Schafer: Bitcoin fund doesn't make a bit of sense

It's now clear who is likely to ruin the appeal of Bitcoins as an emerging electronic form of payment.

The Winklevoss brothers.

Still best known for their roles in the messy story of how Facebook got its start, Cameron and Tyler Winklevoss filed a registration statement with the Securities and Exchange Commission the week of the 4th of July for the Winklevoss Bitcoin Trust.

Even if they never sell a single share of their proposed fund, the Winklevoss brothers are doing a fabulous job of highlighting just what makes the Bitcoin such a silly financial innovation.

Odds seem to favor that the SEC will kill this proposed offering, but it's worth noting that there are more than 1,200 exchange-traded funds, and some appear to be almost as odd as a Bitcoin fund. And besides, the principal role of securities regulators like the SEC is to make sure there is full and understandable disclosure, not necessarily to sit in judgment on whether any proposed investment is wise.

The list of risk factors disclosed in the Winklevoss Bitcoin Trust filing starts on page 8 and wraps up on page 25. It's hard to imagine anybody who isn't a pure speculator reading past the first one.

"The loss or destruction of a private key required to access a Bitcoin may be irreversible," the filing states. "The Trust's loss of access to its private keys or its experience of a data loss relating to the Trust's Bitcoins could adversely affect an investment in the Shares."

The thing is, no one would be asking questions like this if the champions of the Bitcoin would only confine themselves to talking about payments.

Bitcoins first came into use in 2009, created by an unknown hacker or hackers. It was the time of the global financial crisis and its fallout, and hostility toward politicians and central bankers was running high. And here was Bitcoin, a virtual currency beyond of the reach of any of them.

A Bitcoin, created through a mathematical problem-solving process that's apparently known as "mining," is purely electronic. It can be swapped for currencies like dollars, and as a means of payment for those who know how to do it, the Bitcoin appears to be as advertised: Fast, anonymous and low-cost, if not free.

You can't pay your Ramsey County property taxes with them, but if you live and work in a place with an unstable currency and seek to do business electronically, maybe Bitcoins make some sense.

It has a few problems as a means of making payments, however. For one thing, it's not invulnerable to theft, but of course the same is true for U.S. dollars. A much bigger problem is its volatility.

The more volatile the currency, the less appeal it will have as a means of payment. Lining up a software programmer who wants to get paid in Bitcoins wouldn't be smart if a programmer who cost $75 an hour on Monday could cost $225 an hour on Friday.

Then there's the problem of scarcity. The creators capped the total amount of Bitcoins that can be mined at 21 million.

If you cared about keeping Bitcoins as an effective means of payment, the last thing you would do is go public with some scheme to turn them into an investment asset. If speculator appetite for scarce Bitcoins were to grow, say, with the entry into the Bitcoin market of a high-profile exchange-traded fund sponsored by two second-tier business celebrities, then the price of Bitcoins will surely rise.

Great, a speculator might say, look at the eye-popping value of my trading position. At the same time, however, the Bitcoin's value for making payments will be getting destroyed, simply because no one will be spending them. Why buy a car for 100 Bitcoins this week when the same car could be acquired next week for 90 Bitcoins?

So what the Winklevoss brothers are saying, and convincingly so, is that a Bitcoin isn't really money at all. It's a commodity.

Even the Winklevoss brothers, who emerged as Bitcoin magnates in the spring, can get themselves mixed up on what is useful in exchange and what's a good store of value.

As the brothers talked up the currency aspects in an interview in April with the New York Times, Tyler Winklevoss then added this: "We have elected to put our money and faith in a mathematical framework that is free of politics and human error."

Their fund's registration statement has the look and feel of a real securities offering, and it has language that's a bit more grounded than what they told reporters. It explains that "the value of Bitcoins is determined by the value that various market participants place on Bitcoins through their transactions."

Just like everything else human beings trade.

And in the thousands of years humans have been doing so, there's been plenty of human errors in the pricing of assets. If the Winklevoss brothers manage to get this Bitcoin fund of theirs launched, they will likely prove that point in spades.