A Bitcoin ETF Exists

Bitcoin has captured the attention of news outlets, governments, hackers, entrepreneurs and regulators. It has the potential to transform the world of international payments forever; but given that nearly two-thirds of Americans don’t know what Bitcoin is, a good question to ask is: What is Bitcoin?

bitcoin etf
Bitcoin is a digital currency, or cryptocurrency.

Bitcoin’s Origin

In 2009 a mysterious man, or entity – depending on who you ask, named Satashi Nakamoto released a paper titled “Bitcoin: A Peer-to-Peer Electronic Cash System”. The very first bitcoins were created that year and with them came to life a new way of transacting: a peer-to-peer, and open system of money.

Cryptocurrencies are currencies that use some sort of cryptographic procedure, or an embedded security protocol, to ensure security. Bitcoins are “mined” using computers that solve complex algorithms to unlock new “blocks” of the currency. All transactions involving bitcoin take place through p2p (peer-to-peer) networks, easy and frictionless. Think of it like file-sharing for currency – except with a ton of security.

But bitcoin is more than just a way to pay for goods and services. It’s a means of exchanging value over the internet without any middlemen. Any time you want to exchange money over the internet – there’s typically a third party involved taking a cut.

bitcoin etfs
A Global Currency

Consider global remittances. A remittance is a transfer of money from a foreign worker to someone in their home country. In Tajikistan, migrant workers send home what is approximately half of the country’s GDP. 40% of Somalia’s population depends on foreign workers sending money home. In 2013, migrant workers collectively sent $500 billion to their respective countries. More than half of that ends up in Asia but a lot of it is wasted on expensive transfer services. The World Bank estimates that fees rack up $16 billion a year!

In poorer countries where people don’t necessarily have access to banks migrants have to resort to costly money transfer services like MoneyGram or Western Union – two money transfer services that have a tight hold on the global money transfer industry. In Africa fees can add up to 20% of the money being transferred. In fact, there are five “corridors” (country to country transfer channels) with an average fee greater than 20%. The average fee on money transfers from South Africa to Botswana: 23%. South Africa to Mozambique: 22%. In the 2014 Africa Progress Panel report Kofi Annan wrote that sending $1000 to Africa costs consumers an average of $124.

Remittances are only set to grow, and as the World Bank reports, “forcing migrant workers to pay as much as $50 to send $200 is wrong, especially when they are sending salaries they have earned in the hope of supporting their families back home.”

But what if we could get rid of those exorbitant fees?

Switching our money transfer systems to bitcoin could reduce transfer payments to near-zero and totally disrupt the industry, saving billions of dollars in value for some of the poorest people in the world.

bitcoin etf

And the Winklevoss twins are betting that bitcoin can do just that.

The Bitcoin ETF

Yes, that’s right. The 6 and a half foot, ex-Olympic rowers and former litigants in the lawsuit against Facebook founder Mark Zuckerberg have now turned their attention to bitcoin. After the lawsuit against Facebook the twins were awarded $20 million in cash and $45 million in Facebook stock. Since then they have styled themselves as venture capitalists and in 2013 filed the paperwork to create a bitcoin ETF called the Winklevoss Bitcoin Trust.

The twins aim to start a bitcoin ETF, or exchange-traded fund, where “anyone” can buy shares. As the “first publically traded bitcoin investment fund” the Winklevoss twins, or Winklevii as they are known, are certainly not short on ambition. By April 2013 they claimed to own 1% of all the bitcoin in the world.

Technically speaking the Bitcoin Investment Trust they are proposing is not an ETF, or a security that tracks a particular index. What the twins are starting is actually a hedge fund that is exploiting certain financial rules but in practice the fund should function like an ETF.

The fund is also not open to just anyone. You have to be an accredited investor, meaning individuals who have at least $1 million in assets or net income of $200,000 a year.

So it’s not open to anyone, and it’s not really an ETF, but it’s a start. The twins hope to see a “future where people will use Bitcoin and they won’t even know they’re using it. At that point it’s everywhere – it’s a part of global finance, it’s a part of our everyday lives.”

The Winklevoss twins went one step towards making bitcoin part of our everyday lives by establishing the Winkdex, a price index for bitcoin which is “calculated by blending the trading prices in U.S. dollar for the top three (by volume) qualified Bitcoin Exchanges during the previous two-hour period using a volume-weighted exponential moving average.” It’s basically just a fancy average of three Bitcoin price quotes.

 

The Future of Payments

The cryptocurrency definitely has it in it to help people around the world. The Winklevoss twin estimate that the intrinsic value of all bitcoin is $400 billion, based on its value to provide near zero-cost transactions all over the world.

That may or may not be true.

Global remittances are around half a trillion dollars and if you generously consider that 20% of that is being lost to fees you could give bitcoin a valuation of $100 billion. That’s just taking remittances into account and nothing else so maybe there is something to that $400 billion valuation.

Tyler Winklevoss puts it best when he says “if you think of what Bitcoin’s benefit is in terms of payments, it’s a transaction free, borderless global payments system…it happens instantly and free.”

It’s hard to disagree with him.

To learn more head over to Wall Street Survivor.

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