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The Winklevoss Bitcoin ETF: How it works

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The Winklevoss Bitcoin Trust issues Winklevoss Bitcoin Shares, which represent fractional ownership in the trust. The trust itself owns bitcoins and will try to match the ETF’s market cap with an equivalent fractional holding in bitcoin. Per the revised prospectus in October, each share in the initial baskets will represent 0.2 bitcoins (BTC). That means each basket of 50,000 shares will hold 10,000 bitcoins. That’s subject to change.

Security is a major concern for the trust, and the plan is to store the trust’s digital wallet private keys in segregated vaults. I presume that means a few private keys per vault spread across the U.S. to lower the risk of loss, damage or theft of all of the private keys at once.

The trust’s net asset value (NAV) will be published on the trust’s website at the conclusion of each trading day. Fees for managing the fund haven’t been published yet. In the event that the trust were ever shut down, the trust’s liabilities would be paid and cash proceeds would be distributed to shareholders.

Top 10 risks of investing in the Winklevoss Bitcoin Trust:

1) The trust could lose it’s private keys (and therefore lose access to its bitcoin).

2) Governmental regulation.

3) Bitcoin could get shut down or usurped by another virtual currency.

4) Bitcoin speculation can lead to wild price swings that could impact the trust’s share price.

5) The source code for the Bitcoin Network could get amended, changed or “forked” by the bitcoin community.

6) Bitcoins could get manipulated.

7) Miners could stop mining bitcoin (particularly if it doesn’t make economic sense to do so).

8) Bitcoin miners could start charging higher transaction fees, which would make bitcoin less attractive.

9) If the trust grows too large it could impact the global market for bitcoin.

10) The trust’s bitcoin could get stolen.

As of August 31, 2013, approximately 11,636,000 bitcoins have been created. The plan is to create no more than 21,000,000 bitcoins, so more than half of the world’s global supply is already on the market.

Here’s a copy of the full amended Winklevoss S-1 filing from October:

If there’s anything that could create a true bitcoin mania, I think it will be the launch of the Winklevoss ETF. There are just too many “cool” factors going for it:

1) The intrigue around the Winklevoss twins themselves.

2) General excitement over bitcoin.

3) The use of bitcoin as an inflation hedge (one that works even better than gold or silver).

On top of that, daytraders won’t care about the underlying commodity. They’ll pile into both up and down trades, which will make bitcoin even more headline-worthy. That’s part of the reason I’m hoping this ETF doesn’t come to market anytime soon. I’d like to see everyday Americans using bitcoin before it becomes the trade-of-the-day for wall street bankers and bots.

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