Exchange-Traded Funds (ETF, for short) have rose to great popularity among the financial geek types during the last decade or so. They date back, however, to the 1990s and were partially modeled on the preceding Index Funds.
Index Funds were premised on John C. Bogle's recognition that most fund managers were not actually able to beat the market on a consistent basis. Once their fees were taken into account, from the perspective of the financial end-consumer, the idea of beating the market was sheer folly.
For those who recall those days, there is an amusing irony in describing the situation in that manner, for this is precisely how those on Wall Street condemned Bolge's indexed approach: "Bogle's folly." Yet, the truth of the matter is that this approach, which resulted in creation of funds that tracked the S&P 500, at minimal-to-no fees, has turned out to have embodied great wisdom.
Today's ETF endeavor to learn from Index Funds' best practices: avoiding the expense of high volume turnover and vastly reducing operation costs, as steady indexing eliminates labor intensive managerial fees. The one big difference, though, is that whereas Index Funds were difficult and expensive to trade, since their very purpose was to leverage long term advantage, ETF are traded much more easily and far less expensively.
There have been movements afoot to create a publicly traded Bitcoin ETF. The most famous efforts in this direction have been those of the infamous Winklevoss twins.
These twin brothers have been notorious in popular culture for their struggle with Mark Zuckerberg over control of the FaceBook social media site. Less widely known is that the Winklevoss twins have been big time early adopters of Bitcoin. Estimates on the extent of their holdings of Bitcoin have been in the area of $11 million.
Setting up a publicly traded ETF requires the nod of financial regulators. This effort has been undertaken by them. Yet, even before the regulators have had their say, the prospects of such ETF are already being belittled. No less a heavy roller than Knight Capital managing director Reggie Browne has dismissed such a prospect as unworkable in the ETF market.
It is true, of course, with the extreme volatility of Bitcoin of late, such efforts would seem to run counter to the original Index Fund spirit of the early ETF tradition. This might though be a case of not seeing the trees for the forest (or the forest for the trees, perhaps).
To begin with, trading of such funds already exists in the form of private funds. SecondMarket's private Bitcoin Investment Trust (BIT, for short, get it?) is modeled on a successful gold ETF. BIT has a $25,000 minimum investment, but, as testified by its creator, the SecondMarket CEO, at the conclusion of 2013, it held $65 million of investment.
Thus, sweeping, generalized condemnations of Bitcoin's volatility as too risky for ETF investors, such as claimed by Browne, hardly seem to be prima facie obvious. There's still a more basic matter involved here, though. It is a huge mistake to lose sight of the fact that any currency, including Bitcoin, earns its mettle (or not) as a medium of exchange, not as an investment opportunity.
This is not to say that betting on (or against) anything, including a new currency, is perfectly legitimate and speculators and short selling and so on is all a necessary and valuable part of a dynamic and free market. The danger, though, of treating Bitcoin as an investment opportunity is that - unlike gold, for instance - it has been designed specifically to serve as an alternate currency.
As with any product introduced onto the market to meet specific consumer demands, the features and benefits which will determine its fate can only be revealed by customer testing in the fullness of time. The notorious Bitcoin volatility the last while though has been a function of financial, rather than monetary, ambivalence. It seems to this author that one of two possibilities lie ahead of us.
In the future, Bitcoin may manage (and there are many hurdles to overcome) to catch on with the monetary consuming public, bringing it expansive global usage - whether sanctioned by nation-states or not. On the other hand, the digital currency could be judged by those consumers (of currency) to offer insufficient benefits over so-called sovereign currencies. In that case, I expect it will pretty much collapse into disuse, despite the best efforts of the enthusiasts.
If the former happens, the holdings of the currency will be so extensive (and exempt from the inflationary pressures of fiat currencies) that financial hiccups will cease to cause the kinds of fluctuations recently observed. If that is the result, Bitcoin ETF will indeed become the kind of secure, indexed funds which were the original inspiration behind ETF in general.
And, should the other, less pretty, result come to pass, the truth is that the majority of those financially hurt by a collapse in the value of Bitcoin will be the speculators who bought up the currency, not on monetary merits, but rather in hope of financial windfalls. I wish such people no ill-will, but such risk is the very nature of such speculation.
In no way are these observations meant to stigmatize anyone who, persuaded of the viability of Bitcoin, chooses to invest in an ETF. Why shouldn't such people profit from their knowledge of and conviction in a great product. All financial investments, though, are risky. And anyone who is simply hoping to catch a financial wave needs to know that surfing does often enough lead to dumps in the drink.
Bitcoin ETF are an interesting prospect worth watching, but, ultimately, whatever their fortunes, they tell us little about the future prospects of Bitcoin as a currency. That story will be told, not by financial, but by monetary, and, even more importantly, by consumer markets.
