The Winklevoss Bitcoin Trust recently filed its third amendment to its S-1 registration statement May 8, and the Winklevoss twins’ Bitcoin ETF is expected to hit the market later this year trading on Nasdaq.
However, while the Winklevoss Bitcoin Trust is much like the SPDR Gold Shares (GLD) in that it will hold the actual underlying asset, it’s impossible to know whether the Bitcoin ETF will be nearly as successful as GLD.
Thing is … many believe the IPO market has already peaked. Also, by the time the Bitcoin ETF hits the streets, the registration process will have been underway for well more than a year.
And while I might not go as far as calling Bitcoin a fad, the point remains that, like all niche ETFs, the Winklevoss Bitcoin Trust’s success will be determined by the success of the underlying asset. If the world embraces the virtual currency, then the Bitcoin ETF has a shot.
But like many failed ETFs chasing a niche, the chances of success are stacked against the Winklevoss Bitcoin Trust from the start.
Bitcoin: The Underlying Asset
Every five shares of the Winklevoss Bitcoin Trust will be backed by one Bitcoin, the price of which is determined by the “Winkdex,” a proprietary index provided by Math-Based Asset Services LLC, which is run by Cameron Winklevoss.
According to the S-1:
“The proprietary index of the index provider that calculates a blended price for Bitcoins denominated in US dollars. Winkdex is calculated by blending the trading prices in US dollars for the top three (by volume) qualified Bitcoin Exchanges during the previous 24-hour period using a volume-weighted, two hour exponential moving average.”
Normally I don’t have a problem with an index sponsor and index provider being the same — think WisdomTree Investments (WETF). However, when you have something as contentious as virtual currency, it seems appropriate that there is some sort of arm’s-length dealing between the two.
For this reason (and many others), the Winklevoss twins have hired the law firm Katten Muchin Rosenman to usher them through the regulatory process, which clearly isn’t a slam dunk.
According to Business Insider, more than 800,000 Bitcoins have been stolen to date, totaling some $502 million in value, or 6.6% of the overall supply. Needless to say, safety is of the utmost concern.
The Winklevoss twins say they have developed a proprietary method for storing the virtual Bitcoins to ensure they are safe and secure. But when you consider that Winklevoss IP LLC receives an annual royalty payment of at least $300,000 for the sponsor’s (Math-Based Asset Services LLC) use of its intellectual property including the security system, the brothers win regardless of whether the Bitcoin ETF is a success or the security system actually works.
Investors should be very leery of this entire arrangement.