In recent weeks, there has been a noticeable increase in traditional finance’s interest in crypto-based exchange-traded funds (ETFs). One significant development in this area was BlackRock’s fresh application for a Bitcoin ETF on July 3, after the Securities and Exchange Commission (SEC) raised concerns about its initial filing. A week earlier, several investment firms, led by Fidelity, also filed applications with the SEC for Bitcoin-based ETFs. Additionally, HSBC became the first bank to offer Bitcoin (BTC) and Ether (ETH) ETFs to customers in Hong Kong. These moves reflect a growing mainstream acceptance and recognition of the potential of cryptocurrencies.
However, the impact of such news in the Bitcoin market can be complex. Often, seemingly positive news can have long-term negative consequences, while short-term negative news can strengthen the case for Bitcoin. The 2017 “Blocksize War” serves as a prime example of this. It divided the Bitcoin community into two camps: the big block camp that resulted in the Bitcoin Cash fork and the small block camp that implemented the Segregated Witness upgrade in Bitcoin. Although chaotic in the short term, this conflict taught important lessons about decentralized consensus and paved the way for the development of the Lightning Network, which has greatly improved Bitcoin’s scalability.
Conversely, seemingly positive developments can also turn negative. Just recently, FTX, which had been considered a prime example of cryptocurrency going mainstream with its Superbowl ads and other high-profile marketing efforts, collapsed, leading to substantial losses for its users and damaging the industry’s reputation. This highlights the need for caution and careful evaluation in the cryptocurrency space.
One area of concern is the increasing trend of Bitcoin-linked ETFs. While these may seem like an attractive investment opportunity, they come with significant downsides. Unlike actual Bitcoin, ETF holders cannot withdraw the underlying asset and, hence, cannot truly control their funds. This contradicts one of the most important features of Bitcoin: the ability to control one’s funds without the need to trust anyone. Furthermore, the presence of “paper Bitcoin” or claims not backed by actual Bitcoin in ETFs could distort the market and undermine Bitcoin’s monetary policy. Unlike previous instances of fake Bitcoin claims, which led to exchange collapses, ETFs would not be susceptible to such withdrawal runs, potentially flooding the market with millions of paper Bitcoins and suppressing the price.
In the context of Bitcoin, ownership is closely tied to control over the associated cryptographic keys. While it might be possible to legally own Bitcoin without direct control over the keys, such as through an exchange account or holding an ETF share, this is not advisable in the Bitcoin world. Bitcoin’s digital nature and portability make it particularly vulnerable to theft or mismanagement. True ownership of Bitcoin can only be achieved by controlling the keys.
While the approval of a major Bitcoin ETF may lead to a short-term price increase, it could have negative long-term implications for Bitcoin adoption and its price. Genuine adoption involves self-custody, where individuals control their own keys, rather than relying on intermediaries. Everything else, including ETFs, can be seen as a potential trap.
In conclusion, the recent interest from traditional finance in crypto-based ETFs reflects a growing acceptance of cryptocurrencies. However, the impact of such developments on the Bitcoin market is nuanced. Caution is necessary when considering ETFs, as they limit control over one’s funds and may introduce distortions into the market. True ownership of Bitcoin involves controlling the associated cryptographic keys. Ultimately, genuine adoption and widespread use of Bitcoin require individuals to take self-custody of their funds.