Despite its many booms and busts, cries that it’s a passing fad and a technological fallacy, Bitcoin simply won't go away. Five years after it was introduced to the world on an obscure mailing list for cryptography experts, the bitcoins in circulation are now worth around $1.5 billion. But so far, most traditional investors have stayed away, frightened off by occasional government shutdowns of the largest trading hubs, volatile price spikes, and the difficulty in exchanging bitcoins quickly.

Now SecondMarket, the exchange that specializes in selling hard-to-trade items like distressed debt and Twitter stock, is launching what it calls the Bitcoin Investment Trust, an investment vehicle which will function like an exchange-traded fund (ETF). The goal is to give hedge funds and institutional investors enough confidence to finally dabble in this esoteric currency.

SecondMarket sees a goldmine in Bitcoin

The basics of an ETF are simple. Instead of buying something directly which is difficult to store and trade, like a bitcoin or a bar of gold, investors can buy shares in an ETF which represent ownership of these items. The custodian of the ETF creates and destroys shares so that the price of the ETF tracks that of the commodity which is represents. In this case SecondMarket is the custodian, and is seeding the bitcoin trust with $2 million of its own capital.

SecondMarket hopes its new trust will do for bitcoin what the ETF did for gold. Before 2004, investing directly in gold was difficult. As the Motley Fool notes, "The ETF was quite revolutionary when it first came out. Before then, investing in gold meant either paying costly commissions to coin dealers or getting a futures account that required huge investments and high levels of risk. Stock investors tended to invest in mining companies instead." In the decade since, investing in gold has boomed and the value of the largest gold ETF has grown more than twelvefold.

"People have been scared off Bitcoin by the fact that you needed to put your money in an unregulated overseas platform that has been cut off by banks and scrutinized by the Fed," says Barry Silbert, CEO of SecondMarket. "We are looking to remove the pain points and create a way to invest that is faster and more secure." In some ways, says Silbert, this new fund is not really a departure from what SecondMarket has been doing. "We are in the business of taking illiquid assets classes, like [pre-IPO] Facebook shares, and making them easy for a larger group of investors to access and understand."

"People have been scared off Bitcoin."

There is another group actively at work trying to create a Bitcoin ETF, the infamous Winkelvoss twins, best known for their role in Facebook’s founding. The brothers filed a proposal with the SEC to create an electronically traded fund. "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 Bitcoins while offering similar investment attributes to direct ownership."

SecondMarket's head of communications Mark Murphy doesn't think the Winkelvoss stand much chance of success. "The SEC approval process is long and arduous. We don't expect to see a public ETF like that any time soon." For now the SecondMarket trust is private, open only to accredited and institutional investors. "We don't think it has the right risk profile for retail investors."

There are plenty of SecondMarket skeptics in the financial community. "You can put a nice wrapper around a turd, and present it in a very well-manicured product to investors that you say is safe," says Barry Ritholtz, a wealth manager and founder of The Big Picture blog, "but at the end of the day it’s still crap."

"This seems like a marketing stunt to me," says StockTwits Howard Lindzon. An ETF, he argues, "has no impact on the underlying stability of Bitcoin, which has been all over the map." Because there are relatively few Bitcoins trading hands each day, critics argue an ETF could distort prices. "The trouble starts when the derivative [the ETF], is more liquid than the underlying asset," says Paul Kedrosky, a venture capitalist and author of the finance blog Infectious Greed. "You can get this entertaining and horrifying tail-wagging-the-dog phenomenon."

"Entertaining and horrifying tail-wagging-the-dog phenomenon."

But ETFs have suffered similar slights in the past. "Industry watchers laughed when the first specialty internet fund was launched back in the late 1990s, right up until the early iterations of those funds became a huge success," writes Chuck Jaffe on Market Watch. "They also laughed just over a decade ago at the first gold exchange-traded funds, saying funds backed by hard assets were a gimmick; today gold ETFs, combined, are the world’s fourth-largest holder of gold, behind only the United States, Germany, and the International Monetary Fund."

At least one investment advisor thinks a Bitcoin ETF would be an interesting opportunity for his clients. Jack Tatar spent years as an analyst with Morgan Stanley before starting his own market research firm. "I think Bitcoin presents an interesting alternative investment, something with a lot of risk and a lot of reward." Up till now, says Tatar, it's been too difficult to put clients' money into the digital currency. "An ETF would definitely change that."