‘With Winklevoss Twins’ Bitcoin Exchange-Traded Fund, Risk Isn’t Virtual,’ Says WSJ

Investing in bitcoin exchange-traded fund poses certain risks for inevstors.

Photo: Krista Gonzales/Flickr

Photo: Krista Gonzales/Flickr

Some entrepreneurs already invest into a trust that tracks digital money price in dollars. The company behind the fund expects to promote bitcoin use by creating a publicly traded fund.

Although analysts predict a rise in the bitcoin value, which is now traded at $475, three risks should be considered.

The first one is high volatility of bitcoin. Second, it is unknown whether bitcoins will become a mainstream currency, disappear or will be limitedly utilized. Third, if hackers could rob Mt. Gox bitcoin exchange, they would be able to do the same robbery of bitcoins from virtual storage.

Gil Luria, an analyst from the brokerage firm Wedbush Securities, said: “The main risk of investing in bitcoin is that it’s a financial instrument unlike any other that we’ve ever had.”

“It’s more difficult to value, more difficult to understand, and at this point in time, more difficult to buy and sell than any other financial instrument,” he added.

This is the reason why the Securities and Exchange Commission needs more time than usual to approve an application for the release of the first bitcoin exchange-traded fund. It usually takes around a year to provide a permit for ETF, but SEC is still reviewing an application that was filed 14 months ago.

The fund, which is expected to be named Winklevoss Bitcoin Trust, was created by the brothers Tyler Winklevoss and Cameron Winklevoss.

The existing Bitcoin Investment Trust (BIT) could avoid SEC scrutiny as it was opened as a private trust available only to accredited investors last year. As of July, BIT accumulated assets of $70 million, according to the trust manager and founder of SecondMarket Holdings Inc., Barry Silbert. The trust now owns about 1% of all circulating bitcoins.

BIT could attract the sum despite its fees of 2% and the fact that it is open only to investors who make over $200,000 annually or control assets of $1 million and the minimum investment totals $25,000. According to Cameron Winklevoss, his company hasn’t installed COIN’s fee structure.

Mr. Silbert told that his target is to turn BIT into a publicly tradable bitcoin fund in Q4 of 2014. BIT will operate like ETF, providing a simple way to buy bitcoin.

At the same time, Mr. Silbert cautions investors not to spend more money that they are ready to lose. A 10% loss, which is a sharp decrease for the stock market, is not the same for bitcoin.

Mr. Winklevoss says: “Traders love volatility and volatility doesn’t make an ETF product problematic; for a lot of people it makes it more relevant and more interesting.”

The Winklevoss fund will hold the private keys in a vault where they will be checked by a security firm twice a year, according to SEC filings. The investors are still warned that private keys could be stolen by hackers or lost.

David Ripley, chief executive of Glidera Inc., said: “Once [an ETF] comes out, there might be new individuals getting interested, and that results in a near-term bump to the price.”

“That doesn’t affect long-term price,” he noted. “The long term depends on whether the bitcoin network is adopted for its core properties to purchase goods and transfer money.”

It is still the question for investors how much bitcoin will finally cost.

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