<p>Normally, ETFs define a "Creation Units" (CU), for which they are exchangeable electronically with the ETF administrator.  If the size isn't be practical for a retail investor, then the value of any discrepancy is eventually captured by HFT arbitrageurs, thus forcing the prices into alignment.  This tends to be very effective in keeping the prices within transaction costs of eachother.</p>

<p><a href="http://www.investopedia.com/terms/c/creationunit.asp" rel="nofollow noreferrer">http://www.investopedia.com/terms/c/creationunit.asp</a></p>

<p><a href="https://www.flexshares.com/education/what-are-etfs/how-do-etfs-work" rel="nofollow noreferrer">https://www.flexshares.com/education/what-are-etfs/how-do-etfs-work</a></p>

<p>According to Crispy's Form S-1 link, if you're able to qualify as an "Authorized Participant", then you can do the redemptions yourself.  Normal people can't do it:</p>

<blockquote>
  <p>Baskets may be created or redeemed only by Authorized Participants.
  Each Authorized Participant must (1) be a <strong>registered broker-dealer</strong> or
  other securities market participant such as a bank or other financial
  institution which is not required to register as a broker-dealer to
  engage in securities transactions, (2) be a direct <strong>participant in DTC</strong>,
  (3) have entered into <strong>an agreement with the Trustee</strong> and the Sponsor
  (“Authorized Participant Agreement”) and (4) have established a
  <strong>Bitcoin custody account</strong> (“Authorized Participant Custody Account”)
  with the Trustee. The Authorized Participant Agreement provides the
  procedures for the creation and redemption of Baskets and for the
  delivery of Bitcoins required for such creations or redemptions. A
  list of the current Authorized Participants can be obtained from the
  Trustee or the Sponsor. See “Creation and Redemption of Shares” for
  more details.</p>
</blockquote>

<p>and the size is fairly large:</p>

<blockquote>
  <p>The Shares may be purchased from the Trust only in one or more blocks
  of [50,000] Shares (a block of [50,000] Shares is called a Basket).</p>
</blockquote>

<p>If not, and you spot a discrepancy in price, then you can go long the cheap basket vs. going short the expensive basket, and <em>theoretically</em> rely on the "Authorized Participants" to eventually normalize the prices.  In practice, these exchanges are <em>not</em> efficient and continue to exhibit pricing anomalies, so this trade could go very much against you and stay that way for a very long time.</p>

<p><a href="http://www.forbes.com/sites/beltway/2013/09/03/how-bitcoin-spreads-violate-a-fundamental-economic-law/" rel="nofollow noreferrer">http://www.forbes.com/sites/beltway/2013/09/03/how-bitcoin-spreads-violate-a-fundamental-economic-law/</a></p>

<p><a href="https://bitcoin.stackexchange.com/questions/9626/why-do-the-price-of-bitcoins-vary-wildly-between-exchanges">Why do the price of bitcoins vary wildly between exchanges?</a></p>

<p>If the W. Twins didn't distinguish between exchanges on their Creation Units , then Gresham's Law tells us that their ETF would become flooded with bitcoin from the cheaper exchanges.  I assume they're smart enough to figure this out, and define their Creation Units such that the CUs reflect the stated investment policy "to reflect the performance of a weighted average price of Bitcoins"</p>

<p><a href="http://en.wikipedia.org/wiki/Gresham%27s_law" rel="nofollow noreferrer">http://en.wikipedia.org/wiki/Gresham's_law</a></p>

