Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Market Insanity

Demise of Winklevoss ETF might be Boosting Bitcoin

Strangely enough the denial of the Winklevoss twins’ exchange traded fund (EFT) might end up boosting the prices of bitcoin and etherum.

On March 9, 2016, bitcoin was trading at $1,193.55 a coin, and etherum was trading at $17.84 apiece, Coinbase indicated. The next day, on March 10, 2017, the Securities and Exchange Commission (SEC); America’s financial regulator, said no to the Winklevoss Bitcoin Fund.

By March 11, 2017, bitcoin was trading at $1,201.97 apiece, an increase of $11.42. Nor was it was just bitcoin, etherum rose to $20.28 a new high and an increase of $2.44.

Bitcoin’s price actually grew even though the SEC noted “concerns about the potential for fraudulent or manipulative acts and practices in this market,” The New York Times Dealbook reported. The Commission’s regulators were worried about the lack of regulation in the bitcoin market.

Bitcoin Confounds Conventional Wisdom Again

What’s going on here, why is bitcoin’s price is growing despite the SEC’s action? Many analysts had expected bitcoin to double or triple on the news of an approval, and collapse if the Commission said no. Yet the movement was modest and it was up.

The most likely reason for the lack of an SEC effect is the nature of bitcoin investment. Most bitcoin investors are located outside the United States; mainly in China, that means most of them simply don’t care about the Commission or the US markets.

The motivation of the average bitcoin buyer is also very different than that of the American ETF investor. Most bitcoin owners are either using it as a hedge against inflation of unstable currencies such as the Chinese yuan or the Venezuelan bolivar, or to do an end run around monetary controls or the banking system.

A great many bitcoin owners live in nations where governments have a long history of confiscating bank accounts and demonetizing currencies. They view bitcoin as a means of keeping their money out of bureaucrats’ greedy hands.

Therefore the existence of the Winklevoss fund would not matter to the average bitcoin owner. Even in the United States, a bitcoin owner is likely to be an outlier who does not trust the financial system.

The average ETF owner is looking for a safe place to stash her retirement. Hardly the kind of person that invests in new-fangled instruments like bitcoin. The Winklevoss twins’ hope was that they could convince American retirees to put their money in bitcoin and boosts its value, and the stash of the cryptocurrency they own.

Back in 2013, several media outlets including Business Insider reported that the twins owned 1% of all bitcoins. That worked out to 108,000 bitcoins which would have been worth around $129.813 million on March 11, 2017.

Conventional market wisdom was once again wrong about bitcoin. The existence or nonexistence of a bitcoin ETF means little or nothing to most bitcoin investors, so its failure has little influence on the market.

Would a Bitcoin ETF be a Good Investment?

Naturally some people are wondering if a bitcoin ETF is a good investment, I would say no. There are easier and cheaper ways of investing in cryptocurrency including buying it directly or mining. Why pay double fees to an ETF when you can buy it yourself.

The only time investing in the Winklevoss Bitcoin Trust would make sense is to get the tax benefits from a 401K or individual retirement account (IRA). Since you can still get those by investing in a wide variety of instruments, buying the twins’ product made little sense.

Another point here is that bitcoin is a very volatile investment not suited for retirement. There are safer investments around including stocks. The SEC was probably right to pull the plug on the twins’ scheme it simply put too many average people’s retirement at risk.

If you want to invest in bitcoin do it directly. If you want to save for retirement please stick to more conventional instruments for now.