The long-awaited approvals of spot Bitcoin exchange-traded funds (ETFs) by the SEC this week is being hailed as a milestone event that will open cryptocurrencies to mainstream investors. But while the newfound accessibility is a boon for short-term prices, these ETFs may undermine the founding principles that make cryptos like Bitcoin (BTC) unique and interesting in the first place.
By packaging Bitcoin into a regulated financial product traded on stock exchanges, ETFs effectively turn the cryptocurrency into just another asset class for portfolio diversification. Great for your run-of-the-mill investor, sure. But for those who saw Bitcoin as the future of money, excitement about ETFs is kind of missing the point.
Fundamentally, this financialization clashes with Bitcoin’s original purpose as a decentralized digital currency outside the traditional financial system. It concentrates ownership under a few large asset managers (BlackRock etc.) instead of a broad network of distributed users. And it places trust in intermediary institutions over the sovereignty of individuals.
For anyone familiar with crypto’s ethos of decentralization and disintermediation, this is not part of the master plan. But what’s the problem? ETFs themselves aren’t changing anything about Bitcoin itself. The high ideals of crypto aren’t going anywhere, right?
Importantly, while ETFs provide an easier on-ramp for new investors, they also shift the narrative around Bitcoin itself.
Excitement over these new funds is focused almost entirely on the potential for price appreciation, rather than enthusiasm for the technology or ideals behind cryptocurrencies. The innovations around digital wallets, blockchain-based transactions, and self-custody get overshadowed when Bitcoin becomes merely something to trade.
And let’s be clear: the excitement around spot Bitcoin ETFs is because of a lack of patience, understanding and buy-in from “normal people” about self-custody. It is because of the alternative that exchange-traded funds look so exciting. No more remembering private keys and seed phrases, just add ETF shares to your brokerage account, and done.
This shift threatens to turbocharge a narrative change that has already been underway for several years. As it continued to outperform expectations, Bitcoin went from a revolutionary monetary system into just another speculative asset class. Instead of using Bitcoin as decentralized peer-to-peer cash, most investors will simply buy and sell paper claims on the coins.
The aspects that made Bitcoin unique become abstracted away, as market participants care more about chasing profits than advancing a new financial paradigm.
It’s true that the first application for a spot Bitcoin ETF was made in 2013. If, hypothetically, it had been approved, the ETF would exist in a world less primed to regulate the cryptocurrency (in part, because everyone knew a lot less about it). But, we’re in 2024, and Bitcoin is now a finance story, not a tech one. Perhaps if approval was granted earlier things could have been different. C’est la vie.
Some argue that increased investment inflows will help fund Bitcoin’s development in the long run. But much of that capital will flow towards centralized institutions antithetical to Bitcoin’s ethos. And as volatile price swings draw more speculative manias, the likelihood of overregulation only increases.
Perhaps the Bitcoin dream is already on its way to being over. In December, US lawmakers took aim at the decentralization and pseudonymity that has long been a core tenet of Bitcoin and the broader cryptocurrency industry.
Senator Elizabeth Warren and Rep. Sean Casten introduced legislation in their respective chambers that would subject cryptocurrency entities like wallet providers, miners, and validators to stringent anti-money laundering rules that currently apply to traditional financial institutions. Crypto industry advocates argue that imposing centralized oversight runs counter to cryptocurrencies’ raison d’être, but lawmakers believe tighter regulation is necessary to combat illicit financing and national security threats.
With bipartisan support growing, Congress may soon vote to approve controls that could fundamentally alter the legal and practical reality around digital assets. One thing is fairly certain though, the new holders of ETF shares probably won’t be the ones complaining. Many of them never cared in the first place.