Bitcoin ETFs: Unconventional assets carry unusual risks
The Winklevoss twins are perhaps best known for their feud with Facebook (NASDAQ:FB) , which they claim was an idea stolen from them by Mark Zuckerberg. In addition to claiming to be co-founders of the world’s leading social media website, the twins have been pursuing various investment opportunities. One of those opportunities is bitcoin, a crypto-currency that enables creation and exchange on the basis of open source protocol independent of any central authority. The twins have poured millions of dollars into bitcoin (dollars they earned by suing Facebook), which they are now ready to convert into an exchange-traded fund (ETF).
How serious are the twins about the Bitcoin ETF? For starters, they just filed the paperwork for a public listing with the SEC with a proposed valuation of $20 million. Although this may seem like a joke to most investors, it’s quintessential of all that is lousy about ETFs. Unlike gold ETFs, which are rooted in tangible assets that can function as currency to some degree, the Winklevoss Bitcoin Trust (WBT) doesn’t contain the same reliability. Unconventional assets carry unusual risks, and investors should be weary of the pitfalls before experimenting.
For one, the WBT is rooted in new and rapidly evolving areas at the intersection of virtual currency, advanced software and security protocols—hardly something investors can feel safe about. The Winklevoss prospectus says as much:
The trust may not have adequate sources of recovery of its bitcoins are lost, stolen or destroyed.
… And one cannot help but notice the following:
The loss or destruction of a private key required to access a bitcoin may be irreversible… [which] could adversely affect an investment in the shares.
In the rapidly evolving digital age, bitcoins are certainly not a bad idea. They potentially represent the next wave of monetary exchange, at least conceptually. However the inherent security risks of the bitcoin exchange system leave much to be desired, not to mention the legal grey area surrounding its use. But there appears to be a growing market for bitcoins: Namely, those involved in illegal activities. US anti-laundering agencies have already thrown the book at bitcoin, something investors should consider carefully before investing in virtual currency ETFs.
We contend that the bitcoin system is not entirely a bad idea, but wrapping it up in an ETF is premature and carries with it more risk than harm. The Winklevoss twins are out to prove us wrong. Although the jury is still out, the twins may soon find themselves on the wrong side of a market known for its shady dealings.
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