The Winklevoss brothers, best known for their long-running dispute with Mark Zuckerberg over Facebook's origins, have gotten into Bitcoin in a big way. They've said they hold about 1 percent of the world's supply of Bitcoins, and they've become active investors in Bitcoin startups. Their latest move has been to create the first mainstream vehicle for investing in Bitcoins. If approved by regulators, the Winklevoss Bitcoin Trust will allow people with zero technical savvy to add Bitcoins to their portfolios with an ordinary brokerage account.
In their S-1 filing with the Securities and Exchange Commission, the Winklevii are required to disclose risks that could negatively impact the value of the Winklevoss Bitcoin Trust. The filing provides a helpful reminder of all the ways that Bitcoin investing can go horribly wrong—whether you invest in the Winklevoss brothers' fund or buy bitcoins on your own:
1. Lost keys. Unlike conventional web services, the Bitcoin network doesn't have a "password reset" mechanism. "The loss or destruction of a private key required to access a Bitcoin may be irreversible," the Winklevii warn. Once you lose they keys to your Bitcoin account, the Bitcoins are gone forever.
2. Falling popularity. "The slowing or stopping of the development or acceptance of the Bitcoin Network may adversely affect an investment in the Shares." If people stop using the Bitcoin network, Bitcoins won't be worth anything.
3. Price volatility. "There is relatively small use of Bitcoins in the retail and commercial marketplace in comparison to relatively large use by speculators," the brothers say. That can lead to wild price fluctuations.
4. Changes to the Bitcoin protocol. Bitcoin is an open source project. "The administrators of the Bitcoin Network’s source code could propose amendments to the Bitcoin Network’s protocols and software that could adversely affect an investment in the Shares."
5. Hacking. The Bitcoin network operates by consensus. The Winklevii worry about "a malicious actor or botnet" gaining control of a majority of nodes on the network, which could give it the power to change the rules, damaging the currency's long-term value.
6. High fees. Currently, the Bitcoin network has transaction fees that are much lower than conventional credit card networks. But that could change. If fees go up, that could "decrease demand for Bitcoins and prevent the expansion of the Bitcoin Network to retail merchants and commercial businesses."
7. Upgrade problems. Some nodes in the network could upgrade their software to a new version that was incompatible with previous versions of the Bitcoin protocol. That "could result in a 'fork' in the Blockchain, resulting in the operation of two separate networks," confusing consumers and reducing the demand for Bitcoins.
8. Patent trolling. "Intellectual property rights claims may adversely affect the operation of the Bitcoin Network."
To be clear, this doesn't necessarily mean you shouldn't buy Bitcoins. All investments are risky, and investments in new technologies are particularly so. But if you do buy Bitcoins, it's important to understand what you're getting into.