Here comes SecondMarket’s new Bitcoin fund: but is it a trophy or a turd?

Bitcoin, the synthetic currency beloved by techies and libertarians, faces a catch-22 in its quest for mainstream acceptance: it needs more liquidity to attract investors, but most investors stay away because it’s not liquid enough.

The situation is improving, though, as as more firms offer products that could break the liquidity logjam. The latest of these is SecondMarket, a financial firm that specializes in hard-to-trade items. The company, and its Bitcoin-obsessed CEO, Barry Silbert, has launched the Bitcoin Investment Trust, which will resemble an exchange trade fund (ETF).

ETF’s are popular because they let investors trade shares that mimic the value of an underlying asset like gold or a basket of equities — or Bitcoin, in the case of SecondMarket. (To ensure the ETF shares maintain a value relative to the asset, the entity that controls the fund adds or destroys shares as needed.)

If this sounds familiar, that’s because it is. The twins known as the Winklevii, who may own more Bitcoin than anyone, are leading a charge to create a publicly-traded ETF for the currency but remain stuck in SEC negotiations. The difference for SecondMarket is that it proposes to offer the share only to private, accredited investors, meaning it is free from most of the regulatory headaches.

The new fund could be a vehicle for more liquidity, and Silbert suggests an ETF in Bitcoin will catalyze interest in the currency in the same the funds did for gold and silver a decade ago. But there are more than a few skeptics:

“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 but at the end of the day it’s still crap,” wealth manager Barry Ritholtz told the Verge, which has the best account of the SecondMarket offering. Other big financial names like Paul Kedrosky and Howard Lindzon are also skeptical.

There’s also the question of why an accredited investor interested in Bitcoin doesn’t simply buy and sell it directly — Bitcoins, after all, are easier to carry than a bar of gold. While plans for U.S.-based franchises of Tokyo-based Mt. Gox (the most popular Bitcoin exchange) have gone down in legal flames, services like Coinbase are now letting investors trade up to 50 Bitcoins (worth about $6,700 on September 25) instantly.