Op-Ed: Bitcoin ETF draws skepticism from Wall Street

Posted Jul 9, 2013 by Marvin Dumon
Will financial markets be receptive to a bitcoin exchange-traded product? Apparently, there are a lot of skeptics on Wall Street.
A pile of Bitcoin slugs ready to be minted in Sandy  Utah on April 26  2013
A pile of Bitcoin slugs ready to be minted in Sandy, Utah on April 26, 2013
George Frey, Getty/AFP/File
Last week, Math-Based Asset Services LLC filed registration papers with the U.S. Securities and Exchange Commission (SEC) to set up a Winklevoss Bitcoin Trust. The new exchange-traded product, proponents argue, could take off similar to the recent popularity of gold exchange-traded funds.
“The proposed fund would hold bitcoins in a trust structure similar to those used by gold ETFs, and it would protect its assets using a proprietary security system,” according to a July 7 report by Seeking Alpha. “The fund is being proposed by Tyler and Cameron Winklevoss, who are best known for their multiple lawsuits against Facebook (FB) . . . . Although the bitcoin is an interesting concept, the asset is riddled with risks that prevent it from having any investment merit in its current state.”
For the uninitiated, bitcoin is a digital currency that some – including speculators – believe could be the next evolution in Internet commerce. Unlike online payment systems such as PayPal and MoneyBookers, bitcoin’s transaction fees are essentially negligible. Additionally, users can send and receive money from virtually anywhere on the planet. Perhaps it will become the first interplanetary currency as mankind begins to populate the solar system.
However, skeptics contend that the virtual currency won’t take off due to government regulators around the world looking to clamp down on illegal transactions. Bitcoins can be used to conduct anonymous purchases, and is often used by drug traffickers and money launderers.
Some economists believe that the main driver of bitcoin’s value is speculation on the asset's future acceptance as a currency. In 2013, the virtual currency has seen extreme fluctuations in price, ranging from $13 to nearly $250.
As far as earning profits from ETFs, Chris Rowe of “The Tycoon Report” suggests a simpler, less speculative method. “At the turn of the quarter . . . find out which sector ETFs have been among the quarter's top performers (last 3 months) and look at your investment account to see if you own them,” says Rowe, who is a trader and ex-money manager.
“If you don't own them, then you should sell the ones that were not among the top performers last quarter and switch them out with sector ETFs that [are] among the top performers.”
Gold funds are different from the bitcoin fund because the former are backed by hard assets. However, Math-Based Asset Services claims on the SEC registration papers that they possess a proprietary method for storing bitcoin holdings. Many industry observers believe that the digital currency will need to become more liquid if it is to become more widely accepted as a medium for exchange.
Rowe offers additional information on ETFs: “ETFs are Exchange Traded Funds. They represent a basket of stocks, so you are diversified instead of betting on one stock in a sector or having to pay tons of commissions to build your own portfolio of stocks.”