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The only thing I am concerned about is "paper bitcoin" and rehypothecation. Is there anything published about how ETF entities might prove they have custody of

The only thing I am concerned about is "paper bitcoin" and rehypothecation. Is there anything published about how ETF entities might prove they have custody of the amount of bitcoin they claim (in other words, proof of reserves)?

CyberDildonics 3y ago
You sign a message with your private key. This has been solved since day 1 of bitcoin's existence.
- jdewerd 3y ago
  You can prove presence of assets, you can't prove absence of liabilities, and you can't audit the balance sheet without seeing both sides.
  - nullc 3y ago
    You can, but it's not simple in the context of an ETP, due to all the infrastructure in between the parties with an ownership interest and the assets. If we ignore that: Dumbest version: You give everyone a list of all the liabilities. They make sure they are in there themselves. Anyone left out isn't entitled to the assets in an insolvency, so there is an incentive to check. This isn't very efficient, giving everyone the whole list. But make a hash tree with each node carrying a hash and the sum of liabilities below it. Show each user their log2() sized proof. Much more efficient. This leaks information about the distribution of ownership. Replace the values with pedersen commitment (and range proofs on their sums), and only open the top and bottom ones. There is a fine writeup on the subject here: https://web.archive.org/web/20170928054354/https://iwilcox.me.uk/2014/proving-bitcoin-reserves https://web.archive.org/web/20170928054354/https://iwilcox.m... (Archive.org link because Zak died a couple years ago stomach cancer at age 40 due to an undetected chronic H. pylori infection, and his website didn't out survive him for long)
- hackernudes 3y ago
  I guess what I'm asking is do they have to do it? I haven't tried reading any of the filings, etc... I'm wondering if someone has already done the work for me to say if this issue has been addressed by the SEC and/or individual ETFs.
- fooker 3y ago
  Suppose you have 1 bitcoin, you can now show to a dozen different people that you have it. Convincing them to buy your ETF or whatever you are selling.
jekrb 3y ago
This should actually be quicker and easier to prove than something like gold ETFs (e.g. SPDR) or other commodity ETFs. The custody provider (e.g. Coinbase is the custody provider for most of these ETFs) should be able to simply show wallet addresses for all the Bitcoin they hold.
- panarky 3y ago
  >>> finally reaches its ultimate form of a centralised list maintained by the DTC > simply show wallet addresses for all the Bitcoin they hold DTC's database is not where the Bitcoin is. It's still on Bitcoin's decentralized blockchain, just like always. That's the ultimate authority no matter how many centralized forms you stack on top of it. At least with this structure, there are separate, distinct entities for custody, market making, transfer agent, etc. to reduce the incentives to self-deal and print fake paper securities and commodities. So a huge improvement on the current state of affairs, where FTX or Binance handles all of these functions, with no segregation.
piuantiderp 3y ago
This is a valid concern, the actual value of BTC and ETF might diverge wildly. Never a better time to actually own some
- lucw 3y ago
  If they diverge, an arbitrage opportunity will appear which market participants will jump on.
  - fsckboy 3y ago
    if they diverge because an economic shitstorm has started and everybody is buying food for survival with bitcoin, but the rump government still wants its cut of your new mad gainz, bitcoin in the ETF and bitcoin out of the ETF might maintain independent values, FEC vs RMB
    - kbrkbr 3y ago
      Talking about extreme situations, here is another possible scenario - if electricity is then rationed and works only for two hours a day, people with cigarettes or gold may actually buy the food, while people with Bitcoin go hungry, and the value may plummet.
      - jgilias 3y ago
        This needs to happen worldwide though. And if that’s the case I have a hunch that the value of my investments might just be the least of my concerns.
  - cmcaleer 3y ago
    A trade like this (partly) is what blew up 3AC. Borrowing has cost and if futures funding premium turns against you and your perceived arb, along with a further divergence against you, it’s game over. Funnily enough that GBTC gap basically closed today; it was a >30% discount when 3AC died. Very nice if you get paid to hedge! Not so nice when you’re paying 0.1% in hourly funding premium.
lucw 3y ago
With ETFs, you don't need to be concerned with reserves. I can buy the ETF, go to the market-makers, and ask them to exchange the ETF for either bitcoin, or a cash equivalent. If they can't deliver, they're in trouble. There's a two way arb in ETFs which keeps the price tracking accurate: - if the ETF trades higher than bitcoin on crypto exchanges: the market makers can simply buy bitcoin on exchange, sell the ETF on traditional exchanges: do this enough and the price difference narrows. - if the ETF trades lower than bitcoin on crypto exchanges: I can just buy the ETF, ask to redeem to bitcoin and pocket the difference. Sooner or later this price discrepancy goes away.
- latchkey 3y ago
  > I can just buy the ETF, ask to redeem to bitcoin and pocket the difference. Can only redeem to cash. https://www.etfcentral.com/news/two-important-things-need-know-upcoming-bitcoin-etf https://www.etfcentral.com/news/two-important-things-need-kn...
  - deleted 3y ago
    [deleted]
- tesdinger 3y ago
  > If they can't deliver, they're in trouble How are you protected against losing your investment if they can not deliver? > Price tracking Does Bitcoin support a high enough frequency of transactions for long enough to make this possible for years into the future? Does it not become too hard to mine at some point?
miohtama 3y ago
This is described in the every prospectus that was approved today. Prospectuses are public.
- johnyzee 3y ago
  Can you quote the relevant parts then, since you have apparently read all the prospectuses? I am wondering the same thing. Will they publish the custody addresses?
  - miohtama 3y ago
    Sorry, I am not your secretary. You can perfectly fine to go to read those yourself, please do not be lazy.
    - johnyzee 3y ago
      Then why are you even commenting.
  - ur-whale 3y ago
    I thought reading long and boring documents and answering questions about them was what ChatGPT was for, no ?

