The upstart stock exchange SecondMarket has made a name for itself allowing investors to buy shares of hot private companies like Twitter. Now that those companies are going public, SecondMarket is turning its attention to the next new thing — bitcoin. On Thursday, SecondMarket is expected to begin raising money for an investment fund — the first of its kind in the United States — that will hold only bitcoins, giving wealthy investors exposure to the trendy but controversial virtual currency. The fund, the Bitcoin Investment Trust, aims to provide a reliable and easy way to bet on the future price of bitcoin, a currency generally traded on unregulated, online exchanges based overseas.
“If you speak with people who have tried to purchase bitcoin in the past — you’ll hear, ‘it’s a difficult process,’ ‘it’s a confusing process,’ ‘it’s a scary process,’ ” said Barry Silbert, the chief executive of SecondMarket, based in New York. “We want to make it an accessible asset class.” SecondMarket’s venture into bitcoin represents the latest effort to bring the virtual currency into the mainstream. But it is also likely to fuel the debate around the legitimacy and legality of a form of money that exists outside the conventional banking system, and has already attracted scrutiny for being used in illicit transactions. Created in 2009 by a still unknown individual, or group, known as Satoshi Nakamoto, bitcoins exist only in digital form and can be bought with traditional money through the Internet. New bitcoins are “mined” by programmers solving complex math problems.
The original programmers determined that only a finite number of bitcoins would be created. While bitcoin is accepted as a form of payment by a growing, but still small number of businesses, it is mostly the domain of speculators, some of whom are drawn to its potential as an alternative to national currencies. The fortunes of bitcoin have in some ways paralleled the postfinancial crisis interest in gold, another asset that has appealed to investors skeptical of the monetary policy of the major central banks. “It’s still at a point where the value is set by what the next guy is willing to pay for it,” said Brian Riley, senior research director at the CEB TowerGroup. “Even though it’s got the cool factor to it, it’s still not a place to park your 401(k).” Bitcoins gained much wider public exposure this year, when the price doubled and then collapsed over a few weeks. Recently, the price of a single bitcoin has stabilized, trading at $135, down from its peak of more than $250 in April. The total value of all outstanding bitcoins is currently over $1.5 billion. The SecondMarket fund’s creation comes just a few months after Cameron and Tyler Winklevoss, the technology investors best known for their involvement with Facebook, announced the creation of a similar product. The Winklevosses’ vehicle, though, will be an exchange traded fund, or E.T.F., accessible to all investors. As a result it must go through a lengthy and uncertain review process with federal regulators.
In contrast, the SecondMarket fund can begin raising money immediately because it will be available only to investors who meet a wealth threshold set by the Securities and Exchange Commission. Those who qualify, called “accredited investors,” must have a net worth of at least $1 million, excluding their primary residence, or annual income of more than $200,000 in each of the previous two years. Mr. Silbert said that because of the risky nature of bitcoins, they should not be sold to ordinary retail investors who could buy E.T.F.’s. “It’s premature for this kind of product to be in the public market,” Mr. Silbert said. “It should not be available to unsophisticated investors.” Mr. Silbert, who started SecondMarket in 2004, has built a business making markets in risky, inaccessible investments. The company operates an exchange on which employees of private companies can sell their shares to wealthy investors, essentially a private-company stock market. This kind of trading exploded in recent years because of the boom in social networking Web sites, driving up the valuations of start-ups like Facebook, Twitter, Groupon and Zynga. Now that all these companies have either gone public or announced their intention to do so, there are questions about how SecondMarket and its ilk will adapt. Its biggest competitor, SharesPost, announced a partnership with Nasdaq to raise the visibility of its private exchange. For SecondMarket, the bitcoin fund signals a push to diversify into new businesses. Beyond its exchange for private company shares, it has facilitated the buying and selling of other hard-to-trade assets like bankruptcy claims and auction rate securities. Another recently created division helps start-ups raise capital. The company has already amassed a $2.25 million stake of bitcoins that will seed the new fund. SecondMarket has spent the last year developing relationships with over a hundred bitcoin players, including programmers, merchants and exchanges. Those relationships should make it easier for the company to quickly find the best price for bitcoin at a given time. SecondMarket says the fund will make it possible for investors to have access to the bitcoin market without dealing with the sometimes unreliable online exchanges and the complex security issues involved in storing digital money. Packaging bitcoins as a fund may also allow the investment to be kept in tax-advantaged retirement account, Mr. Silbert said. SecondMarket’s new fund is following in the steps of Exante, a hedge fund operator in Malta. That firm said that its Bitcoin Hedge Fund has amassed 90,000 bitcoins, which would be worth about $12.2 million. Mr. Silbert, 37, has already been involved in the bitcoin world, parlaying his early purchases of the digital money into a broader array of investments in bitcoin-related companies including Coinbase, a bitcoin storage company, and Bitpay, a payment processor. One of the risks for bitcoin investors is the uncertain regulatory environment. A Senate committee and a number of state regulators have been examining whether the currency is evading financial oversight, allowing it to be used by money launderers, tax dodgers and drug traffickers. The world’s largest bitcoin exchange, Mt. Gox, based in Japan, has had numerous run-ins with American authorities, leading to periodic closings of the service for American customers. On at least one front, though, SecondMarket is taking advantage of relaxed regulations that went into effect just this week letting financial firms publicly market their private funds. But that does not mean that investment experts think the bitcoin fund will be a smart purchase for most investors, even well-heeled ones. “Just because the S.E.C. now allows a private fund to advertise an offering doesn’t mean it’s a prudent investment,” said Jay G. Baris, a lawyer who leads the investment management practice at Morrison & Foerster. “And investing in bitcoin does not have the same risk profile as investing in a blue chip stock.”