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The case against a Bitcoin ETF

The Winklevoss brothers first announced their intention to launch a Bitcoin ETF in 2013. Anticipation continues to build for the launch of an exchange-traded fund that tracks the price of bitcoin. While no such investment vehicle has yet been approved by the SEC, the consensus view is that an ETF will eventually be approved.

While the majority of market participants believe that an ETF would be a bullish catalyst for Bitcoin, not everyone holds the same view.

Why an ETF might be bullish for Bitcoin

The reasons to be excited about a potential Bitcoin ETF are very clear. The more investor funds that flow into a Bitcoin ETF, the more “physical” BTC would be purchased by the fund, with the potential to drive up the price of Bitcoin.

The first ETF to hold physical gold came to market in 2003. Both retail and institutional investors were able to gain exposure to gold as an asset class without having to store the precious metal physically. As a result, funds started to flow in, and the price of gold rallied to new highs in the following years. Ten years later, gold ETFs rivaled central banks in holdings.

Most people that buy Bitcoin do so as an investment. The amount of people who use bitcoin as a currency is largely limited to individuals working within the bitcoin economy. As a result, bitcoin has become an investment asset akin to gold. Hence, the nickname “digital gold.” That also explains why the Bitcoin ETF has found such strong support in the Bitcoin community.

Why an ETF might be bearish for Bitcoin

Despite ongoing Bitcoin ETF discussion in the media, and commentary on the potential price upside should an ETF be approved, not everyone is a fan of the idea of a publicly-traded Bitcoin fund. Opponents of the Bitcoin ETF, however, have valid reasons.

Andreas Antonopoulos, for example, believes that a Bitcoin ETF is inevitable but thinks “it is a terrible idea” that will be damaging to the ecosystem.

In a Q&A on Youtube, he explained that a Bitcoin ETF could lead to substantial centralization of bitcoin holdings by a financial institution that would act as a custodian for its investors. That would leave investors without ownership of their keys, “not your keys, not your bitcoin,” says Antonopoulos. As a result, none of the Bitcoin ETF investors would have the rights, benefits, and responsibilities that a key holder of bitcoin has.

For example, investors would not be able to “vote” using their coins by deciding what exchange to send them to nor would they be able to receive forked coins since they are not holding the private keys. Institutions holding the private keys might have a degree of influence over any future discussion on bitcoin politics and forks.

Moreover, a Bitcoin ETF could also enable “big market players” to potentially manipulate the price of bitcoin as they have done with other commodities (such as silver) in the past. This would leave Bitcoin vulnerable to severe price manipulation, suggests Antonopoulos.

BitRefill COO John Carvalho shares many of these views. He recently pointed out on Twitter, that if a Bitcoin ETF leads to Wall Street holding significant amounts of Bitcoin, it could influence Bitcoin’s price, politics, and its place in trade.

Additionally, he suggested that another financial crisis or bank failure could have devastating effects on bitcoin should Wall Street become a significant holder. “One major Wall St catastrophe could cause a decade of slowdown for BTC,” Carvalho stated.

Good for investors, bad for the network?

It is hard to envision how the launch of a Bitcoin ETF could have a negative effect on the price of bitcoin. The two most likely scenarios that could follow the approval of the first publicly-traded bitcoin fund in the US is either a massive rally as investors – from both mainstream and Wall Street – poor money into the ETF or no price action because there is limited investor interest.

For investors, the approval of a Bitcoin ETF has little downside and will, therefore, likely be celebrated.

For day-to-day users of bitcoin, proponents of decentralization, as well as crypto-anarchists who want to change the world with bitcoin, the picture looks very different.

Should a Bitcoin ETF experience mass investor inflows, we could end up with a scenario where Wall Street institutions hold the majority of the 21 million bitcoin that will ever exist. That would mean centralization led by financial institutions.

Perhaps the most significant reason why Bitcoin has value is that it is decentralized. Anyone in the world with an Internet connection can connect and become part of the network. That also means that there is no single point of failure, which turns the digital currency into a censorship-resistant store of value. Should financial institutions become large holders the network’s decentralization and autonomy could be threatened.


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