The Bitcoin ETF — A Marketing Stunt Accelerating Adoption
The new year has only recently started, but we have already witnessed enough turbulent headlines within the crypto industry to inspire Hollywood screenwriters with material labelled as “based on true events.” The Securities and Exchange Commission (SEC), largely responsible for most of the drama within the space, can certainly pride itself with a self-printed cinematographic golden star award this time for playing a crucial role in destroying the wealth of investors they swore to protect. While debating and opposing the implementation of a specific investment product certainly has merit, causing misinformation due to the failure of implement basic Social Media security features, and destroying approximately $220 million worth of investor value along the way, is borderline criminal and absolutely unacceptable. A government institution that imposes its published words as the only truth to be considered must be held liable for this kind of negligence. One cannot vehemently argue against blockchain technology and its growing investment offerings because of privacy concerns, security risks, and threats to Anti-Money Laundering (AML) agreements when, on the other end of the stick, basic best practices are ignored.
The known risks of cryptocurrencies are omnipresent and should always be at the forefront when driving technological development forward. However, that is a topic for a different day.
Today, we want to focus on the, in retrospect inevitable approval of the Bitcoin Exchange-Traded Fund (ETF) by the SEC and what this means for blockchain and Bitcoin. To recap, an ETF is a type of investment vehicle that tracks an index (i.e., the price) of the collection of securities the fund comprises. This pool can include stocks, bonds, or commodities, depending on the purpose of the product. Exchange-Traded Funds have several key characteristics that make them interesting to institutional and retail investors, including liquidity, diversification, lower costs, transparency, and tax efficiency.
Bitcoin’s TradFi Adoption
The ETF concept is very similar for Bitcoin. A fund issuer (such as BlackRock, Ark Invest, Grayscale, etc.) purchases the underlying asset, which is Bitcoin in this case, and creates a fund that represents the underlying value, tracking it through an index. With the authorization of such a product on the traditional financial market (i.e., the New York Stock Exchange, NASDAQ, etc.), investors are now able to gain exposure to Bitcoin in the United States without actually owning the cryptocurrency. This eliminates a major barrier to entry, namely the perceived complexities of buying, storing, and managing the digital currency. Furthermore, the Bitcoin ETF establishes a new layer of regulatory trust for potential investors who previously deemed holding the virtual token to be too risky for their appetite.
With this newfound legitimacy within Traditional Finance (TradFi), Bitcoin has many new opportunities at its disposal that may well translate into benefits for the entire blockchain industry. The potential (and expected) influx of funds will not only increase the demand for the scarce digital asset but could also stimulate further interest from institutional and retail investors in the entire blockchain industry. Besides fostering growth and adoption, this will certainly lead to further developments in blockchain technology, data privacy, data security, and regulatory frameworks.
The Critical Approach
The argument must be made that Bitcoin should never be traded within the traditional market to begin with because it was founded on the principles of replacing our current financial system. While that is true, Bitcoin is nowhere near strong enough to sustainably replace our current market dynamics. The agricultural revolution didn’t happen overnight either; it rather occurred gradually over millennia. However, we can confidently assume that, if we look at the current adoption curve, Bitcoin might have an edge on the timeline versus agricultural progression. With that in mind, integrating Bitcoin into traditional finance has major advantages. Exposure, trust, and familiarity are characteristics that should not be underestimated when it comes to driving the adoption of digital assets, especially when they have lucrative prospects as a store of value.
However, it must be noted that fifteen years since inception is not a long track record for an asset that is valued at close to a trillion dollars in market capitalization. This bears major risks for all stakeholders and investors. Those who have been exposed to decentralized finance know (or should know) about the ever-looming risks associated with blockchain technology caused by hackers, regulatory and governmental restrictions, or simple misappropriation of crucial access codes. Trusting an institution because of their track record does not automatically guarantee that they are capable of storing (let alone keeping safe from hackers) seed phrase and private key information over a long period of time. Just think about how difficult it can be to hand over key information and tasks from one departing employee to a new employee.
On the more technical front, tracking highly volatile assets can lead to reporting errors, inaccurate asset valuation, and in the worst case, liquidations for those who dare to engage in leverage trading. Furthermore, concerns about potential market manipulation should be discussed and taken seriously. Observing small-time frame charts reveals countless examples of double-digit percentage price swings to the up- and downside. The relative newness of Bitcoin and the cryptocurrency market, coupled with its unregulated status in many jurisdictions, adds to the fear of potential manipulation, impacting both the ETF and the underlying asset’s price.
The Fragile Bitcoin ETF Conviction
Even though, the Bitcoin ETF has positive arguments to increase capital inflow and blockchain familiarity it is not an essential product to stimulate its adoption. Yes, it will most likely accelerate the curve even further. However, from a pure ideological standpoint, the ETF opposes the purpose of blockchain and decentralized finance in its fundamentals. Our growing frustration with the current financial system has led us to alternatives where we can be responsible for our own finances and take decisions that suit our risk profile. The Bitcoin ETF returns that decision-making power to the institutions, so far even that they prohibit you from owning the ETF in the first place. Which raises the custody issue. If you don’t own the actual Bitcoin, but only an Exchange-Traded Fund, what happens if something happens to the Asset Fund Manager, the government takes regulatory action against Bitcoin ETFs repossessing your holdings, or some other apocalyptic scenario I cannot think of right now? The point is, wouldn’t owning the actual Bitcoin let you sleep a lot better at night? You can live a borderless life-style (you don’t have to, but it’s nice to have the option) without losing access to the wealth you’ve built up over time. Most importantly, you are not depending on anyone else, or paying regular fees to manage your portfolio. It’s not that difficult to learn about, how to buy Bitcoin on a Centralized Exchange (Binance, Coinbase, KuCoin, etc.) and move it to your hardware wallet for safekeeping. There are plenty of step-by-step guides on the internet, so that is not an excuse anymore. It is merely a question of determination to take financial responsibility into ones own hands and take the appropriate security measures to keep keys and codes safe. A small effort to remove a host of third parties quarrels and cyclical fee structures. We need to learn that outsourcing financial responsibility is not the norm. Just like personal hygiene, the key components should start and stay at home.
Closing Thoughts
While it is understandable why a large number of crypto enthusiasts welcome the launch of the Bitcoin ETF in the United States of America, the long-term benefits are questionable. The potential capital influx may extend to the entire crypto industry, driving further development and expansion of crucial technological progress for our societies to thrive, address climate change, social injustice, poverty, and more. But as promising as this outlook may be, Bitcoin itself is primarily and, most importantly, a medium to store value.
Of course, there will always be individuals who want to trade with Bitcoin, just as there are people who trade gold and silver. However, if I could get my hands on actual gold bars, I would buy those instead of an ETF version of it. With Bitcoin, that issue doesn’t arise. If you want to hold Bitcoin to store value over long periods of time, you can do that directly without dependency on third parties. That is the whole point of Bitcoin, to begin with. Therefore, it seems illogical that this particular financial product, the Bitcoin ETF, will sustain as a major player in the long-term. That said, it is a fantastic marketing stunt by a product without a marketing campaign (let alone a budget) to drive visibility and adoption in the short-term.
It will be interesting to observe the evolution and development of events related to Bitcoin, its ETF version, blockchain technology, and the traditional financial markets. Chances are, things will turn out completely differently than anticipated. They usually do. If you want to join the discussion about this topic and other financially-driven discussions, we welcome you with open arms to our Discord server.
Thank you for reading.
