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It’s not every day that a new asset class is born. The last time was probably a few decades ago when managed futures funds became an accepted asset class among portfolio managers.
Now, alternative trading system company SecondMarket has launched The Bitcoin Investment Trust (BIT), an open-ended, private trust that is exclusively invested in bitcoin and derives its value solely from the price of bitcoin.
The
private investment vehicle is based in the US and open to institutional
and accredited individual investors. Alternative Currency Asset
Management (ACAM), a wholly-owned subsidiary of SecondMarket, is BIT’s
sponsor and SecondMarket has also made a $2 million seed investment in
the BIT.
Certainly, a bitcoin trust can be thought of as a unique
proxy for investing in bitcoin startups that would not carry the
specific risk of management team execution or adopting the correct
business model.
Not many other currencies in the world can serve
as a proxy investment for an entire high tech, venture-funded sector.
Until the bitcoin ecosystem matures and deepens, it will be possible to
bet on its success simply by going long on the actual monetary unit.
Generally, the bitcoin funds, or trusts, can also be thought of as precursors to more retail-oriented exchange-traded funds (ETFs) which require substantially more due diligence and regulatory clearance.
When
bitcoin ETFs start appearing on a regular basis, bitcoin will have
completed its transition into both retail and wholesale asset class.
The
bitcoin offering from SecondMarket has been in development for over a
year now and it will set the standard for best practices of bitcoin as
an asset class in the US.
Non-correlated to other investment
classes and alongside more conventional portfolio components like
equities, bonds, real estate, and commodities, a position in bitcoin
allows a portfolio to participate in the potential upside from an
economy based on digital currencies.
Following Exante’s Bitcoin Fund
from Malta which debuted last year, SecondMarket also intends to
facilitate two-way trading of the trust shares on its proprietary
platform enabling both long and short positions. This is significant
because commercial processors and large merchants of bitcoin would have a
reliable method to hedge their bitcoin inventories without having to
liquidate actual bitcoin on a daily basis.
For
instance, if a bitcoin merchant processor, such as BitPay, wanted to
“lock in” a certain aggregate exchange rate for their merchants or for
their own books, they could initiate a short position in the Bitcoin
Investment Trust without the need to sell bitcoin on the open market.
The
company has established relationships with over 100 players in the
bitcoin space, including large merchants, early adopters, and exchanges
which should aid in the development of additional liquidity.
The critic's view
Last week, the forlorn and chronic bitcoin skeptic Felix Salmon, of the Reuters blogging world, took a shot
at SecondMarket and their new trust. Salmon says that “no sensible
investor should go anywhere near it” and he doesn’t “really understand
why [Silbert's] doing this.”
Correctly stating that bitcoin is a
combination of currency and commodity, Salmon goes on to claim “this
trust strips out the interesting bit, which is the currency part,
leaving just the stupidly speculative commodity aspect.”
As with
most professional critics at the beginning of a new asset class, the
cries of disbelief and suggestions of investor imprudence are to be
expected because prior to becoming portfolio orthodoxy an element of
risk weeds out the non-brave.
I
wouldn’t expect Salmon to promote the adoption of largely undefined
risk, but I would expect him to understand why a particular investment
vehicle makes sense for certain investors.
Firstly, there is the
aspect of institutional participation and the possibility of favorable
tax treatment for investments made through retirement funds.
Many
endowments and institutions that administer investment funds have strict
guidelines for placing those investments such as placement must be with
registered broker-dealer. Therefore, a straight investment into bitcoin
“on your own” would not satisfy those institutional parameters.
Secondly,
Salmon must also realize that larger aggregated wholesale purchases of
bitcoin can be accomplished at more preferential pricing terms than
smaller individuals would be able to achieve acting on their own. The
consolidated purchasing power of a trust could easily make up for a good
portion of those fees.
Thirdly, and most importantly, the custodial features of safe-keeping and private key management are paramount.
The
Bitcoin Investment Trust administrative and safekeeping fee is
analogous to the storage fee assessed on gold and precious metals
warehousing. Also, a professionally-managed trust provides protection
against a slew of risks that could prove overwhelming for the casual
weekend bitcoin investor.
For instance, as enunciated
by Exante, top-level risks include data loss risk, hardware failure
risk, jurisdictional risk, external hacker risk, dishonest employee
risk, and employee death or disability risk. Also, succession planning
and inheritance are just as important with a bitcoin asset as with any
other asset.
Perhaps some year in the future Salmon will look back
at this bitcoin article and say “I was not a True Believer when I
really should have known better.” Or, maybe he will be smugly proud of
himself for establishing a massive short bitcoin position in 2013. I
doubt the latter.
According to the private placement memorandum,
ACAM has retained prominent service providers including Sidley Austin
LLP (legal counsel), Ernst & Young (auditor), Continental Stock
Transfer & Trust (transfer agent) and SecondMarket (marketplace,
custodian and authorized participant).
Investors who purchase
shares in the BIT will have the opportunity to gain liquidity through
periodic auctions on SecondMarket beginning in 2014. The Net Asset Value
(NAV) of the BIT will be calculated daily and made publicly available.
Disclosure:
Author is Executive Director of Bitcoin Foundation and participates on
the Advisory Board for Alternative Currency Asset Management (ACAM).
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