CC BY-SA 3.0
2013-11-24T15:09:15.130Z
ok so basically you are saying that the shares we bought cannot be directly exchanged for bitcoins right?
Pacerier
CC BY-SA 3.0
2013-11-24T18:09:06.047Z
Correct.  I've updated my answer to include the actual requirements.  The size of 50,000 shares already rules out pretty much any normal individual.  Requirements 1 & 2 pretty explicitly say you have to be a securities mega-corp to do it; and Requirements 3 & 4 say that you need to set up prior contracts to do it.
woodvi
CC BY-SA 3.0
2013-11-25T12:12:15.690Z
Btw, Assuming everyone can exchange the shares directly for bitcoins, will a bitcoin ETF still be able to regulate pricing?
Pacerier
CC BY-SA 3.0
2013-12-01T17:38:02.630Z
The more who can, the faster the prices self-regulate.  http://en.wikipedia.org/wiki/Arbitrage#Price_convergence
woodvi
CC BY-SA 3.0
2013-11-23T18:48:30.057Z
2013-11-24T18:05:20.247Z
2017-04-13T12:47:33.283Z
woodvi
<p>You don't get the bitcoins themselves.  Your investment fluctuates in response to the exchange rate.  From the brothers W:</p>

<blockquote>
  <p>The investment objective of the Trust is for the Shares to <strong>reflect the</strong>
  *<em>performance</em>* of a weighted average price of Bitcoins, less the Trust’s
  expenses.</p>
</blockquote>

<p>In other words, if the average exchange rate USD/BTC is $230, and you buy $230 worth of the ETF, when the average rate goes to $250, you could sell the ETF shares for around $250 ("less the Trust's expenses").  All of your transactions would have taken place on a US stock exchange, using US dollars.</p>

<p>You <strong>could</strong> do this yourself, by buying and selling BTC on a variety of exchanges, but your profits would be more than eaten up with the commissions for buying and selling.  </p>

<p>The ETF, on the other hand, would presumably have the benefit of volume, and may not even have to invest all incoming funds when there are outgoing funds (from redemptions) at the same time.</p>

CC BY-SA 3.0
2013-10-24T16:54:47.047Z
Even though the transaction take place in USD, they stated that the ETF stock can itself be liquidated into bitcoins. That means, I can buy $230 worth of the ETF and sell it to the market with the highest rate (e.g. $260) for instant profit right? In fact, if they do maintain the "average rate", I could keep repeating that process since there will always be a market with a higher rate since their rate is set to be at "average".
Pacerier
CC BY-SA 3.0
2013-10-24T18:26:37.367Z
I didn't see anywhere that people buying ETF shares on the exchange would be able to redeem them directly for BTC.  The [Form S-1](http://www.sec.gov/Archives/edgar/data/1579346/000119312513279830/d562329ds1.htm#tx562329_14) filing says that "Authorized Participants" can invest and redeem in BTC, but those would be brokerage houses and the like. Ordinary investors would buy and sell shares at the *market value* set by the exchange and influenced by the trust's calculation of NAV.
Crispy
CC BY-SA 3.0
2013-10-24T18:36:17.560Z
It would certainly be possible to arbitrage between the ETF price and the "best price" exchange, whether or not you can redeem ETF shares directly to BTC. The trick will be to find significant differences after your transaction costs are taken into account. If the ETF takes off, there would be a lot of people buying or selling BTC wherever the prices stray far from the average. Further, the volume available at profitable prices is likely to be fairly low.
Crispy
CC BY-SA 3.0
2013-10-24T14:55:54.567Z
2013-10-24T14:55:54.567Z
Crispy
<p>The W.Twins bitcoin ETF/trust stock <a href="http://www.marketwatch.com/story/dont-laugh-off-the-winkleviis-bitcoin-etf-2013-07-08" rel="nofollow">can be converted to real bitcoins</a>. This means that we can buy $100 worth of stock and convert it to maybe 0.5 BTC depending on the current rate. And we can buy 0.5 BTC and convert it to maybe $100 worth of stock depending on the current rate.</p>

<p>Doesn't that make the bitcoin ETF yet another bitcoin exchange like MtGox, BitStamp, etc?</p>

<p><strong>What is the difference between a bitcoin ETF and a bitcoin exchange then?</strong></p>

<p><a href="http://www.businessinsider.com/winklevoss-bitcoin-etf-2013-7" rel="nofollow">W.Twins claimed</a> that the ETF shares will reflect the performance of a weighted average price of Bitcoins in the other markets. </p>

<p>Now we all know that's not going to happen. Being yet another exchange, it is subject to supply and demand, which in turn is dependent on the popularity and the ease of deposit / withdrawal of USD among other factors.</p>

