Bitcoins, the digital currency, are the best performing asset of 2013, even after a quick boom-and-bust cycle earlier this year. Exchange traded fund investors may soon be able to gain exposure to the strengthening currency as the Winklevoss twins push for wider awareness.
"An ETF can potentially make it successful for mainstream investors," said Cameron Winklevoss, reports Brendan Conway for Barron's.
Tyler and Cameron Winklevoss at the Value Investing Congress in New York explained that investors who purchase Bitcoins directly will have to deal with "pain points and friction." The brothers have filed to launch an exchange traded product backed by bitcoins. It's not clear whether the SEC will give the bitcoin ETF clearance to list.
"Buying Bitcoin today, it's sort of a scary proposition. You store it on a USB stick, [you have to be somewhat] technically savvy … [If you're transacting in] large amounts of money, there's no real insurance aspect," Cameron Winklevoss said.
On the other hand, the ETF investment vehicle helps mitigate the risks and hassle of buying the coins directly.
"An ETF can help solve the purchasing friction in terms of security. It can offload that to the ETF… Storing Bitcoin takes expertise [and] accessibility. …. It's similar to how [people] can't buy gold bars so they instead buy an ETF," he added, comparing the structure to something similar to physically backed precious metal ETFs, according to the Barron's report.
What do we know about Bitcoins?
- Satoshi Nakamoto is a pseudonym for a person or persons unknown who wrote the technical specifications that serve as the system's base code, Nicholas Colas, Chief Market Strategist at ConvergEx, said in a research note.
- Bitcoin records, or the "block chain," resides on thousands of servers around the world. Every ten minutes, the whole system updates records of recent transactions. "No one government, or even 100 governments, can 'shut down' bitcoin or establish uniform regulations for the currency," Colas added.
- Creating, or "mining," bitcoins requires time and money. Cryptographic puzzles need to be solved during a 10 minute window and the answer has to be delivered to everyone else in the system. If the task is done, you receive 25 new bitcoins. "The bitcoin ecosystem is dominated by very proficient computer programmers and hardware designers, but even as they improve the speed and efficiency of their servers the universe of available bitcoins still only grows by 25 units every 10 minutes," Colas said.
- Many view bitcoins as a disruptive currency since a user can transfer the money anywhere without paying wire or banking fees. "The bitcoin ecosystem is more efficient than the currency global banking system for money transfers since the process of managing the block chain incentivizes bitcoin miners to keep the system operating, rather than the banking system's user fees," Colas said.
Bitcoins started the year at $13.55 and traded at $141 at last check Tuesday, a 940% increase year-to-date. The currency experienced a boom-and-bust in April where the Bitcoin surged to $266 and plunged to as low as $70.80 in a few days.
Basic demand and supply fundamentals favor the asset.
"Volume trends were fairly consistent through the year, so the increase in price
came from steady demand and little incremental supply from sellers," Colas said.
The future of a viable ETF option will depend on the bitcoin itself. If more accept the asset as real currency alternative, the more likely an ETF will be able to come out.
Max Chen contributed to this article.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.