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.
There's some irony in that turn of phrase, as "Bolge's folly" was the term of derision used to dismiss his ideas by the Wall Street crowd. Bogle was, though, to have the last laugh: his philosophy, initially implemented through funds established to track the S&P 500, at minimal-to-no fees, proved to be a big time winner.
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.
Some of the big news in ETF these days is the prospect of launching publicly traded Bitcoin ETF. The effort receiving the biggest spotlight in this regard has been the initiatives undertaken by the Winklevoss twins.
The brothers, renowned for their struggle over FaceBook, with Mark Zuckerberg, have been early adopters of Bitcoin. Estimates have their holdings in the crypto-currency at around $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).
Right off the bat, sweeping claims about the viability of Bitcoin on the ETF market has to be tempered with the realization that in fact such trading opportunities already exist. SecondMarket offers a private Bitcoin Investment Trust (BIT, for short, get it?). BIT is modeled on a well established gold ETF. And, with its $25k minimum investment, it is humming right along, according to its creator, the SecondMarket CEO: the close of 2013 finds it holding $65 million.
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.
Of course I'm not saying that anyone isn't perfectly entitled to wager on the success (or failure) of any product, including a new currency. Speculators and short sellers alike are a perfectly legitimate and necessary part of a dynamic and free market. The confusion, and the misguidance to which it may give rise, is that treating Bitcoin as an investment opportunity - akin to gold, for instance - fails to take account that, unlike gold, it is designed specifically as an alternate currency. Its ultimate fate lies in its capacity to serve consumer needs in that regard.
Like any other product designed to serve a specific purpose, its features and benefits will only be revealed as tested in time. The recent volatility has been a function of financial, rather than monetary, considerations. I can only see two long term prospects.
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.
On the other hand, should we see the collapse of the currency, the truth is that it is those who bought into the currency, not for the virtues of its monetary features, but to gather its hoped for financial windfalls, that will be most hurt in the process. The big losers would be the speculators. And speculation offers the prospect of big rewards, because it presents the danger of high risk.
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 intriguing development and personally I'll be keeping a close eye on how that financial market evolves. Regardless of their fortunes, though, ETF in the end will really reveal very little about the prospects of Bitcoin as a currency. Many people will make and lose lots of money along the way, but the story of Bitcoin will be told, not in the financial markets, but in the 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.
There's some irony in that turn of phrase, as "Bolge's folly" was the term of derision used to dismiss his ideas by the Wall Street crowd. Bogle was, though, to have the last laugh: his philosophy, initially implemented through funds established to track the S&P 500, at minimal-to-no fees, proved to be a big time winner.
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.
Some of the big news in ETF these days is the prospect of launching publicly traded Bitcoin ETF. The effort receiving the biggest spotlight in this regard has been the initiatives undertaken by the Winklevoss twins.
The brothers, renowned for their struggle over FaceBook, with Mark Zuckerberg, have been early adopters of Bitcoin. Estimates have their holdings in the crypto-currency at around $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).
Right off the bat, sweeping claims about the viability of Bitcoin on the ETF market has to be tempered with the realization that in fact such trading opportunities already exist. SecondMarket offers a private Bitcoin Investment Trust (BIT, for short, get it?). BIT is modeled on a well established gold ETF. And, with its $25k minimum investment, it is humming right along, according to its creator, the SecondMarket CEO: the close of 2013 finds it holding $65 million.
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.
Of course I'm not saying that anyone isn't perfectly entitled to wager on the success (or failure) of any product, including a new currency. Speculators and short sellers alike are a perfectly legitimate and necessary part of a dynamic and free market. The confusion, and the misguidance to which it may give rise, is that treating Bitcoin as an investment opportunity - akin to gold, for instance - fails to take account that, unlike gold, it is designed specifically as an alternate currency. Its ultimate fate lies in its capacity to serve consumer needs in that regard.
Like any other product designed to serve a specific purpose, its features and benefits will only be revealed as tested in time. The recent volatility has been a function of financial, rather than monetary, considerations. I can only see two long term prospects.
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.
On the other hand, should we see the collapse of the currency, the truth is that it is those who bought into the currency, not for the virtues of its monetary features, but to gather its hoped for financial windfalls, that will be most hurt in the process. The big losers would be the speculators. And speculation offers the prospect of big rewards, because it presents the danger of high risk.
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 intriguing development and personally I'll be keeping a close eye on how that financial market evolves. Regardless of their fortunes, though, ETF in the end will really reveal very little about the prospects of Bitcoin as a currency. Many people will make and lose lots of money along the way, but the story of Bitcoin will be told, not in the financial markets, but in the consumer markets.
About the Author:
To keep up on the rollercoaster ride of Bitcoin, follow our Bitcoin Profit Calculator . Wallace Eddington is staff writer at our blog, providing a practical and provocative treatment of monetary and financial issues concerning Bitcoin. His recent article elaborating the role of Bitcoin address and private key is a must read for those who want to take advantage of the exciting new crypto-currency.