The almost-founders of the world's biggest social network are enthusiastic champions of Bitcoin -- the cryptographic, algorithmic currency of the future that you mine with computer programs and can use to anonymously purchase items online. And now the Winklevosses have submitted an SEC filing registering the $20 million "Winklevoss Bitcoin Trust."
If you're giving any thought to putting money into their exchange-traded fund -- or bitcoins in general -- the filing should top your summer reading list.
The Bitcoin ETF?
Currency ETFs have existed for some time, and serve as a way for people to invest in a vehicle that mimics the movements of the currency markets without trading currency futures or buying physical foreign currency. So, technically, it makes sense for Bitcoins to have a seat in the ETF theater. In this case, a Bitcoin ETF may be the only halfway accessible vehicle for the average person to invest in this highly complex and somewhat rare asset.
An ETF allows an investor to trade assets relatively easily. It provides favorable tax considerations, and, in this case, offers a way to put cash into a digital currency that is immune to bank runs and geopolitical disasters.
So let's take a look at the just-filed registration document for the Winklevoss Bitcoin Trust.
As the filing points out, would-be investors should have their eyes wide open before considering an investment in the Bitcoin Trust: "The loss or destruction of a private key required to access a Bitcoin may be irreversible. The Trust's loss of access to its private keys or its experience of a data loss relating to the Trust's Bitcoins could adversely affect an investment in the Shares."
Without getting too deep into the anatomy of a Bitcoin, the owner of each Bitcoin gets a super-secret password that allows them to spend it. If you lose this private key, your Bitcoins are gone. Where did they go? Don't ask.
So, if the Trust that holds your fractional Bitcoin investment loses private keys, then a portion of your investment instantly evaporates. It seems incredibly unlikely the trust would just lose those keys, but it does raise questions about theft.
In April 2011, a user lost 25,000 BTC -- roughly $500,000 at the time -- when a Bitcoin storage service, InstaWallet, was hacked and pillaged. While InstaWallet refunded the losses of account holders who'd held less than 50 BTC, the service said it would treat depositors who'd held more than 50 on a case-by-case basis.
Fact or Fiction, It's Rather Ridiculous
By investing in this ETF, you're handing over your government-supported currency to gamble on a currency the value of which is almost entirely determined by speculation to begin with.
Beyond the ETF itself, Bitcoins have many hoops to jump through before they resemble a sound investment. The currency's value needs to stabilize; its user base needs to expand significantly; more coins need to come into circulation; and investors need more assurance that the exchanges won't have their assets seized by governments concerned about money laundering.
Bitcoins themselves may be untraceable and the ultimate cryptocurrency, but if investors want to "cash out," it'll still come down to good old government-backed folding money from somewhere. Investing in this ETF, though simpler than the Bitcoin alternatives, is buying into a large number of risks that only a few people really understand.
Motley Fool contributor Michael Lewis has no position in any stocks mentioned. The Motley Fool recommends American Express and Facebook. The Motley Fool owns shares of Facebook.