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Proposed ETP illustrates growing visibility of Bitcoin

TradingPub Admin | July 5, 2013

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Proposed Bitcoin trust
Bitcoin is a form of virtual currency that can be used in online transactions involving many different goods and services, and the first exchange-traded product related to this currency was recently proposed by Cameron and Tyler Winklevoss, according to Bloomberg.

These twin brothers recently filed paperwork with the U.S. Securities and Exchange Commission, seeking to obtain approval for Winklevoss Bitcoin Trust, which is a type of exchange-traded fund based on holdings of Bitcoins, the media outlet reports. The financial instrument would be available to investors through secondary exchanges, where they could buy shares of this ETF.

The twins are proposing the trust as a method of providing investors with a simple way to trade this virtual currency, according to InvestmentNews. The filing provided to the SEC indicated that the trust is "designed for investors seeking a cost-effective and convenient means to gain exposure to Bitcoins with minimal credit risk." By holding an initial public offering, the trust aims to raise $20 million. Data contained in the regulatory filing indicates that 0.2 Bitcoins would be equal to around $20 worth of shares.

Strong price fluctuations
Such a goal faces risks due to the wild price fluctuations that the virtual currency has experienced since being launched, as it has surged to as much as $266 and then plunged to less than $20, the media outlet reports. As of the night of July 1, Bitcoin was trading at $91.

The trust would aim to create a more stable trading value by monitoring "the daily average of the high and low trading prices on various Bitcoin Exchanges in the Bitcoin Exchange Market chosen by the Sponsor," which will then be used to create "the Blended Bitcoin Price."

Regulatory challenges
In addition to these pricing difficulties, the trust could face many challenges from government agencies. The review process that is applied to the proposed Bitcoin trust could take years, Reginald Browne, head of exchange-traded product trading at market maker Knight Capital Group Inc., told Bloomberg.

"I like new, creative ideas but I would need a lot more information to figure out the investor metrics of that proposal," Browne, who is based in Jersey City, told the news source during a telephone interview.

While various market participants have certainly displayed interest in this form of virtual currency, its regulatory status is completely unclear, according to InvestmentNews. The trust asserted in its regulatory filing that the virtual currency is similar to certain assets that are tracked by ETFs, but that government agencies may not agree with such an assessment.

"The Sponsor believes that, on balance, the important features of Bitcoins and other Digital Math-Based Assets are those that are characteristics of commodities and therefore has referred to and discussed these assets as such," the trust wrote in the filing, the media outlet reports. "It is not known whether U.S. or foreign regulators will share this view, adopt a single, different view or espouse a variety of differing views." 

When considering proposed financial instruments that either have unique characteristics or make use of complex strategies, the SEC has generally made an effort to expedite its review, according to Bloomberg.

The government agency has become more conservative in its treatment of exotic securities in recent years, as it has announced that any ETFs that provide the inverse of an index or alternatively ones that aim to provide a multiple of its returns will not be approved, the media outlet reports. In addition, it stopped reviewing all applications for funds of this type that use derivatives in March 2010.

People who are considering investing in this complex virtual currency might benefit from obtaining more information on the subject.

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