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July 17, 2013

Winklevoss Brothers Reveal Plans For Bitcoin Trust

Posted by Rajashekara V. Maiya (View Profile | View All Posts) at 12:23 PM

Winklevoss Brothers Reveal Plans For Bitcoin Trust [Source: NewsMedia24 http://www.youtube.com/watch?v=RCgHYu1aw0U]

Nobody ever said an innovative product on Wall Street assured immediate gratification.

Warren Buffett has tried to teach us otherwise. For decades he's been expounding Graham & Dodd's value investing mantra, initially to housewives in an Omaha classroom and eventually to the better part of the world. But it's easy to grow impatient with the Oracle of Omaha's measured approach to investing. If he can't immediately grasp how a business or a financial instrument operates, he tends to stay clear of it.

Being careful and investing with a long-term outlook is a trait that doesn't seem to sit well with some consumers in the digital age. They want immediate results and have grown accustomed to lightning fast transactions and communications. Why should the practice of investing be any different? Experiences created by the retail and internet businesses are spilling over to influence expectations from banking. People cannot wait over 30 seconds for a burger at their favorite fast food joint and are pampered by the likes of Google that delivers results even before a user completes her query. Little wonder, consumers expect instant gratification from everywhere. In fact, in the U.S, the average investment holding period dropped to less than 4 months in the year 2000 in contrast to nearly 16 years in the 60s-70s.

Now the Winklevoss brothers, the twins who gained notoriety for claiming to think up Facebook, are feeding digital consumers' lust for immediate results with a new investment tool. Recently, they announced that they would launch a Bitcoin Exchange Traded Fund (ETF). It would be the first time an exchange-traded fund would track a virtual asset instead of something tangible like a basket of bonds, gold, or currencies. Upon first glance, a Bitcoin ETF appears to be really interesting. Because ETFs trade like stocks, an investor could buy a few shares of them in order to get exposure to the Bitcoin market without actually owning the so-called cyber currency.

Now just what is the Bitcoin market, you might ask? The best I can tell is that it's a global community focused on a currency that's generated by open source software and can transferred digitally from device to device without any kind of financial intermediary. There are plenty of transactions in which Bitcoins would come in handy, including (as it's been widely reported) those of the illicit variety. Think drug kingpins or off-shore gambling rackets. Because Bitcoins are not regulated by a central bank, they're accountable to nobody except those who hold them.

The Winklevoss twins reportedly reached a $65 million settlement over Facebook and have been keen to invest in innovative - or, at the very least, exotic - financial instrument ever since their windfall. They're said to own 1 percent of all Bitcoins in existence. Now, thanks to the twins, you, too, can be a part of the Bitcoin universe.

But think what you're trading in for the privilege of owning shares in a Bitcoin ETF: U.S. dollars or Indian rupees or British pounds - three currencies that are backed by the good faith of their respective governments. In theory, an investor would be handing over cold, hard cash to the Winklevoss brothers in return for bits and bytes. Sounds like a pretty good deal for them - the ability to unload a volatile and unproven cyber currency for real paper money.

You have to hand it to them - they've come up with an interesting financial innovation. It reminds me of how tantalizing innovations like mortgage backed derivatives and collateralized debt obligations sounded back when they first hit the scene not too long ago.

The financial world is always receptive to innovative new products. But financial innovations need to be more than just interesting concepts with cool names. Think of the hysteria in the late 1990s when investors were buying shares of dot-com start-ups that were little more than Web sites with no discernible business plans.

Such innovations also need to have checks-and-balances so that they don't spiral out of control. We forget that when CDOs first appeared, nothing suggested that they would contribute to a near financial meltdown. It was an innovative way for a bank to securitize debt and make some money off the new instrument. A decade later, the organizations that ended up with the CDOs had nowhere to unload them.

That's why a value investor like Warren Buffett might be very wary of a Bitcoin ETF. Even one of the Bitcoin's largest exchanges was reportedly sputtering in May because of a lack of activity. Mt. Gox, as it's known, also happens to be under investigation by the U.S. Treasury Department's Financial Crimes Enforcement Network.

But on purely technical points, you have to credit the Winklevoss twins for thinking outside the box.

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