Financial innovation of the day, Winklevii edition

By Felix Salmon
July 2, 2013

You can see why they called it the Winklevoss Bitcoin Trust. Without their name in there somewhere, they would never have gotten a respectful thousand-word article in the NYT just for making a speculative SEC filing. To be clear: this thing is a really, really silly idea, from a pair of brothers whose main ambition, these days, is to be the biggest helminths in the bitcoinverse.

As I explained back in April, bitcoin is a combination of two things: it’s a very interesting payment mechanism, and it’s also a highly stupid and speculative store of value. With their new product, the Winklevii are basically separating the two, and selling — for an extra fee — the stupid-investment part of bitcoin without any of the benefits of the much more interesting and useful payments-mechanism aspect. As Peter Thal Larsen points out, you might as well buy an ETF which holds dollars.

Still, if you want to own bitcoins, and you never want to spend your bitcoins, and if you want to pay the Winklevii for the privilege of looking after your bitcoins on your behalf, and if you trust that the Winklevii, after putting out a huge shingle saying “millions of dollars worth of bitcoins stored here”, won’t get hacked and lose all their coins, — then, well, then I’m afraid I have bad news for you. Which is that the SEC will never, ever, approve this product. After all, this is an asset that senators want to ban, an asset which is probably illegal under US law, and an asset that is mainly known for its ease of facilitating money laundering, tax evasion, and the purchase of contraband material. It’s hard to see why the SEC would do anything whatsoever to legitimize that asset as an investible asset class.

Still, the Winklevii have made their SEC filing now, and have received lots of press around it. Just by doing that, before getting any kind of regulatory approval, have helped to make the idea of bitcoins just that tiny bit more legitimate. They’re even trying to invent a whole new asset class — they call it the DMBA ETP, for Digital Math-Based Asset Exchange-Traded Product — in the hope that they can somehow jump onto the ETF bandwagon with the same unerring sense of timing they displayed with their initial bitcoin announcement. (Price of bitcoins then, on April 11: $165. Price of bitcoins today: $90.)

ETFs themselves are looking a bit shaky right now: the market support they need from “authorized participants” doesn’t seem to be able to keep up with the billions of dollars flowing in and out of the asset class. ETFs have never been more popular as an asset. At the same time, the big banks — which are needed to underpin the market — “may no longer be willing to support ETFs in volatile markets”, in the words of the FT. The result, Bloomberg reports, is that many of the less liquid ETFs are seeing increasingly alarming gaps between their own values and the values of the securities they represent.

On Saturday, Blackrock — the world’s largest provider of ETFs — became so worried about all of the negative chatter surrounding the asset class that it put out a truly extraordinary statement, saying that “during the market volatility of the past few weeks, ETFs performed precisely as they are designed to do”, and that (in bold print) “more and more ETFs are becoming the true market”. In other words, if the price of an ETF is lower than the price of the underlying stocks, then, well, that’s just because the ETF is a better indication of the true market price than the stocks themselves are. This is a truly glorious argument, in the Humpty Dumpty sense of the word:

Said Humpty Dumpty: ‘There are three hundred and sixty-four days when you might get un-birthday presents —’

‘Certainly,’ said Alice.

‘And only one for birthday presents, you know. There’s glory for you!’

‘I don’t know what you mean by “glory”,’ Alice said.

Humpty Dumpty smiled contemptuously. ‘Of course you don’t — till I tell you. I meant “there’s a nice knock-down argument for you!”‘

‘But “glory” doesn’t mean “a nice knock-down argument”,’ Alice objected.

‘When I use a word,’ Humpty Dumpty said, in rather a scornful tone, ‘it means just what I choose it to mean — neither more nor less.’

‘The question is,’ said Alice, ‘whether you can make words mean so many different things.’

‘The question is,’ said Humpty Dumpty, ‘which is to be master — that’s all.’

Here, Humpty Dumpty is Blackrock, and Alice is, well, Izabella Kaminska, I guess.

As Jonathan Kahn notes today in a letter to the FT, it’s never particularly reassuring, in the wake of the financial crisis, that an asset class is supported by large banks who have a financial incentive to provide liquidity to the market. Because when you really need that liquidity, those banks are going to be nowhere to be found.

