The Winklevoss twins—famous for suing Mark Zuckerberg over Facebook—have unveiled plans to fund a Bitcoin-related trust. The application, filed with the U.S. Securities and Exchange Commission on July 1st, 2013 outlines a trust that will initially sell approximately $20m worth of shares to investors.
The trust is sponsored by one Math-Based Asset Services, a Delaware-based LLC that is wholly owned by the Winklevoss twins. And from reading the submission to the SEC will function by holding bitcoins.
From the filing:
The Trust holds “Bitcoins,” a digital commodity based on an open source cryptographic protocol existing on the online, end-user-to-end-user network hosting the public transaction ledger, known as the “Blockchain,” and the source code comprising the basis for the cryptographic and algorithmic protocols governing the issuance of and transactions in Bitcoins (the “Bitcoin Network”). The Trust is expected from time to time to issue Baskets in exchange for deposits of Bitcoins and to distribute Bitcoins in connection with redemptions of Baskets.
As a trust, it looks like the Vinklevoss twins want to use it as a springboard to allow otherwise staid and shrewd business moguls a way to invest in Bitcoin without getting burned by its current volatility.
“The investment objective of the Trust is for the Shares to reflect the performance of the Blended Bitcoin Price of Bitcoins, less the expenses of the Trust’s operations,” reads the Trust Overview section, but the real meat is this: “The Shares are designed for investors seeking a cost-effective and convenient means to gain exposure to Bitcoins with minimal credit risk.”
Since the trust will be based on holding Bitcoins, the filing includes some extremely amusing risks that are pertinent primarily to Bitcoin. The first risk factor: “The loss or destruction of a private key required to access a Bitcoin may be irreversible. The Trust’s loss of access to its private keys or its experience of a data loss relating to the Trust’s Bitcoins could adversely affect an investment in the Shares.” It’s doubtful that the Trust will hold all its bitcoins in one wallet—but if there ever was a situation where backups and redundancy would become a powerful issue it would be when $20m in BTC was on the line.
It’s not a bad time for a “Bitcoin Trust” or is it?
It’s been a long road for the cryptocurrency from relative obscurity in naïve mining pools at the beginning, the rise and fall of scattered exchanges, and a smattering of businesses that accept the coin as payment next to dollars, euros, or other payment—or of course businesses that run entirely on BTC like BitcoinStore. A major obstacle for most merchants interested in joining in by accepting bitcoins has been volatility in the currency, and this has been solved mostly by payment processors; next is going to be the simple popularity of bitcoin itself and the likelihood that more customers want to use it.
A Bitcoin Trust, like the planned $20m IPO of the Winklevoss trust will likely serve to bring more money and trading stabilization to the market of bitcoins—although due to the current regulatory limbo that bitcoin rests in with governments just barely beginning to notice its trade within their borders investors might see more risks than rewards.
The trust does look good from a standpoint of publicity and generally getting bitcoin accepted in the global market, but it may not come without risks for those who intend to invest. Mark Gongloff at the Huffington Post has published a long list of criticism and potential pitfalls for the trust going so far as to call it “a great tool for separating suckers [and] their money.” Most of the risks seem to be reflected in the trust filing and Gongloff even includes the recent shutdown of MtGox’s Dwolla account and last year’s wild rumpus of hacking events.
All of these are good reasons to be concerned about investing in the ever-growing market, but as with any growing technology the future is yet entirely unwritten. As more people and businesses become connected into the network the value of bitcoins will ultimately begin go act more like a currency. It knows no borders, it would be difficult to regulate directly, and most of the grief in the market has come from exchanges or online wallets failing to live up to their promises—not the Bitcoin cryptocurrency or the protocol itself.