Exploring the Bear Case: Risks of Bitcoin ETFs

• Bitcoin's Value Surge in 2023: A Revival of Interest in Bitcoin ETFs
• The Potential Approval of Bitcoin ETF
• Bitcoin ETF: A Sign of Crypto's Maturity
• Cryptocurrency's Readiness for Approval
• Market Manipulation: A Concern for Crypto Trading
• The Potential Impact of Bitcoin ETF on Bitcoin's Usability
• Bitcoin ETF and its Potential Impact on Bitcoin's Original Vision
• Unresolved Issues Regarding Bitcoin's Future

Bitcoin's Value Surge in 2023: A Revival of Interest in Bitcoin ETFs

The significant increase in Bitcoin$42,260 -0.64%'s price action last year, which more than doubled in 2023, was largely propelled by a renewed enthusiasm for spot Bitcoin exchange-traded funds (ETFs). An unexpected filing by BlackRock with the U.S. Securities and Exchange Commission (SEC) in June brought attention to the asset, marking it as one of the year's top performers with gains exceeding 100%.

The Potential Approval of Bitcoin ETF

With expectations that a Bitcoin ETF could be approved this week, many are positioning to cash in on the good news. A multitude of spot Bitcoin ETF applications are pending, yet it remains uncertain whether the SEC will greenlight one or more of them. A denial of these applications is a potential outcome. However, the continuous state of uncertainty concerning Bitcoin ETFs may not necessarily be detrimental for cryptocurrency. Live Bitcoin ETFs might not meet the expectations of market observers and could even pose a net negative for the industry.

Bitcoin ETF: A Sign of Crypto's Maturity

Without a doubt, the approval of a Bitcoin ETF would indicate maturity in the crypto industry. This impending maturity is precisely what critical politicians like Senator Elizabeth Warren and skeptical regulators such as SEC Chair Gary Gensler are concerned about. An open letter from Better Markets, an organization linked to both political figures, recently expressed that a Bitcoin ETF could legitimize an industry replete with fraud.

Cryptocurrency's Readiness for Approval

Although a court ruling from last year is compelling the SEC to decide on Bitcoin ETFs by January 10th, it is prudent to consider the agency's historical concerns over crypto ETFs seriously. The SEC has been hesitant to approve a Bitcoin ETF since the Winklevoss twins first submitted an application a decade ago, due to worries about potential market manipulation.

Market Manipulation: A Concern for Crypto Trading

Market manipulation is a common worry for ETFs that track indexes, due to the potential discrepancy between benchmark asset prices and the daily disclosures offered by ETF managers which can be exploited by insiders. A similar issue could arise based on how Bitcoin's price is calculated. As Bitcoin is decentralized, it doesn't have a single price. Its dollar value is generally calculated by averaging the current price of Bitcoin across trusted exchanges. Yet, it's not uncommon for investors to intentionally or unintentionally manipulate crypto prices with large trades, creating arbitrage opportunities.

The Potential Impact of Bitcoin ETF on Bitcoin's Usability

There's a broad question surrounding the actual beneficiaries of Bitcoin ETFs. Exchange-traded funds often increase the cost of their primary assets, which seems beneficial for Bitcoin holders at first glance. However, this may have significant implications on commodities like gold and oil, which serve both as investments and goods with usage costs. Essentially, if 1 BTC equals 1 million dollars, what would the implications on the fees be? Such a scenario could eventually price many people out, particularly in developing countries where Bitcoin is seen as a potential banking solution.

Bitcoin ETF and its Potential Impact on Bitcoin's Original Vision

The projected success of a Bitcoin ETF might be seen as a deviation from Bitcoin's original vision of a system that operates outside of the conventional financial structure. A Bitcoin ETF, in essence, is a share representing BTC that could end up in millions of peoples' 401(k)s. This would be a product managed by the world's largest asset manager using coins held by an outside company. This would not necessarily be a pathway to adoption, but rather a distortion of the idea that through self-custody, one can assume control over their own money.

Unresolved Issues Regarding Bitcoin's Future

There are nuances to consider. Protocols that are open by definition can be accessed by anyone. BlackRock's intrusion does not inherently diminish Bitcoin's peer-to-peer aspect. However, questions remain about the implications of Wall Street's growing influence on Bitcoin, whether the influx of capital will alter the realities of Core development or Bitcoin mining. Each decision has its own trade-offs, and it remains to be seen what bringing Bitcoin into the mainstream will truly cost.

Edited by Jonathan Stoker