If this is a problem with ETFs in general, it’s a particularly enormous problem with the Winklevii’s monstrosity. So, rather than paying any further attention to their ridiculous stunts, I would advise a much more sensible alternative for anybody looking for an easy and legitimate way to buy and store bitcoins. Here’s a press release from OpenCoin today, announcing that anybody with a Ripple account — something you can easily set up for free, online, in any currency, and which I explained back in April — can now use that account to pay anybody in the world in bitcoins. A Ripple account, then, can be used to store bitcoins, if that’s what you want to do, or you can keep your money in a real currency instead: it’s up to you. And whatever form your money is in, you can use it to pay for things in bitcoins as well. In other words, it does everything that the Winklevii are offering to do, plus a lot more, without charging a management fee.

Ripple, bitcoin, ETFs — all of these are financial innovations, and financial innovations have a deservedly bad name these days. All of them have potential downsides. But most of them at least serve a real purpose, and have their defenders. The Winklevii, muscling in to the financial-innovation game, are being much more selfish about the whole thing. They’re going to fail; I just hope they don’t cause too much harm to others in doing so.


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“Price of bitcoins then, on April 11: $165. Price of bitcoins today: $90.”

I’m sorry, but this what is wrong with a lot of journalists – and you are no exception, unfortunately. If you would zoom out only a little bit you would see that the value of bitcoin has been rising exponentially for years – the Winklevii started buying when they were still in the single digits only a year ago. There have been three hype-cycles with a boom and bust, but the value has ended up higher than before every time. At the current price, the value of bitcoin has risen 600% throughout the past six months alone.

Yet, you choose to pick a specific period which perfectly fits your narrative.

Ah well, it’s all good. I still respect you, I just think you are very wrong on this specific subject, and I do suspect you will learn that some day. I just hope you will keep your mind open enough to maybe change it at some point in the future, instead of insisting to prove your own right by disseminating Fear, uncertainty and doubt for some time to go – like many would.

Posted by EwoutDVP | Report as abusive

I’d like to (slightly) defend BlackRock here: the “alarming” dislocations from NAV weren’t — for the most part — in stock ETFs… they were in muni or other fixed income ETFs.

Liquidity and trading activity in some of the underlying is vary sparse, potentially on the order of one trade of size (or less!) per day. In that VERY PARTICULAR case, I could agree with BlackRock. Next time random series of municipality GO bonds trades, it will mark down 5 points and — like magic? — the NAV will come back in line without the price of the ETF “correcting” back to it.

Posted by CasualSophist | Report as abusive

The currency of choice by the black market.

Remind me again what currency HSBC was caught helping the drug cartels with, in the trillions? US DOLLARS. Still the currency of choice of everyone. Including the baddies.

This article totally ruined my Friday morning.

Posted by Opethian | Report as abusive

Gotta say, this seems highly biased at this point – not what I’d expect from a Reuters journalist from what I remember of their reputation. The second you label something ‘stupid’ in an article, you’re dismissing all the value without actually discussing why.

Saying bitcoin will definitely be banned because of X in the states is incredibly short sighted – first, because it assumes the states regulatory laws rule the world, and second because you’re ruling out innovation as something we’ve outlawed. There are some very good arguments against banning bitcoin in the states – mostly that the arguments FOR banning it are silly in themselves. For instance, banning it because it can be used to launder money loses its steam when you consider that paper money can also be just as effectively used to launder money.

I wont get into every possible argument here but – as a reporter – you may want to soften your tone. Many products look to be on shaky ground when they first come out – until they are accepted and laws adapt to the new way of doing things. Has twenty years of software developments taught you nothing? I’m not sure of bitcoin myself, but I know better than to dismiss it outright.

Posted by HeyJay | Report as abusive

Ripple is doing the full-court press trying to FUD Bitcoin to death.

It isn’t going to work. No matter how many ignorant journalists like this one you employee.

Especially ones that say dumb stuff like.

“an asset which is probably illegal under US law”
There is ZERO evidence of that.

Posted by indio007 | Report as abusive

1. Start asking the kind of questions you ask here about the ability of a bitcoin to store value, and next thing you know you’ll be asking the same questions about most of the major world currencies (including USD), and the answers aren’t that different. Yes, the “full faith and credit…” and so on and so forth, but if/when it ever comes to the point where that backing is truly needed, is the same moment where it’s not worth the paper it’s printed on.

2. If you’re going to criticize, think a few steps into the future. You’re standing on the sidelines throwing mud at the first few moves of a chess match. Please, intelligently debate how bitcoin & new methods of payment/currency might play out, but this article is simply a weather report on what’s already happened. No value added.

Posted by AdvocatesDevil | Report as abusive

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