process which is naturally also independent of existing capital markets, is quite clear. Yet a BitCoin-based ETF prospectus, namely the Winklevoss BitCoin Trust, with a proposed offering of 1 million shares at a price of $20 each, is precisely what the Winklevi filed today with the SEC. We can only assume this idiotic idea is proposed simply to entice the habitual gambling momentum-chasers, who seek a conventional method of pursuing the momentous volatility that only Bitcoin can offer now that regular BitCoin exchanges are being shut down by the US and other governments, as absolutely nobody else would be interested. That, or just another expression of the identical twins' megalomania who enjoy nothing more than seeing their name in lights or in the title of a security. Because once one reads the risk factors, among which we find the following, we doubt even said habitual gamblers will be interested: "It may be illegal now, or in the future, to acquire, own, hold, sell or use Bitcoins in one or more countries, and ownership of, holding or trading in Shares may also be considered illegal and subject to sanction." Well, you have been warned.

We encourage readers to read the full amusing prospectus for their own enlightenment, but for the sake of protecting your capital, here is the full risk factors section, i.e., the only one that matters.

  • The loss or destruction of a private key required to access a Bitcoin may be irreversible. The Trust’s loss of access to its private keys or its experience of a data loss relating to the Trust’s Bitcoins could adversely affect an investment in the Shares.

Bitcoins are controllable only by the possessor of both the unique public and private keys relating to the local or online digital wallet in which the Bitcoins are held, which wallet’s public key or address is reflected in the Bitcoin Network’s public Blockchain. The Trust publishes the public key relating to digital wallets in use by the Trust when it verifies the receipt of Bitcoin transfers and disseminates such information into the Bitcoin Network, but is required to safeguard the private keys relating to such digital wallets using the Security System. To the extent such private keys are lost, destroyed or otherwise compromised, the Trust will be unable to access the related Bitcoins and such private keys will not be capable of being restored by the Bitcoin Network. Any loss of private keys relating to digital wallets used to store the Trust’s Bitcoins could adversely affect an investment in the Shares.

  • Currently, there is relatively small use of Bitcoins in the retail and commercial marketplace in comparison to relatively large use by speculators, thus contributing to price volatility that could adversely affect an investment in the Shares.

As relatively new products and technologies, Bitcoins and the Bitcoin Network have not been widely adopted as a means of payment for goods and services by major retail and commercial outlets. Conversely, a significant portion of Bitcoin demand is generated by speculators and investors seeking to profit from the short—or long-term holding of Bitcoins. The relative lack of acceptance of Bitcoins in the retail and commercial marketplace limits the ability of end-users to pay for goods and services with Bitcoins. A lack of expansion by Bitcoins into retail and commercial markets, or a contraction of such use, may result in increased volatility or a reduction in the Blended Bitcoin Price, either of which could adversely impact an investment in the Shares.

  • The value of Bitcoins as represented by the Blended Bitcoin Price may be subject to momentum pricing whereby the current Blended Bitcoin Price may account for speculation regarding future appreciation in value. Momentum pricing of Bitcoins may subject the Blended Bitcoin Price to greater volatility and adversely affect an investment in the Shares.

Momentum pricing typically is associated with growth stocks and other assets whose valuation, as determined by the investing public, accounts for anticipated future appreciation in value. The Blended Bitcoin Price is determined using data from various Bitcoin Exchanges that are selected by the Sponsor. The Sponsor believes that momentum pricing of Bitcoins has resulted, and may continue to result, in speculation regarding future appreciation in the value of Bitcoins, inflating and making more volatile the Blended Bitcoin Price. As a result, Bitcoins may be more likely to fluctuate in value due to changing investor confidence in future appreciation in the Blended Bitcoin Price, which could adversely affect an investment in the Shares.

  • The Bitcoin Exchanges on which Bitcoins trade are relatively new and largely unregulated and may therefore be more exposed to fraud and failure than established, regulated exchanges for other products. To the extent that the Bitcoin Exchanges representing a substantial portion of the volume in Bitcoin trading are involved in fraud or experience security failures or other operational issues, such Bitcoin Exchanges’ failures may result in a reduction in the Blended Bitcoin Price and can adversely affect an investment in the Shares.

The Bitcoin Exchanges on which the Bitcoins trade are new and largely unregulated. The Blended Bitcoin Price on which the NAV of the Shares is based utilizes data from Bitcoin Exchanges selected by the Sponsor to determine the weighted average price for Bitcoins. For a further discussion of the Bitcoin Exchange Market and the selection of Bitcoin Exchanges for inclusion in the Blended Bitcoin Price, see “Overview of the Bitcoin Industry and Market—Bitcoin Value” and “—Uses of Bitcoins.”

