6 Things We Learned from the Winklevoss Bitcoin ETF Filing
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As first pointed out by StreetInsider.com, on Monday the Winklevoss twins filed to issue Winklevoss Bitcoin Shares through the Winklevoss Bitcoin Trust, which when offered to the public will give investors exposure to Bitcoins through an ETF. The trust plans to issue one million shares at a price of $20.09, effectively raising $20.09 million.
In addition to the news making for juicy print given the Winklevoss' history surrounding the founding of Facebook and the intrigue about Bitcoin as an alternative currency, the filing provides elaborate details about Bitcoin and the risk involved.
Below are 6 truly interesting things gleaned from the filing:
1. Bitcoin can be stolen:
"There is a risk that part or all of the Trust's Bitcoins could be lost, stolen or destroyed. The Sponsor believes that the Trust's Bitcoins held in the Trust Custody Account will be an appealing target to hackers or malware distributors seeking to destroy, damage or steal the Trust's Bitcoins. Although the Security System has been designed to minimize the risk of loss, damage and theft, neither the Trustee nor the Sponsor can guarantee that the Security System will prevent such loss, damage or theft, whether caused intentionally, accidentally or by act of God. Access to the Trust's Bitcoins could also be restricted by natural events (such as an earthquake) or human actions (such as a terrorist attack). Any of these events may adversely affect the operations of the Trust and, consequently, an investment in the Shares."
2. Mining Bitcoin takes time and is not cheap:
"Miners dedicate substantial resources to mining. Given the increasing difficulty of the target established by the Bitcoin Network, current miners must invest in expensive mining devices with adequate processing power to hash at a competitive rate. The first mining devices were standard home computers; however, mining computers are currently designed solely for mining purposes. Such devices include ASIC (application-specific integrated circuit) machines built by specialized companies like Avalon and Butterfly Labs. Miners also incur substantial electricity costs in order to continuously power and cool their devices while solving for a new block. It is estimated that the aggregate electricity costs of mining across the Bitcoin Network exceed $300,000 every 24 hours."
3. The supply of Bitcoin is mathematically controlled and it is estimated that more than 90% of supply will have been produced by 2020:
"The method for creating new Bitcoins is mathematically controlled in a manner so that the supply of Bitcoins grows at a limited rate pursuant to a pre-set schedule. The number of Bitcoins awarded for solving a new block is automatically halved every 210,000 blocks. Thus, the current fixed reward for solving a new block is 25 Bitcoins per block and the reward will decrease by half to become 12.5 Bitcoins around the year 2017. This deliberately controlled rate of Bitcoin creation means that the number of Bitcoins in existence will never exceed 21 million and that Bitcoins cannot be devalued through excessive production unless the Bitcoin Network’s source code (and the underlying protocol for Bitcoin issuance) is altered. See “Modifications to Bitcoin Protocol,” below. As of June 2013, over 11 million Bitcoins have been mined. It is estimated that more than ninety percent (90 percent) of the 21 million Bitcoins will have been produced by 2020."
4. Government oversight is limited at this point, but Bitcoin is on the radar of numerous agencies:
"The Bitcoin Network is a recent technological innovation and the regulatory schemes to which Bitcoins and the Bitcoin Network may be subject have not been fully explored or developed. For example, the SEC, CFTC and IRS have yet to issue official statements describing how each will treat Bitcoins for a variety of regulatory purposes.
As of June 2013, only FinCEN, a bureau of the United States Department of the Treasury responsible for the federal regulation of virtual currency market participants, has released official guidance concerning Bitcoins and the Bitcoin Network. On March 18th, 2013, FinCEN issued interpretive guidance relating to the application of the Bank Secrecy Act to distributing, exchanging and transmitting “virtual currencies.” More specifically, it determined that a user of Bitcoins will not be considered a money services business or be required to register, report and perform recordkeeping; however, an administrator or exchanger of Bitcoins must be a registered money services business under FinCEN’s money transmitter regulations. As a result, Bitcoin Exchanges that deal with US residents or otherwise fall under US jurisdiction are required to obtain licenses and comply with FinCEN regulations.
In addition, various foreign jurisdictions may adopt laws, regulations or directives that affect Bitcoin. In October 2012, the European Central Bank issued a report on “virtual currency” schemes indicating that Bitcoin may become the subject of regulatory interest in the European Union."
5. Bitcoin is mostly used by speculators versus the retail and commercial marketplace:
As relatively new products and technologies, Bitcoins and the Bitcoin Network have not been widely adopted as a means of payment for goods and services by major retail and commercial outlets. Conversely, a significant portion of Bitcoin demand is generated by speculators and investors seeking to profit from the short—or long-term holding of Bitcoins. The relative lack of acceptance of Bitcoins in the retail and commercial marketplace limits the ability of end-users to pay for goods and services with Bitcoins. A lack of expansion by Bitcoins into retail and commercial markets, or a contraction of such use, may result in increased volatility or a reduction in the Blended Bitcoin Price, either of which could adversely impact an investment in the Shares.
6. A malicious actor or botnet could obtain control in excess of 50 percent of the processing power active on the Bitcoin Network and manipulate the source code of the Bitcoin Network or the Blockchain:
To the extent that a malicious actor or botnet (a volunteer or hacked collection of computers controlled by networked software coordinating the actions of the computers) obtains a majority of the processing power on the Bitcoin Network, it could alter the source code and Blockchain on which the Bitcoin Network and all Bitcoin transactions rely. To the extent that such malicious actor or botnet does not yield its majority control of the processing power on the Bitcoin Network, reversing any changes made to the source code or Blockchain may not be possible. Such changes could adversely affect an investment in the Shares or the ability of the Trust to operate."
