Bitcoin investment vehicles

2

I've heard of at least 2 financial products which enable people to take positions on bitcoin in the stock market. Here's a Reuter's article on one. Can anyone explain what the purpose of these investment vehicles is? Why would someone want to pay a financial institution ~2%/year to hold their bitcoin for them? Not to mention the counterparty risk...

"By listing the ETI on the Gibraltar Stock Exchange, which is an EU-regulated market, we are able to bring a high level of transparency and liquidity to investors", said Revoltura CEO Ransu Salovaara.

Transparency? How is an opaque financial product - which may or may not be backed by actual bitcoin - going to provide more transparency than trades on a public blockchain?

Is this simply a money grab to exploit the people who don't have a clue or am I missing something?

Atte Juvonen

Posted 2016-07-27T20:52:57.937

Reputation: 351

Answers

1

  1. Regarding audience: ETIs are regulated. Not just regulated, but they are marketed for sophisticated investors. In fact regulation prevents marketing these for general audience, so there shouldn't be issues having investors who do not know what they are doing. Investors in this case are banks and pension fund like actor, though I am not sure what's the definition of the sophisticated investor in EU.

  2. Regarding cost: There is a premium cost bringing a new investment vehicle to market. Mainly, because to have something regulated it should be insured. Bitcoin is very new. Financial market operators are not familiar with all risk models yet. Thus, insurance carries a high premium. BitcoinETI is audited by PriceWaterhouseCoopers and needs to pay various fees to stock markets, exchanges and such. For comparison, Digital Currency Group's Grayscale Bitcoin trust carries 2% maintenance fee.

  3. Regarding transparency: BitcoinETI prospectus is public, vetted by regulators and all fees are clear up front. The ETI must publish it Net Asset Value (NAV) continuously. Public blockchain doesn't include fiat nominated (USD, EUR) transactions of traded Bitcoins. These are internal to Bitcoin exchanges. Some exchanges choose to publish this data independently. Even if it's published, it is suspected that many Chinese exchanges manipulate this data. As virtual currency exchanges companies are not regulated, this practice cannot be confirmed or stopped.

Mikko Ohtamaa

Posted 2016-07-27T20:52:57.937

Reputation: 2 407

I can understand the need for creating a more secure exchange to buy/sell bitcoin. I don't understand the need to hold customers' bitcoin at 1.75%/year. All they do is make 1 transaction to cold storage once. It costs $0 to maintain the bitcoin in cold storage. Since the actual trading is done over the stock exchange, and paid separately by the clients to the stock broker, they're literally providing no service at all for this fee. – Atte Juvonen – 2016-07-27T23:08:44.120

What fees you pay to bring your product to stock markets? Who holds the access to your cold storage? Is it insured? What happens if you lose the key? What guarantees your cold storage service provider is not going to disappear with your Bitcoins? These are some of the questions you might want to think of. Whether or not the price is right is up to the markets to decide. – Mikko Ohtamaa – 2016-07-27T23:21:12.077

The costs of converting fiat to bitcoin and back are paid by the fund managers; the commission on trades goes to the brokers, not the managers. So the management costs have to cover that. Also, it costs significantly more than $0 to maintain Bitcoin in cold storage securely. And you can't just keep it there; investors are buying and selling constantly. – Nate Eldredge – 2016-07-27T23:22:11.043

For comparison, Grayscale Bitcoin Trust (from Digital Currency Group, DCG fame) has a management fee of 2%: http://grayscale.co/bitcoin-investment-trust/

– Mikko Ohtamaa – 2016-07-27T23:22:32.357

@Nate Eldredge: there is no fiat-to-bitcoin-and-back trading going on. They buy bitcoin once and put it in cold storage. The only thing that's being traded is investors' claim to the ownership of those bitcoins - on the stock exchange, for a separate fee. – Atte Juvonen – 2016-07-27T23:26:24.790

@Mikko Ohtamaa: you're right, there are SOME ongoing costs. I can't imagine anything to justify the 2% price point, though. I see this in the same category as door-to-door salesmen selling vacuum cleaners to old ladies for 4000€. They can also claim there is a "demand for their product" and that it's a fair rate if the market is willing to pay it. – Atte Juvonen – 2016-07-27T23:28:44.803

If you think the price is hugely unjustified there there must be room for market disruption. You can always launch your own ETI product with better price point and make a lot of money there. It's public market after all. – Mikko Ohtamaa – 2016-07-27T23:33:26.207

Right, why don't I set up my own bank while I'm at it? Sorry if I provocated you to the point where you felt that was an appropriate response. I appreciate your earlier posts. – Atte Juvonen – 2016-07-27T23:47:39.757

Yes. There must be a cost of setting up a bank :) The fee is below the management fee of comparable products. It's a high compared for maintaining Bitcoin cold storage yourself, but instead you should compare it to other similar products, which is difficult in this case as there are only few of them currently. – Mikko Ohtamaa – 2016-07-27T23:48:07.253

Technically, I could set up my own bitcoin fund in 1-2 days. I wouldn't have to charge people millions in fees. But we both know it's not possible due to regulations and lack of connections and marketing capital. – Atte Juvonen – 2016-07-27T23:50:18.027

Here's a comparable product for you: stock index funds. They typically charge 0.5%/year and their operations (trading to match the index, book keeping, etc.) cost more to maintain than bitcoin in cold storage. – Atte Juvonen – 2016-07-27T23:54:00.807

Let's see when SolidX and Winklevoss's ETFs come out, so there is more data points in the same category. – Mikko Ohtamaa – 2016-07-27T23:55:54.050

Cleaned up the answer. – Mikko Ohtamaa – 2016-07-28T13:23:23.090