Winklevoss trust will test Bitcoin security concerns
Will an investment trust push Bitcoin into the mainstream? Or will security fears leave growth of the "cryptocurrency" stagnant?
Bitcoin is a currency that exists in a digital form and is bought and sold using software operating over peer-to-peer networks. But it's also a technology platform that is built with an open-source code that has essentially de-centralized transactions.
Cameron and Tyler Winklevoss on Monday filed a proposal with the U.S. Securities and Exchange Commission to create a Bitcoin trust that will allow investors to purchase shares on a secondary exchange that is a variation on an exchange-traded fund (ETF), Bloomberg reports.
According to the New York Times, the Winklevoss brothers claim to own $11 million worth of Bitcoin as of April 11 -- making them the largest-known single shareholders of the currency.
The Winklevoss Bitcoin Trust will be managed by Math-Based Asset Services, which is also co-founded by the twins, The Times reports. If approved by the SEC, the trust will act like a buffer for investors who are concerned about the security risks associated with the currency.
"The trust brings Bitcoin to Main Street and mainstream investors to Bitcoin," Tyler Winklevoss told the New York Times. "It eliminates the friction of buying and reduces the risks associated with storing Bitcoin while offering similar investment attributes to direct ownership."
Bitcoin drew international attention amid the financial crisis in Cyprus. Some speculated at the time that the nature of a bank that has no nationality and a finite number of "coins" that can be released could be especially appealing. According to Bloomberg Businessweek, Spanish investors turned to Bitcoin in March out of fear that the Cypriot government would raid domestic savings accounts to pay off the country's massive debts.
Since that time, the Bitcoin's value has seen wild fluctuation - shooting up to $266 per Bitcoin in April to $83, as of Wednesday.
The Winklevoss' proposal included 18 pages of risk factors, including the loss or destruction of the private key that is required to access a Bitcoin, unforeseen changes in technology and malicious software -- among other factors. What can make the investment pay off is if the currency can prove to be secure enough to be used by average consumers with minimal glitches.
"New technology comes with all sorts of new benefits, but it also comes with these downsides," Alan Reiner, developer at Bitcoin management software developer Armory, told CBSNews.com. "You need to take responsibility for your own money." Bitcoin owners are responsible for safely storing a record of ownership. Reiner says a majority of Bitcoin losses happen because of lost passwords.
"That needs to be addressed," Reiner says. "We need to come up with ways to come up with insurance."
Hacking is at the top of the list of concerns among novice users, who aren't tech savvy. Bitcoin owners store their shares in a virtual wallet on a computer or mobile device. But Reiner says some of the best experts in the field are working to improve security measures.
A method called cold storage is considered one of the safest ways to store Bitcoin, Reiner says. The data associated with a Bitcoin, like the private key, can be stored on a computer that has never been connected to the Internet. When trades or purchases happen, a USB drive can be used to communicate currency transfer approvals between the "cold" computer and one that is connected to the Internet. A wide variety of other security methods are also being explored by experts in the field.
The race to secure Bitcoin is under way, and the community that supports it is passionate about what the cryptocurrency symbolizes.
"The Bitcoin network is decentralized. Million computers are running the network," Reiner says, adding that to appreciate Bitcoin, you'd have to understand that there are no privileged users.
"Everyone is the same."
