The Winklevoss twins are making big startup news again.
Years after winning a $65 million legal settlement for their claim that Mark Zuckerberg stole their idea for Facebook (FB), Cameron and Tyler now plan to bring the digital currency Bitcoin to Wall Street through an exchange-traded fund. The pair filed with the SEC to form the Winklevoss Bitcoin Trust, with plans to sell $20 million in units to the public.
In short, Bitcoins are electronic currency that, so far, are out of the reach of government control. Bitcoins is issued through a highly secure system of algorithms (a process known as “mining”). Only 21 million can be created; so far, 11 million are on the market.
However, trading this digital currency can be an expensive and complex process; the Winklevoss Bitcoin Trust should give retail investors an easier way to play Bitcoin, should it actually come to market.
But why trade Bitcoins in the first place?
Well, there are some perceived advantages. For example, buyers and sellers are anonymous (which, one supposes would be attractive to criminals). Bitcoins also aren’t taxed, though that might one day be a fun argument with the IRS.
Finally, they are often touted as a way to help preserve wealth amid an implosion of the global financial system, and in fact were launched in 2009, the height of the financial crisis. However, the currency has been far from stable, with Bitcoin prices going from $13 to $266 to $90 — all in this year.
The irony is that an ETF would cancel out some of the key benefits of Bitcoins. You’d lose the confidentiality, tax advantages and the ability to make digital transactions — instead, you’d just be making or losing money as the fund tracked price movements. And that’s about it.
Worse, you’d still be exposed to the potentially enormous risks of Bitcoins (you can check them out in the filing, starting on page 8). Perhaps the most dangerous one is a potential government crackdown. According to the Winklevoss Bitcoin Trust S-1:
“Although currently Bitcoins are not regulated or are lightly regulated in most countries, including the United States, one or more countries may take regulatory actions in the future that severely restricts the right to acquire, own, hold, sell or use Bitcoins or to exchange Bitcoins for fiat currency. Such an action may also result in the restriction of ownership, holding or trading in the Shares. Such a restriction could result in the termination and liquidation of the Trust at a time that is disadvantageous to Shareholders, or may adversely affect an investment in the Shares.”
Translation: Avoid at all costs.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.