No Bitcoin ETF after 10 years, but does it matter?

No Bitcoin ETF after 10 years, but does it matter?

The Evolution of Bitcoin ETFs: A Step Forward or Backward for the Crypto Industry?

The journey towards the approval of a Bitcoin Exchange-Traded Fund (ETF) has been a long and arduous one. The first application was filed in July 2013, and since then, the Securities and Exchange Commission (SEC) has rejected multiple applications and continuously delayed decisions on others. Recently, a court ruling deemed the SEC’s rejection of Grayscale’s ETF application “arbitrary and capricious,” causing Bitcoin to surge by more than 6%. Despite this victory, the SEC subsequently postponed its decision on all pending Bitcoin ETFs, resulting in a subsequent price drop.

The idea of a Bitcoin ETF appeals to many because it could potentially open the doors to mainstream adoption. With a $7 trillion ETF industry, there are still many investors waiting on the sidelines, hoping for a product that would allow them to gain exposure to Bitcoin without directly buying and managing the cryptocurrency themselves. Additionally, the crypto community seeks validation, hoping that a United States spot ETF approval would signal a recognition of digital assets as a serious investment.

However, it is important to consider the fundamental principles upon which crypto, especially Bitcoin, operates. The crypto industry aims to build an alternative financial system that enables financial sovereignty, transparency, and consensus, all of which traditional finance, or TradFi, often lacks. In this context, the eagerness for SEC approval for an intermediated investment product like an ETF could be seen as a step backward, reminiscent of American revolutionaries pleading for parliamentary intervention after rejecting imperial rule.

The irony lies in cautious investors waiting for Bitcoin ETF shares instead of directly acquiring BTC. ETFs introduce layers of counterparty risk involving sponsors, custodians, and other partners. We have witnessed the catastrophic consequences of such risks, as customers lost over $10 billion due to their reliance on third parties during the latest crypto contagion. The lesson is clear – without control over their private keys, investors’ assets may not be truly in their possession.

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As industry builders and veterans, it is our responsibility to help newcomers comprehend the enhanced security and risk aversion that Bitcoin technology offers. While the approval of a spot Bitcoin ETF may appear tempting, it comes with several downsides. Firstly, there is a conceptual contradiction and the potential for unknowing purchases of riskier investments. Secondly, the crypto movement could pay a steep price in terms of compromising its principles.

For instance, BlackRock’s iShares Bitcoin Trust, which caused Bitcoin’s price to spike in June, could accumulate a substantial Bitcoin supply while subjecting shareholders to opacity and possible rehypothecation. This scenario risks leaving shareholders with only a paper claim to Bitcoin that has been lent out, instead of owning the asset itself. The opportunity to own Bitcoin on a transparent and immutable ledger should not be undermined by the potential normalization of ETFs that lack these essential characteristics.

While it is inevitable that the SEC will approve a spot Bitcoin ETF as decentralized finance and TradFi coexist, the Bitcoin community must remain committed to the fundamental reasons driving the creation of a new financial system. Embracing the adoption of Bitcoin by traditional institutions is necessary, but vigilance is required to understand the implications of developments like spot ETFs. We should educate market newcomers about the novelty of Bitcoin’s technology and continue to push forward towards our goals.

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Table 1: Potential Risks of Bitcoin ETFs

Risks	Implications
Counterparty risk	Reliance on third-party intermediaries, subject to failures
Loss of control	Without private keys, assets are not fully in investors’ control
Opacity and rehypothecation	Paper claims to Bitcoin instead of actual ownership
Compromise of principles	Departure from an alternative financial system’s objectives

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