<p>We can't say that BitStamp (or MtGox or BTC-e) rate is the weighted average of all the other exchanges can we? It simply has it's own unique rate, due to it's own unique supply and it's own unique demand. Similarly, the bitcoin ETF/trust will have it's own unique rate, due to it's own unique supply and it's own unique demand.</p>

<p>In fact, if we imagine that MtGox has a subsidiary called "MtGox-Trust", and each of our bitcoin in our MtGox account is a "MtGox-Trust" stock that we can sell and buy, then MtGox is effectively now a bitcoin ETF isn't it?</p>

<p><strong>Can someone explain how will a bitcoin ETF be any different from a bitcoin exchange?</strong></p>

<exchanges><trading><finance><bitcoin-etf>
How will a bitcoin ETF be any different from a bitcoin exchange?
Pacerier
# How will a bitcoin ETF be any different from a bitcoin exchange?

(Asked by: username_0 on 2013-10-22)

The W.Twins bitcoin ETF/trust stock [can be converted to real bitcoins](http://www.marketwatch.com/story/dont-laugh-off-the-winkleviis-bitcoin-etf-2013-07-08). This means that we can buy $100 worth of stock and convert it to maybe 0.5 BTC depending on the current rate. And we can buy 0.5 BTC and convert it to maybe $100 worth of stock depending on the current rate.

Doesn't that make the bitcoin ETF yet another bitcoin exchange like MtGox, BitStamp, etc?

**What is the difference between a bitcoin ETF and a bitcoin exchange then?**

[W.Twins claimed](http://www.businessinsider.com/winklevoss-bitcoin-etf-2013-7) that the ETF shares will reflect the performance of a weighted average price of Bitcoins in the other markets.

Now we all know that's not going to happen. Being yet another exchange, it is subject to supply and demand, which in turn is dependent on the popularity and the ease of deposit / withdrawal of USD among other factors.

We can't say that BitStamp (or MtGox or BTC-e) rate is the weighted average of all the other exchanges can we? It simply has it's own unique rate, due to it's own unique supply and it's own unique demand. Similarly, the bitcoin ETF/trust will have it's own unique rate, due to it's own unique supply and it's own unique demand.

In fact, if we imagine that MtGox has a subsidiary called "MtGox-Trust", and each of our bitcoin in our MtGox account is a "MtGox-Trust" stock that we can sell and buy, then MtGox is effectively now a bitcoin ETF isn't it?

**Can someone explain how will a bitcoin ETF be any different from a bitcoin exchange?**

**Tags:** exchanges, trading, finance, bitcoin-etf


---

## 2 answers

### Answer by username_1 on 2013-11-23. Score: 2 | Accepted answer

Normally, ETFs define a "Creation Units" (CU), for which they are exchangeable electronically with the ETF administrator. If the size isn't be practical for a retail investor, then the value of any discrepancy is eventually captured by HFT arbitrageurs, thus forcing the prices into alignment. This tends to be very effective in keeping the prices within transaction costs of eachother.

<http://www.investopedia.com/terms/c/creationunit.asp>

<https://www.flexshares.com/education/what-are-etfs/how-do-etfs-work>

According to username_2's Form S-1 link, if you're able to qualify as an "Authorized Participant", then you can do the redemptions yourself. Normal people can't do it:

> Baskets may be created or redeemed only by Authorized Participants.
> Each Authorized Participant must (1) be a **registered broker-dealer** or
> other securities market participant such as a bank or other financial
> institution which is not required to register as a broker-dealer to
> engage in securities transactions, (2) be a direct **participant in DTC**,
> (3) have entered into **an agreement with the Trustee** and the Sponsor
> (“Authorized Participant Agreement”) and (4) have established a
> **Bitcoin custody account** (“Authorized Participant Custody Account”)
> with the Trustee. The Authorized Participant Agreement provides the
> procedures for the creation and redemption of Baskets and for the
> delivery of Bitcoins required for such creations or redemptions. A
> list of the current Authorized Participants can be obtained from the
> Trustee or the Sponsor. See “Creation and Redemption of Shares” for
> more details.

and the size is fairly large:

> The Shares may be purchased from the Trust only in one or more blocks
> of [50,000] Shares (a block of [50,000] Shares is called a Basket).

