Late Thursday night Bloomberg reported that it’s looking more and more likely that a bitcoin ETF will indeed trade on Nasdaq, marking a serious milestone in the efforts to bring financial sophistication to the digital investment. But the people bringing that sophistication to the bitcoin marketplace – the Winklevoss Twins – would also be in a curiously strong position to take advantage of their position and corner the market, considering they own a reported $64 million in BTC.
However, they probably don't anymore. The likely scenario is that to form an ETF, the Winklevii were asked by the SEC to liquidate most of their BTC holdings, if not all.
The Assets and Asset-Backed Securities Conundrum
While the BTC ETF has yet to gain tacit approval, its progression through the SEC filing progress indicates the chance it will is quite likely. Gil Luria of Wedbush Securities, a longtime bitcoin analyst, remarked that “the fact that the SEC has allowed the S-1 to progress this far is an indication that it may actually happen.”
The Winklevoss are ideological backers of bitcoin, to be sure. Time and time again, they have voiced their support of the digital currency, investing in both the bitcoin payment startup BitInstant and publically acknowledging they bought up 1 percent of all BTC in existence, right around when they first began formulating the ETF.
Controlling 1 percent of an asset while also controlling the ETF that trades on that asset presents a real problem. It’s the kind of conflicts of interest a regulatory board like the SEC would be loathe to get on board with, suggesting the Winklevii have likely had to get out of BTC.
Let’s paint a scenario to show how, if the Winklevoss control a significant chunk of BTC while also controlling the ETF can be problematic:
1) The Bitcoin ETF debuts on Nasdaq. It receives an influx of capital in the form of investors buying shares with US dollars.
2) The Winklevii use this capital to buy up even more of the inelastic BTC.
3) Both the price of bitcoin and the ETF rise in value. The bubbles inflate one another.
4) When they feel they have inflated the bubble enough, the Winklevii exit their already-established, sizable BTC position.
That is, profit for the founders of the ETF who exited their bitcoin position at exactly the right time. The ETF’s investors, and the BTC holders not "in the know," are left holding the digital bag.
The SEC Don’t Play That (At Least, Not as Much Anymore)
Since last year, intense pressure has been put on traders to minimize the conflict of interest stemming from owning both an underlying asset and the securities that trade on that asset. Goldman Sachs Group (GS) was hammered after the New York Times learned they both had a sizable position in the physical aluminum market while also trading on aluminum futures, and used their position to artificially inflate aluminum prices.
The SEC wouldn’t allow someone like the Winklevoss Twins to have such an obvious ability to manipulate the market. This isn’t to say they would pull the wool over bitcoin aficionado’s eyes, given the chance. The SEC just wants to make sure they don't. The Winklevoss had the option to either invest in BTC startups and create an ETF with a guaranteed management fee or stay long the always-volatile bitcoin, and, with the continued progression of the ETF through the SEC’s lengthy application process, they likely chose the former.
What does this mean? If the Winklevoss have exited their position on orders from the SEC, their sell-off of roughly $64 million in BTC has already been priced into the market.
It also means that ideologically, the Winklevii have not necessarily abandoned their bullish position on bitcoin. With an ETF, they are just going long on this radically different kind of commodity, albeit in a very traditional fashion.