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Comment by hackernudes | Hacker News Reader

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)?

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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.

> 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-kn...

> 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?

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.

>>> 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.

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

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?

I thought reading long and boring documents and answering questions about them was what ChatGPT was for, no ?

Sorry, I am not your secretary. You can perfectly fine to go to read those yourself, please do not be lazy.

Then why are you even commenting.

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

If they diverge, an arbitrage opportunity will appear which market participants will jump on.

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.

I'm not familiar with what happened at 3AC but it sounds like there was leverage involved. The arb opportunity i'm talking about is something that exists with all ETFs and keeps them in line with the underlying asset.

3AC was doing the same arb on GBTC (with an extended lock-in before redemption), but GBTC had no mechanism for selling BTC once their premium reversed.

You don't need futures to arb this. You can demand a payout in cash if the ETF price is higher than the Bitcoin price. There will be market makers jumping on that.

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

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.

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.

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

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.

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.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)

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.

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.

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