Bitcoin ETFs – COIN

Early this year, the SEC (Securities and Exchange Commission) rejected again the proposal of issuing Bitcoin ETF -Winklevoss Bitcoin Trust ETF (COIN) by Winklevoss brothers. They have been waiting for the approval since July 2013 and unfortunately, received a stern “No” again from the SEC again. Similarly, the other two Bitcoin funds – Barry Silbert’s Bitcoin Investment Trust to list on the NYSE Arca and the close end fund  Bitcoin Investment Trust (OTCQX:GBTC) had the same fate.

To understand the validity and viability of Bitcoin ETFs such as Winklevoss Bitcoin Trust ETF (COIN), so when the day the SEC approves it comes, we can nab the opportunity and capitalize on it, it’s necessary to dive deep into the underlying Bitcoin as well as the blockchain technology further underpinning the Bitcoin.

Bitcoin, in essence, can be regarded as an alternative money in a virtual or digital form. It’s backed up by the state-of-the-art BlockChain technology so it possesses the key attributes of existing real money like gold: uncopiable and transferrable, a.k.a fixed amount and liquid fluidity. the current pseudo money such as U.S. dollar, Euro or Chinese Yen is actually quite deficient due to two reasons: one, they can be printed unlimitedly, hence, if, under the hand of an irresponsible or ignorant central bank/government, the paper currency can be inflated to worth nothing within a very short time period; two, an authoritative third party or custodian organization is required to facilitate the transaction of money, a high cost or fee is generated, let alone the time required, and wasted to just exchange the money between hands. Both of these drawbacks are taken care of in the Bitcoin system.

The foundational Blockchain technology first stated in a paper: Bitcoin: A Peer-to-Peer Electronic Cash System, authored by an unknown person named as “Satoshi Nakamoto”, documented the details. In 2008, bitcoin.org is established and the first Bitcoin was minted and created. the Bitcoin price can be followed in Gemini Exchange Auction on business days. I obtained a better knowledge of this seemingly abstract money by an attempt to figure out three questions: how is Bitcoin created and managed of its supply? how to prevent Bitcoin from being double-spent or copied? How is Bitcoin used and exchanged?

How is Bitcoin created and managed of its supply?

According to Bitcoin wiki (https://en.bitcoin.it/wiki/Controlled_supply) , “Bitcoins are created each time a user discovers a new block. The rate of block creation is adjusted every 2016 blocks to aim for a constant two week adjustment period (equivalent to 6 per hour.) The number of bitcoins generated per block is set to decrease geometrically, with a 50% reduction every 210,000 blocks, or approximately four years. The result is that the number of bitcoins in existence is not expected to exceed 21 million.” It requires intensive CPU power to mint one block, mimicking the trait of real money such as gold or silver in the sense that they are hard to mine and produce.

How to prevent Bitcoin from being double-spent or copied?

The Blockchain basically is an open ledger system so every and each ownership, the transaction of the Bitcoin are notarized in the internet space worldwide, to be more specific, “peer-to-peer Bitcoin Network” as was specified in Satosh’s paper. It is a far superior mechanism than a centralized authority to ensure the purity and onlyness of money.

How is Bitcoin used and exchanged?

Bitcoin ought to be used to pay for goods and services, exactly as how money flows from downstream to upstream in the supply chain, goods/services flow another way around. However, it seems as of now, Bitcoin is more often used as an investment vehicle to be converted to fiat currencies, such as the U.S. Dollar,  expecting a higher price than when purchased to gain a return.

Lastly, what’s the downside of Bitcoin: will it collapse one day? what if another cryptocurrency is created to dilute the worth of Bitcoin? why the SEC rejected the approval of Bitcoin ETF over and over again?

Will it collapse one day?

Given this most advanced blockchain technology, it is less likely for Bitcoin to be collapsed than for fiat money system managed by human beings.

What if another cryptocurrency is created to dilute the worth of Bitcoin?

There are other cryptocurrencies that have spawned since the 2009 advent of Bitcoin, among them, Litecoin, Dogecoin and Peercoin, they are often likened as silver, copper etc because of the level of difficulty to produce compared to Bitcoin. Pretty similar to the coexistence of gold and silver, the ability to produce dogecoin or peercoin etc won’t erode the worthiness of Bitcoin.

Why the SEC rejected the approval of Bitcoin ETF over and over again?

Why the SEC, along with many other regulatory departments, take such an unfriendly approach to this new thing? let’s review the rejection terms the SEC gave to the Winklevoss twins, “As discussed further below, the Commission is disapproving this proposed rule change because it does not find the proposal to be consistent with Section 6(b)(5) of the Exchange Act, which requires, among other things, that the rules of a national securities exchange be designed to prevent fraudulent and manipulative acts and practices and to protect investors and the public interest.”, they are highly concerned that Bitcoin will cause or be involved in “fraudulent and manipulative acts and practices”, particularly, money laundry due to the anonymity of Bitcoin. However, this accusation is really groundless, at least unjust. Cash has the trait of anonymity too, and has been extensively used as ransom, why do not blame cash? On the contrary, because every transaction is registered public, Bitcoin makes it possible to not only identify criminal activities but also find a string of them as they are all tied to one block.

Reverting back to the Bitcoin ETF COIN, which provides a handy and liquid tool for investors to gain exposure to Bitcoin without purchasing Bitcoin directly, it is a clever and innovative product. Due to the extreme cautious nature of regulatinos, it is understandable that such ETFs are held off temporarily, but it’s just a matter of time when they will be launched to the market.

Lastly, comparing the currency fluctuation over the last decade can give a sense of how Bitcoin (BTC) sticks out in the past.

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