I have to admit I’m disappointed in this one. It’s no secret that I’m very skeptical about what’s likely to happen when small, risky investments start getting lots of publicity thanks to the ban on general solicitation being lifted. And I’m even more skeptical about funds which do nothing but invest in bitcoins. But at the same time I like quite a lot of the SecondMarket business model. They provide a valuable service to private companies, and they have every ability to carve out a nice little niche for themselves as an accreditation and investment platform — a one-stop shop which allows companies and funders both to avoid much of the onerous paperwork normally associated with private investments.

The problem is that SecondMarket isn’t just a service for issuers and investors. It has also, of late, become a lead-generation engine — or, to put it another way, a mechanism for selling schmucks to wolves. SecondMarket has contact details for a very large number of accredited investors, many of whom trust the company and the reputational capital it has built up over the years. If you send enough of those investors investment pitches for diamond funds, or art funds, or space-based vaporware, the sillier among them will bite. And, eventually, regret doing so. SecondMarket’s investor list is a valuable thing, but the company isn’t behaving in the manner that you’d expect of an owner of something precious and valuable. Instead, it seems to be happy renting its list out to just about anybody.

SecondMarket began life as a way to monetize illiquid fixed-income investments during the financial crisis; it then morphed into a quasi-exchange for Facebook shares. Both businesses were lucrative, but both also came to a natural end, and now it seems that the company is not particularly confident in its ability to make similar sums as a high-end services company. So observers who discerned a whiff of desperation when they first started receiving pitch emails are not going to be surprised by SecondMarket’s latest development: a bitcoin fund.

Bitcoin Investment Trust is basically exactly the same thing as the Winklevii’s bitcoin ETF, only it doesn’t need SEC approval — it’s limited to accredited investors. (But it can still be marketed in public, now that the general solicitation ban has been lifted.) That means it’s even more problematic than the Winkleproduct — it has all the same downsides, plus added illiquidity! If you buy into this trust, you still can’t do the single most useful thing that anybody can do with bitcoins, which is sell them or trade them. (Bitcoins are a combination of currency and commodity; this trust strips out the interesting bit, which is the currency part, leaving just the stupidly speculative commodity aspect.) You still have to pay a fee of 2% per year to SecondMarket for all the work they’re doing sitting on your bitcoins. And then, if you ever do decide to sell, you have to pay another 1.5% fee to get out. On top of that, if you buy into the trust after January 1, you’re also going to have to pay a 1.5% fee to get in.

SecondMarket CEO Barry Silbert is a big booster of bitcoins — he thinks that in 30 years’ time, they’ll be worth lots of money. He’s even put together a 14-page investor presentation, saying that bitcoins could be worth $7,692 apiece if they wind up being worth 1% of the value of the world’s gold today. So let’s say you invest $1,367 in ten bitcoins today: in 30 years’ time, they might be worth $76,920.

On the other hand, if you invest $1,367 in the bitcoin trust, and pay a 1.5% fee, then you only end up with 9.85 bitcoins. And then if you lose 2% of your bitcoins every year for the next 30 years, and then you lose another 1.5% when you sell, your total bitcoin holding in 30 years’ time will be just 5.29 bitcoins. Even if they’re worth $7,692 each, that’s a total of just $40,709 — you’ve ended up paying SecondMarket a full 47% the money you would have made if you’d just sat on the bitcoins yourself.

More profoundly, this announcement marks the end of SecondMarket as an agnostic platform, and the beginning of SecondMarket as a booster of specific investments. The company has already seeded its bitcoin trust with $2 million of its own money — it’s making a big bitcoin bet, and is actively encouraging all of its users to do likewise. Silbert knows that the bitcoin trust is risky: that the most likely scenario is that it goes to zero. It’s a lottery ticket, basically — but one which pays a constant stream of management fees to Silbert’s company, and which risks putting investors off SecondMarket for good if it fails.

Silbert has a Wall Street background, and SecondMarket is a registered and fully regulated broker-dealer. As such, it really should be bending over backwards to be as conservative and sober as it can — no one wants their broker-dealer to be some risky fly-by-night operation offering investments with massive downside. If you’re a broker-dealer, job one is always to be as trustworthy as possible. And getting involved in bitcoins is not a great way of demonstrating trustworthiness.

I have spoken to Silbert about this, at some length, but I still don’t really understand (a) why he’s doing this; and (b) why he’s doing this under the auspices of SecondMarket. Bitcoin does breed True Believers, and Silbert might well be one of them — but that’s no reason to put at risk the reputation of the company he’s spent so many years building up. I don’t necessarily think that SecondMarket has definitively jumped the shark today — I think that it can probably recover from this misstep if it tries. But a bitcoin trust is not a good idea. It didn’t make sense when the Winklevii first came up with it, and it makes no more sense now that SecondMarket has followed their lead. No sensible investor should go anywhere near it, and anybody using SecondMarket as a platform should be more than a little concerned that their trusted broker-dealer has taken this highly unorthodox road.