From an economic standpoint, Bitcoin’s most attractive aspect is the programmed scarcity. There will only ever be 21 million bitcoins whose issuance happens according to a schedule of diminishing mining rewards.
The best part about it? Everything can be verified on the public blockchain – you always know the supply of existing coins, you can see when a new block gets mined, and you can observe the exact moment when the coinbase payment reward gets halved. Bitcoin is a transparent and fair financial system where every monetary unit is verifiably generated via entropy (Proof of Work).
But what do we get when traditional financial institutions, which are very opaque, start selling bitcoins via Exchange Traded Funds (ETFs)? In a nutshell, a loss of transparency and accountability that may damage the value proposition of Bitcoin. And there are two perspectives to it that complete each other: one which concerns inflation and one which concerns the price of BTC.
Bitcoin ETFs, The Bitcoin Supply, and Inflation
When you buy any bitcoin amount from an exchange like Vaultoro, HodlHodl, or Bisq, you can withdraw the coins to your full node wallet and verify the transaction on the blockchain. This way, you know that the BTC that you own is real and has been created via mining according to the consensus rules.
But when you sign a contract to buy or sell bitcoins at an ETF, you have no idea if you’re dealing with real coins or it only exists on paper. If these traditional financial institutions were to get greedy, they could issue certificates for amounts which effectively exceed the 21 million mark.
There is no way to verify the existence of these bitcoins, and it’s not like the parties involved even care since the transaction is paid in fiat money and gets settled in fiat money. It’s not investing, it’s not hedging against traditional finance, it’s not HODLing. We’re talking about pure fiat speculation.
The problem is that this fiat speculation on ETFs might destroy the value proposition of Bitcoin. The market will get flooded with options to buy coins that aren’t necessarily backed by Proof of Work, can’t get verified, but offer convenience. If these ETFs become part of the price aggregation (more on this topic later), the result might be tragic.
We can easily start the debate about security versus convenience and argue that this trade-off happens everywhere. But ETFs are no joking matter, as the fiat economy of Fugazi assets can destroy an otherwise pure and honest project.
At this point, we can also argue that exchanges which enable high leverage trading (such as BitMex, BTSE, and ByBit) have been offering ways to trade with inexistent coins for quite some time. But the issue at stake is the scale or magnitude: as compared to the liquidity of ETFs and traditional financial institutions, BitMex is a two-story start-up.
With 100x leveraged trading on exchanges, the participants had significantly greater odds to lose – and this is why the model remained sustainable for quite a few years. But the fiat financial system is a lot more intricate, with synthetic assets that supposedly back other assets, insurance, and mechanisms that inflate market caps without adding any actual value.
According to cypherpunk Adam Back, Satoshi Nakamoto’s greatest merit was to figure out a fair inflation schedule for Bitcoin. With ETFs, we might get unexpected spikes in terms of the amount of bitcoins that get traded on the market. This also affects the price of BTC.
I’ve also discussed this issue during my interview with Erik Voorhees. To hear his rather optimistic perspective on the Bitcoin ETF situation, listen around the 28-minute mark.
Bitcoin ETFs and The Price of BTC
Beyond artificial inflation, which will definitely suppress the price of one bitcoin, there’s also the shorting involved. Remember the story about r/WallStreetBets, the shorting that kept the GME stock price down, and the subsequent coordinated short squeeze? Remember how hedge funds stepped in to get support from the government to effectively shut down trading while they were legally manipulating the price to represent their best interests?
The same can happen to the price of bitcoin once so much action gets into the hands of fiat billionaires. And given the market capital of Bitcoin, it’s going to be a lot harder to coordinate short squeezes, since the hedge fund managers have the money-printing overlords on speed dial. By using Bitcoin ETF contracts, they can keep the price down, coordinate unexpected pumps, and effectively control the market cycles of BTC.
They have been doing it to gold, which has a significantly-longer history and a market capitalization which is at least 10 times larger than Bitcoin’s. Here is just an article which describes how ETFs manipulate the price of gold. ETFs also have 5-6 times more liquidity than the entire cryptocurrency market, so there’s definitely a lot of potential for manipulation.
Gold is the most stable asset known to man, and has been used as a hedge against fiat money inflation ever since governments have invented mechanisms to inflate the money supply (especially during crises and war times). But if the same governments allow the free financial market to create instruments to prevent the price of gold from surging during times of crisis, then investors will turn to other assets which bring them greater returns and maximize the purchasing power of their money.
Well, if they also tame the price of bitcoin, then retail investors might lose interest. While the adoption for payments might grow now that the cryptocurrency appears to be institutionally “safe” the price discovery phase might reach a steep end.
In the long term, if the trend gets sustained, the lack of significant price increases can also make Bitcoin mining less profitable and therefore threaten the security of the network. That’s right, a less volatile bitcoin price might make mining operations more predictable, but less profitable.
As I argued in a previous article, the private sector is currently helping governments bring the regulations that they desire. It’s a gradual process that doesn’t happen through force and coercion, but via the dynamics of the free market which reports to government agencies to stay in business.
But since these are free market mechanisms, we can choose not to use them and therefore affect their prosperity. In the end, the future of Bitcoin’s financialization is in our hands: we can either help the bankers and the hedge fund managers thrive while making the currency less private and fungible, or we can focus on building products and services that directly compete with their surveilled monopolies.
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