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Bitcoin ETF: the case of the bear
That of Bitcoin (BTC) Price action last year (more than doubling in 2023) was driven, to a large extent, by a resurgence of interest in spot bitcoin exchange traded funds (ETFs). BlackRock’s unexpected filing with the U.S. Securities and Exchange Commission (SEC) in June drew attention to the asset, which was one of the year’s best performers, posting gains of more than 100%.
Now, with the approval of a Bitcoin ETF expected this week (as early as today), many are trying to “sell the news” of BTC’s good fortune. This is an excerpt from The Node newsletter, a daily roundup of the most crucial crypto news on CoinDesk and beyond. You can sign up to get the full service newsletter here. As for the bull case for Bitcoin ETFs, See here.
It remains an open question whether the SEC will approve one or more of the dozens of open spot bitcoin ETF applications, although a denial is still on the cards. Bitcoin ETFs that remain in limbo, or the status quo, may not even be bad for cryptocurrencies. In fact, live bitcoin ETFs may not be all that market watchers are counting on; they could also be a net negative for the industry.
For complete coverage of bitcoin ETFs, click Here.
Without a doubt, a bitcoin ETF would be a sign of maturity for all cryptocurrencies (I’ve covered the topic bull case here). And that’s exactly what antagonistic politicians, including Senator Elizabeth Warren (D-MA), and skeptical regulators like SEC Chairman Gary Gensler they are worried. This was exemplified by a last-minute open letter from Better marketsan organization with ties to both, which argued that a bitcoin ETF would legitimize an industry rife with fraud.
Are cryptocurrencies ready for this?
Even though a court ruling last year is forcing the SEC to make a decision on bitcoin ETFs by January 10, it’s worth taking some of the agency’s historical concerns about cryptocurrency ETFs seriously. Essentially, the SEC has refused to approve a bitcoin ETF since the Winklevoss twins first pitched it a decade ago due to concerns about market manipulation.
Manipulation is typically a concern for ETFs that track indices (or baskets of different assets), because there can be a difference between the prices of the reference assets and the daily information provided by the ETF managers that can be exploited by those with inside information on indices. However, a similar problem could arise based on how the price of bitcoin is formulated.
Since bitcoin is decentralized, there is no single price for bitcoin. Instead, its dollar value is often calculated by averaging the current price of bitcoin on a few reputable exchanges. However, even on established exchanges, it is not unheard of for investors to deliberately or accidentally push cryptocurrency prices up or down with large trades, opening up arbitrage opportunities.
This type of market manipulation isn’t a huge concern to the vast majority of cryptocurrency traders today, and likely won’t be to most potential investors in bitcoin ETFs. But it could become a bigger problem once the Quants get involved. BlackRock was first to suggest a ‘surveillance sharing deal’ via cryptocurrency exchanges to allay SEC fears, but not everyone agrees convinced it will work.
Furthermore, putting aside privacy concerns resulting from increased market surveillance, there is also the broad question of who truly benefits from bitcoin ETFs. Exchange-traded funds often increase the cost of underlying hedging assets. This seems like a boon for bitcoin holders, until you consider what it means for commodities like gold and oil, which are both investments and assets that cost money to use.
In other words, what is the long-term impact on Bitcoin’s usability if 1 BTC = $1 million? What would these fees look like? It is true that bitcoin is divisible into satoshis, that 1 BTC will always be equal to 1 BTC. But wouldn’t many people simply be priced out in the end, particularly those in developing countries that bitcoiners want to “bank?”
And this essentially is the crux of the matter: Bitcoin, by its sheer force of being, invites a cultural clash between the haves and have-nots. Doesn’t the possible success of a bitcoin ETF undersell the original vision of a system that is outside the System?
What is a Bitcoin ETF? This is a stock representing BTC that could end up in the 401(k)s of millions of people via a product managed by the world’s largest asset manager using coins held by an external company (Coinbase is the main custodian of US ETFs). In other words, it is not a “gateway to adoption”; it is a corruption of the idea that, through self-custody, you can take control of your money.
There are certainly shades of grey, especially considering that open protocols by definition can be used by anyone. In this sense, BlackRock’s invasion does not make Bitcoin any less peer-to-peer. But there are unanswered questions about what Wall Street’s growing influence on Bitcoin means for the protocol, whether the influx of money will change the reality of Bitcoin Core development or mining.
There are trade-offs for everything. And it remains to be seen how much it will cost to bring Bitcoin to the “mainstream”.