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Should I Invest In a Bitcoin ETF?

That’s the question the Vinklevoss twins want to know the answer to and their guess is “yes!” CNNMoney reported earlier last week that Cameron and Tyler Winklevoss, whose names you might recognize if you followed the saga of Facebook, filed a proposal with the SEC to offer an exchange-traded fund [3] that would let investors trade in bitcoins. While we have no idea if regulars would approve such a thing, I think the idea is interesting to discuss.

I’ve been following bitcoin [4] for a while, I’ve never done anything more than read about it. I watched its meteoric rise and fall [5] (and smaller rise and fall) earlier this year because the idea of a de-centralized currency is fascinating. The appeal is simple – currency that cannot be manipulated by a central government and one that has zero regulation. The only difference between it and any other currency is acceptance.

As we all know, the US Dollar, like every other currency, is fiat money. We all accept it because the government says so, which is why it’s called legal tender. If I owe you money and I want to pay in dollars, you are legally obligated to accept it as a form of payment. (The legal trickiness part is that this doesn’t apply when the “debt” doesn’t exist before payment… as is the case when buying something. So if I want to buy something from you and pay in pennies, you could decline saying you don’t want all those pennies.)

Since bitcoin isn’t legal tender, no one is required to accept it as a form of payment. It’s no different than a personal check from a legal perspective. But then again, what is a stock? It’s a piece of paper that says you own a microscopic part of a publicly traded company that is required to make certain SEC filings on a regular basis. You can’t go and buy anything with a share of Apple stock.

So the question is, would you invest in a bitcoin ETF? As for me, there’s no way I’d invest in a bitcoin ETF. I might gamble with a bitcoin ETF but it’s unproven, there are no fundamentals to even make an informed decision, and any investment is really no different than picking red or black in roulette.

Also, we still aren’t sure about the security of the bitcoin infrastructure. There are several exchanges and many experience outages or get hacked often. They’re lucrative targets because they don’t have the size and scale of mainstream financial institutions or the depth of experience dealing with hackers and thieves on a regular basis.

Fortunately, many of these risks are outlined in their filing [6] and they write it in a way that’s far scarier:

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.

In other words, the trust could get hacked and lose the private key to its bitcoins… and your investment. If you lose your private key, it’s gone. There’s no one to call up and help you unlock your account. 🙂

So – would you invest? 🙂

(Credit: zcopley [7])