The journey towards the approval of a Bitcoin exchange-traded fund (ETF) has been a long and arduous one. The first application for a Bitcoin ETF was filed in July 2013, but it was denied in 2017 and 2018. Since then, the Securities and Exchange Commission (SEC) has rejected numerous other applications and delayed decisions on several more.
The most recent development in this ongoing saga saw Bitcoin’s price surge by more than 6% after a court ruling deemed the SEC’s rejection of Grayscale’s ETF application as “arbitrary and capricious.” However, this celebration was short-lived as the SEC promptly delayed its decision on all seven pending Bitcoin ETFs, leading to a price drop.
Now, the industry awaits the SEC’s next move while Grayscale pleads for approval. The case for a Bitcoin ETF is based on the idea of mainstream adoption. With a $7 trillion ETF industry, there are many investors who are still hesitant to enter the crypto market directly by buying Bitcoin and setting up a wallet. They are looking for a product that would give them exposure to Bitcoin without the hassle.
Furthermore, the crypto community sees a United States spot ETF as a validation of digital assets and a step towards being taken seriously by traditional finance. However, there is a contradiction in fighting for approval from a centralized agency for an intermediated investment product. Crypto and Bitcoin, in particular, aim to provide an alternative financial system that offers financial sovereignty, transparency, and consensus, which are lacking in traditional finance.
The focus on getting approval for a Bitcoin ETF overlooks the fact that ETFs come with layers of counterparty risk, including the sponsor, custodian, and other partners. We have seen how catastrophic this type of risk can be in crypto, as customers lost over $10 billion within months due to trust in third parties. The bottom line is that if you don’t hold the private keys to your Bitcoin, you don’t have control over your assets.
While the case for a Bitcoin ETF may seem appealing in terms of mainstream adoption and institutional investment inflows, there are potential downsides. For example, BlackRock’s iShares Bitcoin Trust, which drove Bitcoin’s price to a one-year high when announced, includes a clause on hard forks that introduces ambiguity around the consensus mechanism. This undermines the well-defined and battle-tested mechanism Bitcoin already has.
Additionally, BlackRock’s ETF may be subject to opacity and possible rehypothecation, putting shareholders at risk of having only a paper claim to Bitcoin rather than the actual asset. This scenario is unsettling compared to the opportunity to own Bitcoin on a transparent and immutable ledger.
While it’s inevitable that the SEC will eventually approve a spot Bitcoin ETF as decentralized finance and traditional finance coexist, the Bitcoin community must stay true to its mission of building a new financial system. It’s important to educate newcomers about the security and risk aversion that Bitcoin enables, as well as remain vigilant about the implications of developments like spot ETFs.
In conclusion, while the approval of a Bitcoin ETF may seem like a milestone for the industry, it’s crucial to remember why we are building a new financial system. Embracing the adoption of Bitcoin by legacy institutions is important, but we must also be mindful of the potential risks and never lose sight of the forward momentum of the crypto movement.
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