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.

Potential of the Winklevoss Bitcoin Trust

The Winklevoss twins appeared at the Dealbook conference in November 2013 suggesting that, in a very bullish scenario, one Bitcoin would be worth nearly $40,000, more than 100 times its price at the time of $395.

The twins are looking to sell 1 million units of their ETF, so at a Bitcoin price of $441.57 (May 12), that would add up to $88.3 million (1,000,000 shares divided by five Bitcoins per ETF unit multiplied by $441.57) — almost four times the twins’ original estimate at the end of June 2013. In less than a year, the price of one Bitcoin has increased by 341%, so sure — if Bitcoin were to continue accelerating at this rate, the currency would in fact hit $40,000 in a matter of three years.

The biggest competitor to the Bitcoin ETF is Second Market’s private fund, which sought to raise $10 million by the end of 2013 but instead pulled in seven times that amount. Its CEO, Barry Silbert, believes big money is moving into Bitcoin in 2014, and when that happens the price will skyrocket.

If this turns out to be true, the Winklevoss twins’ timing might actually be pretty good.

Bottom Line

I make no bones about the fact I don’t understand Bitcoins or the need for a Bitcoin ETF. I’m especially leery of its setup and I have a hard time getting behind a currency that only exists on a virtual basis. At least gold is a tangible asset that you can hide it in the basement while you wait for the end of the world.

The twins filed the Winklevoss Bitcoin Trust’s registration on July 1, 2013. At the time, the IPO market was working on its best year since 2007. Since then, the IPO market has been on fire, including 231 IPOs so far in 2014 — the highest amount since 2000.

It’s possible that the twins’ legal advisers told them from the beginning that the regulatory process was going to be exhaustive and lengthy and that they should file as early as possible to ensure it became a reality while the IPO market was still hot. If that’s the case, it appears they’ve made the right call.

But if the Bitcoin ETF doesn’t get SEC approval by the end of this year and things drag on until 2015, the fund could face two big headwinds in a slowed IPO market and a significantly lower price of Bitcoin.

Either way, we’re closing in on the day where we’ll see whether the Bitcoin ETF has timed the market correctly or failed like so many niche ETFs chasing a fad.

As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.