Index Funds were premised on John C. Bogle's recognition that most fund managers were not actually able to beat the market on a consistent basis. Once their fees were taken into account, from the perspective of the financial end-consumer, the idea of beating the market was sheer folly.
For those who recall those days, there is an amusing irony in describing the situation in that manner, for this is precisely how those on Wall Street condemned Bolge's indexed approach: "Bogle's folly." Yet, the truth of the matter is that this approach, which resulted in creation of funds that tracked the S&P 500, at minimal-to-no fees, has turned out to have embodied great wisdom.
Today's ETF endeavor to learn from Index Funds' best practices: avoiding the expense of high volume turnover and vastly reducing operation costs, as steady indexing eliminates labor intensive managerial fees. The one big difference, though, is that whereas Index Funds were difficult and expensive to trade, since their very purpose was to leverage long term advantage, ETF are traded much more easily and far less expensively.
There have been movements afoot to create a publicly traded Bitcoin ETF. The most famous efforts in this direction have been those of the infamous Winklevoss twins.
These twin brothers have been notorious in popular culture for their struggle with Mark Zuckerberg over control of the FaceBook social media site. Less widely known is that the Winklevoss twins have been big time early adopters of Bitcoin. Estimates on the extent of their holdings of Bitcoin have been in the area of $11 million.
Setting up a publicly traded ETF requires the nod of financial regulators. This effort has been undertaken by them. Yet, even before the regulators have had their say, the prospects of such ETF are already being belittled. No less a heavy roller than Knight Capital managing director Reggie Browne has dismissed such a prospect as unworkable in the ETF market.
It is true, of course, with the extreme volatility of Bitcoin of late, such efforts would seem to run counter to the original Index Fund spirit of the early ETF tradition. This might though be a case of not seeing the trees for the forest (or the forest for the trees, perhaps).
To begin with, trading of such funds already exists in the form of private funds. SecondMarket's private Bitcoin Investment Trust (BIT, for short, get it?) is modeled on a successful gold ETF. BIT has a $25,000 minimum investment, but, as testified by its creator, the SecondMarket CEO, at the conclusion of 2013, it held $65 million of investment.
Thus, sweeping, generalized condemnations of Bitcoin's volatility as too risky for ETF investors, such as claimed by Browne, hardly seem to be prima facie obvious. There's still a more basic matter involved here, though. It is a huge mistake to lose sight of the fact that any currency, including Bitcoin, earns its mettle (or not) as a medium of exchange, not as an investment opportunity.
This is not to say that betting on (or against) anything, including a new currency, is perfectly legitimate and speculators and short selling and so on is all a necessary and valuable part of a dynamic and free market. The danger, though, of treating Bitcoin as an investment opportunity is that - unlike gold, for instance - it has been designed specifically to serve as an alternate currency.
As with any product introduced onto the market to meet specific consumer demands, the features and benefits which will determine its fate can only be revealed by customer testing in the fullness of time. The notorious Bitcoin volatility the last while though has been a function of financial, rather than monetary, ambivalence. It seems to this author that one of two possibilities lie ahead of us.
In the future, Bitcoin may manage (and there are many hurdles to overcome) to catch on with the monetary consuming public, bringing it expansive global usage - whether sanctioned by nation-states or not. On the other hand, the digital currency could be judged by those consumers (of currency) to offer insufficient benefits over so-called sovereign currencies. In that case, I expect it will pretty much collapse into disuse, despite the best efforts of the enthusiasts.
If the former happens, the holdings of the currency will be so extensive (and exempt from the inflationary pressures of fiat currencies) that financial hiccups will cease to cause the kinds of fluctuations recently observed. If that is the result, Bitcoin ETF will indeed become the kind of secure, indexed funds which were the original inspiration behind ETF in general.
And, should the other, less pretty, result come to pass, the truth is that the majority of those financially hurt by a collapse in the value of Bitcoin will be the speculators who bought up the currency, not on monetary merits, but rather in hope of financial windfalls. I wish such people no ill-will, but such risk is the very nature of such speculation.
In no way are these observations meant to stigmatize anyone who, persuaded of the viability of Bitcoin, chooses to invest in an ETF. Why shouldn't such people profit from their knowledge of and conviction in a great product. All financial investments, though, are risky. And anyone who is simply hoping to catch a financial wave needs to know that surfing does often enough lead to dumps in the drink.
Bitcoin ETF are an interesting prospect worth watching, but, ultimately, whatever their fortunes, they tell us little about the future prospects of Bitcoin as a currency. That story will be told, not by financial, but by monetary, and, even more importantly, by consumer markets.
About the Author:
To keep track of the wild ride of Bitcoin, follow our Bitcoin Profit Calculator . Wallace Eddington is staff writer at our blog, providing a practical and unique treatment of monetary and financial issues concerning Bitcoin. His recent article explaining the role of Bitcoin address and private key is a must read for those who want to take advantage of the exciting new digital currency.
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