Cryptocurrency Derivatives Series: What Drives Anti-Bitcoin ETF Perspectives?

Despite the lingering sentiments towards a bitcoin ETF is mostly conducive, SEC kept declining the various proposals as the ‘conducive perspectives’ are not uniformly so. Andreas Antonopoulos, for example, the author of ​Mastering Bitcoin and a long-time bitcoin advocate, has been particularly vocal about his opposition to an ETF, although he still sees it as inevitable. 

The common arguments against it stem from the fact that the bitcoin is held by a fund and not the investors. That in turn violates the prime principle of the underlying bitcoin being ‘peer-to-peer’ money, which many perceive as the breakthrough of the technology. The common phrase among bitcoiners, “not your keys, not your bitcoin”, emphasises this point. 

Systemic Risks in the Fund Management Industry: Out of about $4 trillion in total ETF assets, 80% is controlled by three firms. Blackrock is by far the largest issuer at $1.554 trillion AUM, with Vanguard Group coming in at $1.008 trillion AUM followed by State Street Corporation at $640 billion AUM. 

Over the past year, ​50.5% of new capital inflows have gone to only 20 funds​, which represents less than 1% of all ETFs publicly available in the US. At present, there are around 5,024 ETFs trading globally, with 1,756 based in the U.S. ETF sponsors typically do their own marketing for the ETFs they provide, but occasionally outside help is contracted. Brokerage firms may also advertise ETFs to their clients because of the fees they earn from executing trades. 

Introducing the risks of passive investing ETFs: Holding a large amount of bitcoin in an ETF is good for increasing availability to investors wanting exposure but ultimately does not contribute to the network effects of bitcoin nor the overall health of the network as the ETF will effectively duplicate the digital asset with ‘paper BTC’ - as opposed to creating natural demand for ‘real BTC’ which is produced every block by miners and validators who add to the network’s hash-rate and security. 

Furthermore, investors have no need to educate themselves on the workings of bitcoin as all custody and management is handled by the ETF manager - and runs the danger of becoming yet another passive investment strategy. 

Governance by Fund Managers: Whilst these concerns around a bitcoin ETF are mainly philosophical, there are practical concerns that should also be considered. For instance, controlling a large amount of bitcoin centralizes the decision-making to the fund manager, reintroduces middlemen and could distort the ethos of the ‘open-source, decentralized’ community. 

If a bitcoin ETF grew to the same size and popularity as the traditional markets, fund managers could indirectly become the largest holders of bitcoin just as they are the largest shareholders in 88% of companies in the S&P 500 and have an outsized effect on steering corporate governance and even government regulations through industry lobbying, a feedback loop known as ‘corporate capture’. 

Tom Lee of Fundstrat seemed quite reluctant about bitcoin, he says in a recent interview, that the space is way too small for a bitcoin-based exchange-traded fund (ETF) to work.

However, bitcoin ETFs are inevitable, though the timeframe is unknown. The SEC’s key concerns are around market manipulation and these concerns have yet to be adequately addressed by any of the bitcoin ETF sponsors. This issue is largely structural in nature as a large amount of trading volume is, and is likely to remain, offshore in jurisdictions with loose financial laws, beyond the gaze and authority of the SEC. The situation may be resolved if US institutional bitcoin trading platforms, such as BAKKT and CME bitcoin futures, are able to obtain a level of volume that satisfies the SEC’s surveillance requirements. Courtesy: BNC