The entire Winklevoss Bitcoin ETF filing is here.
In addition to the news making for juicy print given the Winklevoss' history surrounding the founding of Facebook and the intrigue about Bitcoin as an alternative currency, the filing provides elaborate details about Bitcoin and the risk involved.
Below are 6 truly interesting things gleaned from the filing:
1. Bitcoin can be stolen:
"There is a risk that part or all of the Trust's Bitcoins could be lost, stolen or destroyed. The Sponsor believes that the Trust's Bitcoins held in the Trust Custody Account will be an appealing target to hackers or malware distributors seeking to destroy, damage or steal the Trust's Bitcoins. Although the Security System has been designed to minimize the risk of loss, damage and theft, neither the Trustee nor the Sponsor can guarantee that the Security System will prevent such loss, damage or theft, whether caused intentionally, accidentally or by act of God. Access to the Trust's Bitcoins could also be restricted by natural events (such as an earthquake) or human actions (such as a terrorist attack). Any of these events may adversely affect the operations of the Trust and, consequently, an investment in the Shares."
2. Mining Bitcoin takes time and is not cheap:
"Miners dedicate substantial resources to mining. Given the increasing difficulty of the target established by the Bitcoin Network, current miners must invest in expensive mining devices with adequate processing power to hash at a competitive rate. The first mining devices were standard home computers; however, mining computers are currently designed solely for mining purposes. Such devices include ASIC (application-specific integrated circuit) machines built by specialized companies like Avalon and Butterfly Labs. Miners also incur substantial electricity costs in order to continuously power and cool their devices while solving for a new block. It is estimated that the aggregate electricity costs of mining across the Bitcoin Network exceed $300,000 every 24 hours."
3. The supply of Bitcoin is mathematically controlled and it is estimated that more than 90% of supply will have been produced by 2020:
"The method for creating new Bitcoins is mathematically controlled in a manner so that the supply of Bitcoins grows at a limited rate pursuant to a pre-set schedule. The number of Bitcoins awarded for solving a new block is automatically halved every 210,000 blocks. Thus, the current fixed reward for solving a new block is 25 Bitcoins per block and the reward will decrease by half to become 12.5 Bitcoins around the year 2017. This deliberately controlled rate of Bitcoin creation means that the number of Bitcoins in existence will never exceed 21 million and that Bitcoins cannot be devalued through excessive production unless the Bitcoin Network’s source code (and the underlying protocol for Bitcoin issuance) is altered. See “Modifications to Bitcoin Protocol,” below. As of June 2013, over 11 million Bitcoins have been mined. It is estimated that more than ninety percent (90 percent) of the 21 million Bitcoins will have been produced by 2020."
4. Government oversight is limited at this point, but Bitcoin is on the radar of numerous agencies:
"The Bitcoin Network is a recent technological innovation and the regulatory schemes to which Bitcoins and the Bitcoin Network may be subject have not been fully explored or developed. For example, the SEC, CFTC and IRS have yet to issue official statements describing how each will treat Bitcoins for a variety of regulatory purposes.
As of June 2013, only FinCEN, a bureau of the United States Department of the Treasury responsible for the federal regulation of virtual currency market participants, has released official guidance concerning Bitcoins and the Bitcoin Network. On March 18th, 2013, FinCEN issued interpretive guidance relating to the application of the Bank Secrecy Act to distributing, exchanging and transmitting “virtual currencies.” More specifically, it determined that a user of Bitcoins will not be considered a money services business or be required to register, report and perform recordkeeping; however, an administrator or exchanger of Bitcoins must be a registered money services business under FinCEN’s money transmitter regulations. As a result, Bitcoin Exchanges that deal with US residents or otherwise fall under US jurisdiction are required to obtain licenses and comply with FinCEN regulations.
In addition, various foreign jurisdictions may adopt laws, regulations or directives that affect Bitcoin. In October 2012, the European Central Bank issued a report on “virtual currency” schemes indicating that Bitcoin may become the subject of regulatory interest in the European Union."
5. Bitcoin is mostly used by speculators versus the retail and commercial marketplace:
As relatively new products and technologies, Bitcoins and the Bitcoin Network have not been widely adopted as a means of payment for goods and services by major retail and commercial outlets. Conversely, a significant portion of Bitcoin demand is generated by speculators and investors seeking to profit from the short—or long-term holding of Bitcoins. The relative lack of acceptance of Bitcoins in the retail and commercial marketplace limits the ability of end-users to pay for goods and services with Bitcoins. A lack of expansion by Bitcoins into retail and commercial markets, or a contraction of such use, may result in increased volatility or a reduction in the Blended Bitcoin Price, either of which could adversely impact an investment in the Shares.
6. A malicious actor or botnet could obtain control in excess of 50 percent of the processing power active on the Bitcoin Network and manipulate the source code of the Bitcoin Network or the Blockchain:
To the extent that a malicious actor or botnet (a volunteer or hacked collection of computers controlled by networked software coordinating the actions of the computers) obtains a majority of the processing power on the Bitcoin Network, it could alter the source code and Blockchain on which the Bitcoin Network and all Bitcoin transactions rely. To the extent that such malicious actor or botnet does not yield its majority control of the processing power on the Bitcoin Network, reversing any changes made to the source code or Blockchain may not be possible. Such changes could adversely affect an investment in the Shares or the ability of the Trust to operate."
The entire Winklevoss Bitcoin ETF filing is here.
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