Recent weeks have seen a surge in interest from traditional finance for crypto-based exchange-traded funds (ETFs). After the Securities and Exchange Commission took issue with its initial filing, BlackRock submitted a fresh application for a Bitcoin ETF on July 3. A week earlier, Fidelity led a crop of investment firms in lodging applications with the SEC for Bitcoin-based ETFs. Meanwhile, HSBC has become the first bank to offer Bitcoin (BTC) and Ether (ETH) ETFs to customers in Hong Kong.
Evade the fakes
As we saw with the implosion of FTX and the subsequent market contagion, centralized exchanges were never the answer for everyday investors looking to benefit from the immense promise of Bitcoin. Neither are ETFs. Bitcoin-linked ETFs are an even worse idea than centralized exchanges, as there is zero possibility of withdrawing the underlying instrument — that is, the Bitcoin. This means the holders are never able to take advantage of the single most important feature of Bitcoin: the ability to control their funds without a need to trust anyone.
There are also other dangers for the wider market. With ETFs, there is a risk that “paper Bitcoin,” or claims not backed by actual Bitcoin, could distort the market and undermine Bitcoin’s very monetary policy. Exchanges that have issued paper Bitcoin in the past — such as FTX — have been kept in check via withdrawal runs and eventual collapse, after which the fake Bitcoin claims were wiped out along with the hapless exchanges.
That likely wouldn’t be the case with ETFs. Without the possibility of withdrawing the underlying asset, paper Bitcoin can be printed at will. If Bitcoin ETFs become the dominant way of investing in Bitcoin, it could very well lead to millions of paper Bitcoin flooding the market, suppressing the price of Bitcoin.
With Bitcoin, holding it means owning it
In the context of Bitcoin, ownership is very closely linked to control over the cryptographic keys associated with specific Bitcoin addresses. Now, it might be true that someone can own Bitcoin in a legal sense without having direct control over the keys — such as when owning an exchange account or holding an ETF share — but that is simply not a good idea in the Bitcoin world.
Bitcoin’s digital nature, perfect portability and global liquidity make it especially susceptible to embezzlement, theft or just basic mismanagement. The only way to truly own Bitcoin is to control the keys.
Some might welcome a possible short-term price pump associated with an approval of a major Bitcoin ETF (such as BlackRock’s), but the long-term impact on Bitcoin adoption would be likely negative (including the long-term price of Bitcoin). The only adoption that actually matters involves self-custody — everything else is a trap.