If not, and you spot a discrepancy in price, then you can go long the cheap basket vs. going short the expensive basket, and *theoretically* rely on the "Authorized Participants" to eventually normalize the prices. In practice, these exchanges are *not* efficient and continue to exhibit pricing anomalies, so this trade could go very much against you and stay that way for a very long time.

<http://www.forbes.com/sites/beltway/2013/09/03/how-bitcoin-spreads-violate-a-fundamental-economic-law/>

[Why do the price of bitcoins vary wildly between exchanges?](https://bitcoin.stackexchange.com/questions/9626/why-do-the-price-of-bitcoins-vary-wildly-between-exchanges)

If the W. Twins didn't distinguish between exchanges on their Creation Units , then Gresham's Law tells us that their ETF would become flooded with bitcoin from the cheaper exchanges. I assume they're smart enough to figure this out, and define their Creation Units such that the CUs reflect the stated investment policy "to reflect the performance of a weighted average price of Bitcoins"

[http://en.wikipedia.org/wiki/Gresham's\_law](http://en.wikipedia.org/wiki/Gresham%27s_law)

> **Comments:**
> **username_0**: ok so basically you are saying that the shares we bought cannot be directly exchanged for bitcoins right?  
> **username_1**: Correct.  I've updated my answer to include the actual requirements.  The size of 50,000 shares already rules out pretty much any normal individual.  Requirements 1 & 2 pretty explicitly say you have to be a securities mega-corp to do it; and Requirements 3 & 4 say that you need to set up prior contracts to do it.  
> **username_0**: Btw, Assuming everyone can exchange the shares directly for bitcoins, will a bitcoin ETF still be able to regulate pricing?  
> **username_1**: The more who can, the faster the prices self-regulate.  http://en.wikipedia.org/wiki/Arbitrage#Price_convergence  

---

### Answer by username_2 on 2013-10-24. Score: 2

You don't get the bitcoins themselves. Your investment fluctuates in response to the exchange rate. From the brothers W:

> The investment objective of the Trust is for the Shares to **reflect the**
> \**performance*\* of a weighted average price of Bitcoins, less the Trust’s
> expenses.

In other words, if the average exchange rate USD/BTC is $230, and you buy $230 worth of the ETF, when the average rate goes to $250, you could sell the ETF shares for around $250 ("less the Trust's expenses"). All of your transactions would have taken place on a US stock exchange, using US dollars.

You **could** do this yourself, by buying and selling BTC on a variety of exchanges, but your profits would be more than eaten up with the commissions for buying and selling.

The ETF, on the other hand, would presumably have the benefit of volume, and may not even have to invest all incoming funds when there are outgoing funds (from redemptions) at the same time.

> **Comments:**
> **username_0**: Even though the transaction take place in USD, they stated that the ETF stock can itself be liquidated into bitcoins. That means, I can buy $230 worth of the ETF and sell it to the market with the highest rate (e.g. $260) for instant profit right? In fact, if they do maintain the "average rate", I could keep repeating that process since there will always be a market with a higher rate since their rate is set to be at "average".  
> **username_2**: I didn't see anywhere that people buying ETF shares on the exchange would be able to redeem them directly for BTC.  The [Form S-1](http://www.sec.gov/Archives/edgar/data/1579346/000119312513279830/d562329ds1.htm#tx562329_14) filing says that "Authorized Participants" can invest and redeem in BTC, but those would be brokerage houses and the like. Ordinary investors would buy and sell shares at the *market value* set by the exchange and influenced by the trust's calculation of NAV.  
> **username_2**: It would certainly be possible to arbitrage between the ETF price and the "best price" exchange, whether or not you can redeem ETF shares directly to BTC. The trick will be to find significant differences after your transaction costs are taken into account. If the ETF takes off, there would be a lot of people buying or selling BTC wherever the prices stray far from the average. Further, the volume available at profitable prices is likely to be fairly low.  

---

