A Tale of Two Bitcoin ETFs: COIN and SolidX

ETFs are investment products that allows a certain kind of investor – usually professionally managed money – to gain exposure to a type of asset that would otherwise be difficult if not impossible due to their industry’s regulations and investment norms. There are two US-based ETFs currently under review by the SEC: the COIN ETF from the Winklevoss brothers Tyler and Cameron, and the XBTC ETF from SolidX, a blockchain investment fund. The consensus among experts is that at least one of them will be approved in 2017.

If one or both ETFs are approved, that should give be a major boost to bitcoin’s price. Some traders believe the price run-up to end 2016 – where bitcoin zipped from below 800 to above 1100 within a month – is a sign of market confidence that an ETF will be approved as early as Q1 of 2017. That doesn’t look like it will happen now, as the SEC has again extended its deadline to make a necessary intermediate decision until March 11th.

Two data points indicate ETF approval will be very good for bitcoin’s price and the legitimacy of cryptocurrencies as an asset class:

Number one: The Grayscale Bitcoin Investment Trust (GBTC), still the only US-based exchange-listed product that tracks the underlying price of bitcoin, is trading at a 30% price premium over bitcoin today. This premium was as high as 60% in 2015. This means some investors in the world would rather pay 30-60% more to gain exposure to bitcoin through a regulated and institutionally managed investment vehicle.

Number two: When gold ETFs were first introduced in the mid-2000s, led by sponsors Benchmark Asset Management and Gold Bullion Securities, the gold spot price tripled within 5 years. Many more soon followed around the world.

Having read through both the COIN and XBTC S-1 filings with the SEC, I thought a good way to help us understand them would be a comparison chart of important features.

For the time-starved, here are the main differences:

  • The Winklevoss’ Brothers COIN ETF is all in the family: they use their own Gemini family of services to buy and secure bitcoin underlying the ETF shares. They use their own Gemini Exchange Auction Price as the price index to calculate portfolio value. They offer no insurance, although they have a sophisticated and well-explained cold storage process (again, a Gemini custodial service)
  • The SolidX ETF is more diversified: it uses a portfolio of respected independent services for buying and storing bitcoin and tracking its price. Their bitcoin holdings are insured up to $125M compared to an initial offering size of $1M. But they’re fairly vague about the process for securing their bitcoin

Until I know what fees either one is charging and what the final offering size will be, I recommend the Winklevoss Brothers COIN ETF because:

  • They are a more established and invested name in the bitcoin space, having launched a bitcoin exchange, bitcoin custodial services, and made many blockchain startup investments
  • They are already one of the largest holders of bitcoins, holdings that can provide liquidity in a pinch and a deeper familiarity with the market
  • They have staked their professional reputations on bitcoin and blockchain and have every incentive to see their product and the asset class succeed, and they’ve been working harder and for longer than the SolidX team
  • Finally, though they don’t have portfolio insurance (which I assume will mean they charge lower fees), they do have what seems to be a more sophisticated and thoughtful bitcoin storage system, and their ETF baskets represent a specified amount of bitcoin to start, unlike SolidX

That is not to say the Winklevoss Brothers ETF is perfect. As commenters have rightly pointed out, there are multiple conflicts of interest. They are not registered as an investment advisor with its attendant fiduciary and governance requirements (although I don’t think SolidX is, either).

Name COIN ETF [Form S-1] XBTC ETF [Form S-1]
Listed Exchange BATS NYSE Arca
Bitcoin Exchange Gemini Exchange a mix of major exchanges (eg, Coinbase, Kraken, and OKCoin) and the OTC market for large trades (eg, $500K or greater)
Offering Baskets of 10000 shares which represent, on the first day of trading, 1000 bitcoin each Baskets of 10000 shares with no specified quantity of bitcoin represented
Initial Offering Size $65 million (1000 baskets of 10000 shares at $65 per share, a price which will change depending on bitcoin’s price at launch) $1M
Fees Don’t know Don’t know; only clue is this NYSE Arca filing, regarding transaction fees: “Such expenses may vary, but the Trust currently expects such expenses to constitute 1% or less of the value of a Basket.”
Price Index Gemini Auction’s daily bitcoin auction price XBX, a composite reference rate for the price of bitcoin
Storage Gemini custodial services – cold storage using multi-sig and chain of custody with regular audits “a sophisticated technology system specifically designed to secure its bitcoin” ( we can assume it’s cold storage, but I don’t know if it’s multi-sig and what audit and verification procedures look like)
Insurance None provided Yes, up to $125M for 3 types of insurance: crime, excess crime and excess vault