Winklevosses’ Bitcoin Trust investment carries risks

Los Angeles TimesJuly 2, 2013 

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Cameron (L) and Tyler Winklevoss leave the U.S. Court of Appeals on January 11, 2011 in San Francisco, California. Twin brothers and former Harvard University classmates Cameron and Tyler Winklevoss are requesting that a three-judge panel of the U.S. Court of Appeals in San Francisco to void a 2008 agreement to pay the twins $65 million citing that Facebook did not give an accurate valuation of its shares before agreeing to pay the settlement.

JUSTIN SULLIVAN — Getty

— The Winklevoss twins want to give investors a piece of the virtual currency Bitcoin, the growing popularity of which has caught the eye of entrepreneurs and regulators alike.

Shares in the Winklevoss Bitcoin Trust “are designed for investors seeking a cost-effective and convenient means to gain exposure to bitcoins with minimal credit risk,” according to a prospectus filed with the U.S. Securities and Exchange Commission on Monday.

But Bitcoin, which an anonymous programmer created in 2009, has no backing of any government. The currency’s value has proved highly volatile. Exchanges on which bitcoins trade have been hacked.

So what could go wrong with the investment proposed by Cameron and Tyler Winklevoss, famous for claiming they came up with the idea for Facebook Inc.?

Plenty, according to their securities filing.

Eighteen of the filing’s 74 pages, or about 24 percent, address “risk factors” facing prospective investors.

Such filings often contain a parade of potential worst-case scenarios that have little chance of ever coming to fruition, but they can highlight the unique challenges facing a business – including one in the fast-evolving frontier of digital currency.

For one, the filing notes how Bitcoin is used more by speculators than “in the retail and commercial marketplace.” That could lead to price volatility and could “adversely affect” investors, the filing said.

And Bitcoin’s libertarian appeal may also invite potential losses.

Exchanges on which bitcoins trade are “largely unregulated and may therefore be more exposed to fraud and failure,” the filing said.

Hackers, malware and sabotage could threaten the Bitcoin trading network, endangering an investment, the filing noted.

Despite safeguards put in place, a security system is “not impenetrable and may not be free from defect,” it said.

And if something happens, the filing noted, “the trust may not have adequate sources of recovery if its bitcoins are lost, stolen or destroyed.”

Perhaps one of the biggest risks is how governments around the world will try to regulate the burgeoning digital currency.

In the U.S., officials have become increasingly concerned about how digital currencies in general could be used to launder money from illegal activities.

“It may be illegal now, or in the future, to acquire, own, hold, sell or use bitcoins in one or more countries, and ownership of, holding or trading in (shares of the trust) may also be considered illegal and subject to sanction,” the filing stated.

Jim Angel, a finance professor at Georgetown University, said the risk factors are “very different” from those in a typical prospectus.

“Here what you have is a speculative vehicle that is based on a digital currency of uncertain provenance and uncertain future,” Angel said.

“We have a new technology here that is untried.

“According to some people, it has a great deal of promise. According to some other people, it will soon be in the dustbin of history. … Time will tell which view is correct.”

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