CyberDildonics 3y ago

You sign a message with your private key. This has been solved since day 1 of bitcoin's existence.

jdewerd 3y ago
You can prove presence of assets, you can't prove absence of liabilities, and you can't audit the balance sheet without seeing both sides.
- nullc 3y ago
  You can, but it's not simple in the context of an ETP, due to all the infrastructure in between the parties with an ownership interest and the assets. If we ignore that: Dumbest version: You give everyone a list of all the liabilities. They make sure they are in there themselves. Anyone left out isn't entitled to the assets in an insolvency, so there is an incentive to check. This isn't very efficient, giving everyone the whole list. But make a hash tree with each node carrying a hash and the sum of liabilities below it. Show each user their log2() sized proof. Much more efficient. This leaks information about the distribution of ownership. Replace the values with pedersen commitment (and range proofs on their sums), and only open the top and bottom ones. There is a fine writeup on the subject here: https://web.archive.org/web/20170928054354/https://iwilcox.me.uk/2014/proving-bitcoin-reserves https://web.archive.org/web/20170928054354/https://iwilcox.m... (Archive.org link because Zak died a couple years ago stomach cancer at age 40 due to an undetected chronic H. pylori infection, and his website didn't out survive him for long)
hackernudes 3y ago
I guess what I'm asking is do they have to do it? I haven't tried reading any of the filings, etc... I'm wondering if someone has already done the work for me to say if this issue has been addressed by the SEC and/or individual ETFs.
fooker 3y ago
Suppose you have 1 bitcoin, you can now show to a dozen different people that you have it. Convincing them to buy your ETF or whatever you are selling.

jekrb 3y ago

This should actually be quicker and easier to prove than something like gold ETFs (e.g. SPDR) or other commodity ETFs. The custody provider (e.g. Coinbase is the custody provider for most of these ETFs) should be able to simply show wallet addresses for all the Bitcoin they hold.

panarky 3y ago
>>> finally reaches its ultimate form of a centralised list maintained by the DTC > simply show wallet addresses for all the Bitcoin they hold DTC's database is not where the Bitcoin is. It's still on Bitcoin's decentralized blockchain, just like always. That's the ultimate authority no matter how many centralized forms you stack on top of it. At least with this structure, there are separate, distinct entities for custody, market making, transfer agent, etc. to reduce the incentives to self-deal and print fake paper securities and commodities. So a huge improvement on the current state of affairs, where FTX or Binance handles all of these functions, with no segregation.

piuantiderp 3y ago

This is a valid concern, the actual value of BTC and ETF might diverge wildly. Never a better time to actually own some

lucw 3y ago
If they diverge, an arbitrage opportunity will appear which market participants will jump on.
- fsckboy 3y ago
  if they diverge because an economic shitstorm has started and everybody is buying food for survival with bitcoin, but the rump government still wants its cut of your new mad gainz, bitcoin in the ETF and bitcoin out of the ETF might maintain independent values, FEC vs RMB
  - kbrkbr 3y ago
    Talking about extreme situations, here is another possible scenario - if electricity is then rationed and works only for two hours a day, people with cigarettes or gold may actually buy the food, while people with Bitcoin go hungry, and the value may plummet.
    - jgilias 3y ago
      This needs to happen worldwide though. And if that’s the case I have a hunch that the value of my investments might just be the least of my concerns.
- cmcaleer 3y ago
  A trade like this (partly) is what blew up 3AC. Borrowing has cost and if futures funding premium turns against you and your perceived arb, along with a further divergence against you, it’s game over. Funnily enough that GBTC gap basically closed today; it was a >30% discount when 3AC died. Very nice if you get paid to hedge! Not so nice when you’re paying 0.1% in hourly funding premium.

lucw 3y ago

With ETFs, you don't need to be concerned with reserves. I can buy the ETF, go to the market-makers, and ask them to exchange the ETF for either bitcoin, or a cash equivalent. If they can't deliver, they're in trouble. There's a two way arb in ETFs which keeps the price tracking accurate: - if the ETF trades higher than bitcoin on crypto exchanges: the market makers can simply buy bitcoin on exchange, sell the ETF on traditional exchanges: do this enough and the price difference narrows. - if the ETF trades lower than bitcoin on crypto exchanges: I can just buy the ETF, ask to redeem to bitcoin and pocket the difference. Sooner or later this price discrepancy goes away.

latchkey 3y ago
> I can just buy the ETF, ask to redeem to bitcoin and pocket the difference. Can only redeem to cash. https://www.etfcentral.com/news/two-important-things-need-know-upcoming-bitcoin-etf https://www.etfcentral.com/news/two-important-things-need-kn...
- deleted 3y ago
  [deleted]
tesdinger 3y ago
> If they can't deliver, they're in trouble How are you protected against losing your investment if they can not deliver? > Price tracking Does Bitcoin support a high enough frequency of transactions for long enough to make this possible for years into the future? Does it not become too hard to mine at some point?

miohtama 3y ago

This is described in the every prospectus that was approved today. Prospectuses are public.

johnyzee 3y ago
Can you quote the relevant parts then, since you have apparently read all the prospectuses? I am wondering the same thing. Will they publish the custody addresses?
- miohtama 3y ago
  Sorry, I am not your secretary. You can perfectly fine to go to read those yourself, please do not be lazy.
  - johnyzee 3y ago
    Then why are you even commenting.
- ur-whale 3y ago
  I thought reading long and boring documents and answering questions about them was what ChatGPT was for, no ?