Over the past three years, many Bitcoin Exchanges have been closed due to fraud, failure or security breaches. In many of these instances, the customers of such Bitcoin Exchanges were not compensated or made whole for the partial or complete losses of their account balances in such Bitcoin Exchanges. While smaller Bitcoin Exchanges are less likely to have the infrastructure and capitalization that make larger Bitcoin Exchanges more stable, larger Bitcoin Exchanges are more likely to be appealing targets for hackers and “malware” (i.e., software used or programmed by attackers to disrupt computer operation, gather sensitive information or gain access to private computer systems).

A lack of stability in the Bitcoin Exchange Market and the closure or temporary shutdown of Bitcoin Exchanges due to fraud, business failure, or hackers or malware may reduce confidence in the Bitcoin Network and result in greater volatility in the Blended Bitcoin Price. Furthermore, the closure or temporary shutdown of a constituent Bitcoin Exchange used in calculating the Blended Bitcoin Price may result in a loss of confidence in the Trust’s ability to determine NAV on a daily basis. These potential consequences of a Bitcoin Exchange’s failure could adversely affect an investment in the Shares.

  • A possible “short squeeze” due to a sudden increase in demand for the Shares that largely exceeds supply may lead to price volatility in the Shares.

Investors may purchase Shares to hedge existing Bitcoin or other Digital Math-Based Assets, commodity or currency exposure or to speculate on the price of Bitcoins. Speculation on the price of Bitcoins may involve long and short exposures. To the extent that aggregate short exposure exceeds the number of Shares available for purchase (for example, in the event that large redemption requests by Authorized Participants dramatically affect Share liquidity), investors with short exposure may have to pay a premium to repurchase Shares for delivery to Share lenders. Those repurchases may, in turn, dramatically increase the price of the Shares until additional Shares are created through the creation process. This is often referred to as a “short squeeze.” A short squeeze could lead to volatile price movements in the Shares that are not directly correlated to the price of Bitcoins.

  • Political or economic crises may motivate large-scale sales of Bitcoins, which could result in a reduction in the Blended Bitcoin Price and adversely affect an investment in the Shares.

As an alternative to fiat currencies that are backed by central governments, Digital Math-Based Assets such as Bitcoins, which are relatively new, are subject to supply and demand forces based upon the desirability of an alternative, decentralized means of buying and selling goods and services, and it is unclear how such supply and demand will be impacted by geopolitical events. Nevertheless, political or economic crises may motivate large-scale acquisitions or sales of Bitcoins either globally or locally. Large-scale sales of Bitcoins would result in a reduction in the Blended Bitcoin Price and adversely affect an investment in the Shares.

  • The [EXCHANGE] may halt trading in the Shares, which would adversely impact investors’ ability to sell Shares.

To the extent that the [EXCHANGE] halts trading in the Shares, whether on a temporary or permanent basis, investors may not be able to buy or sell Shares, thus adversely affecting an investment in the Shares.

  • If regulatory changes or interpretations of the Trust’s activities require the regulation of the Trust as a money transmitter under the regulations promulgated by FinCEN under the authority of the US Bank Secrecy Act, the Trust may be required to register and comply with such regulations. To the extent that Sponsor decides to continue the Trust, the required registrations and regulatory compliance steps may result in extraordinary, non-recurring expenses to the Trust. The Sponsor may also decide to terminate the Trust. Any termination of the Trust in response to the changed regulatory circumstances may be at a time that is disadvantageous to investors.

To the extent that the activities of the Trust cause it to be deemed a “money transmitter” under the regulations promulgated by FinCEN under the authority of the US Bank Secrecy Act, the Trust may be required to comply with FinCEN regulations, including those that would mandate the Trust to implement anti-money laundering programs, make certain reports to FinCEN and maintain certain records. Such additional regulatory obligations may cause the Trust to incur extraordinary expenses, possibly affecting an investment in the Shares in a material and adverse manner. If the Sponsor determines not to comply with such additional regulatory and registration requirements, the Sponsor will instruct the Trustee to terminate the Trust. Any such termination could result in the liquidation of the Trust’s Bitcoins at a time that is disadvantageous to an investor in the Shares.

and finally:

  • It may be illegal now, or in the future, to acquire, own, hold, sell or use Bitcoins in one or more countries, and ownership of, holding or trading in Shares may also be considered illegal and subject to sanction.

Although currently Bitcoins are not regulated or are lightly regulated in most countries, including the United States, one or more countries may take regulatory actions in the future that severely restricts the right to acquire, own, hold, sell or use Bitcoins or to exchange Bitcoins for fiat currency. Such an action may also result in the restriction of ownership, holding or trading in the Shares. Such a restriction could result in the termination and liquidation of the Trust at a time that is disadvantageous to Shareholders, or may adversely affect an investment in the Shares.

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Now... where does one sign up for the movie rights to the film that will follow this fiasco, assured to end in yet more Winklelawsuits?