The Winklevoss twins seem to have the best timing but the worst luck.
When the Winklevii filed for a physically backed bitcoin exchange-traded fund nearly three years ago, it created a stir. Their zeitgeist-capturing ETF filing garnered more press attention than all 139 new ETF launches that year combined but soon ran into a wall in the form of U.S. securities regulators.
Since then, the twins have made several adjustments to their filing as seen in the list below—presumably in an attempt to address the U.S. Securities and Exchange Commission's concerns. They even picked an exchange (Nasdaq) and a ticker (COIN) and hired prominent ETF lawyer Kathleen Moriarty of Kaye Scholer LLP. Still, no approval has been forthcoming from the SEC in the intervening years.
If the ETF dream is dead, or at least in regulatory limbo, there is an alternative path for the Winklevosses to explore in the form of a bitcoin exchange-traded note, or ETN. An ETN is legitimate enough for most investors, and it would likely have better tax treatment than an ETF. It would still need SEC approval via a rule change, but that's been done before, namely with VelocityShares, whose founders have received rule changes over the years for currency ETNs, volatility ETNs, and leveraged commodity ETNs.
ETNs are not held to the same standards as typical ETFs since they are unsecured debt obligations, or a promise to pay the holder of the ETN the total return of an index (in this case the "Winkdex," as seen in the chart below) on a set maturity date, which is typically 30 years in the future.
Otherwise, ETNs work similarly to ETFs in that they allow for creations and redemptions and trade on a public exchange that is widely accessible. That last part is hugely important, given that existing bitcoin products currently trade over the counter or are in a private fund for accredited investors.
While ETNs aren't required to hold what they track, most issuers choose to do so to avoid being exposed to market risk. In other words, the Winklevoss twins could operate it just like the physical-based ETF they so wanted and store the bitcoin in an electronic vault.
Currently, there are 204 ETNs with about $23 billion in assets. Most of that money comes from investors looking to sidestep unwanted tax treatment. That's why the lion's share of the assets are in ETNs that track futures contracts or master limited partnerships, both of which have unusual tax treatment in a physically replicating ETF wrapper. Since it doesn’t technically hold the virtual currency, a bitcoin ETN would get ideal tax treatment just like most plain-vanilla ETFs and stocks that investors are used to.
In fact, the only real difference for an ETN user is that investors have to stomach the credit risk of the issuer, typically a bank. The asset-weighted default rate of ETNs over the decade they've been around, however, is less than 0.1 percent, making the risk of an issuer-related loss fairly low.
But perhaps the bigger question beyond all this is do people really even want to invest or trade bitcoin anymore? When they filed three years ago, bitcoin was all the rage. Today, there's much less of a craze for this particular cryptocurrency, as seen in this chart showing the number of news stories mentioning 'bitcoin.'
Bad luck indeed.
Eric Balchunas is an exchange-traded-fund analyst at Bloomberg. This piece was edited by Bloomberg News.