Whether by Bakkt or ETFs, Bitcoin does not need saving
With the crypto bear market entering it’s second year, the community has started to look to saviours from outside. Advocates on Reddit and elsewhere have decided that institutional investors are needed, making use of contracts settled in “physical BTC” (an absurd phrase), namely through ETFs if possible and starting with Bakkt’s long promised warehousing and custody. The idea is that, given the complexity and risk involved in purchasing Bitcoin directly, institutional investors and eventually even pensions and endowment funds will begin to incorporate BTC-backed futures into their portfolios. Of course, this would likely affect the circulating supply as custodians will need to secure the necessary BTC to settle these futures and back these funds. This article will argue, however, both that Bitcoin ETFs are unlikely to happen and that Bitcoin enthusiasts probably should not want them to happen, if they remain committed to Bitcoin’s raison d’etre or even its long term development, positing four arguments to this purpose.
1. CME Bitcoin futures did not play out as planned
Anyone in the space before late 2017 will attest that much the same sentiment existed in anticipation of Bitcoin futures (not settled in BTC) by the Chicago Mercantile Exchange. Indeed, the announcement sparked a rally in which we saw parabolic growth, but the launch of Bitcoin futures occurred on the 17th of December, coincidentally the same day as BTC’s all-time-high, before the market steadily declined to the present where the entire cryptocurrency market is down 50% from before the announcement date. Interestingly, CNBC published an article at the time of the CME announcement drawing parallels with the introduction of cash-settled futures in the Dutch tulip market. What happened after that is well documented, and indeed the comparison seems to hold up.
The existence of “paper BTC” (another absurd term), Bitcoin futures which never require the exchange of actual BTC, has served only to take interest away from actual Bitcoin, and even the Federal Reserve Bank of San Francisco have concededthat CME futures constituted an enormous hindrance to Bitcoin’s value. Worshippers of the moon will tell us that this time will be different and indeed it might, but to suggest the effects are predictable is as valuable now as it was in late 2017.
2. Large investors have access to physical Bitcoin already
To support the idea that ETFs will save Bitcoin, a narrative has been propagated that traditional investors don’t understand Bitcoin and lack access to it until custody or a backed ETF becomes available. This is patently absurd. Yes, endowments and pensions are very unlikely to incorporate BTC into their funds at present, but professional traders are known to accumulate without alerting the market, and of course can find access to OTC Bitcoin or at least delegate this. Several sources have suggested that this is happening — that large “whales” have been accumulating BTC under $4,000 — but this should still be taken with a pinch of salt given Bitcoin’s pseudonymous nature and the fact we don’t know the purpose for these large transactions.
3. The SEC didn’t approve ETFs last year, and it’s even less likely now
When the Winklevoss ETF was rejected in July 2018, the reasons given were that Bitcoin is too susceptible to manipulation and overall too volatile. This has not changed, indeed the lower market cap and volume during the bear market has made Bitcoin far more easy to manipulate. The VanEck ETF SolidX Bitcoin Trust is the last ETF to make its case to the Securities and Exchanges Commission, which it was scheduled to do on February 27th. The government shutdown will likely push this back, but there’s not one single reason for the result to be any different than it has thus far.
4. Bitcoin will become more rare on its own
The last argument against the importance of a Bitcoin ETF is that time will achieve the same desired outcome. Proponents of a Bitcoin EFT believe the requirement to settle futures in BTC will reduce the circulating supply and increase demand. This has already been happening — which is why Bitcoin has seen a growth in value unprecedented in modern investment. Over time, that tendency only increases.
A term often used within the industry is the “flippening”, the oft-hypothesized but never realized event where an altcoin’s market cap exceeds that of Bitcoin. But one flippening we can be sure of is the time when the number of Bitcoins permanently lost on a daily basis is greater than the number of new coins mined. We’re not there yet, but not far away either. Research undertaken by Chainalysis and published by Fortune suggested that as of November 2017, an estimated 4 million BTC had been lost forever — their owners forgetting their private keys, losing their computers without a backup or, and there’s really no sensitive way to say this, dying. At that point, Bitcoin was only 8 years old — an average loss of 0.5 million Bitcoins per year. If accurate that would almost wipe out Bitcoin’s annual inflation, and it would certainly do so when block rewards are halved again in May 2020. We might expect a similar rate of loss going forward — with the improvements in individual due diligence and the increased perceived value of the currency being offset by the greater amount in circulation (and thereby in risk of being lost) as compared to the early days of the blockchain. Under that light, Bitcoin’s supply is not and will not be nearly as large as people tend to believe.
Bitcoin doesn’t need saving from outside
To summarize all this, the yearning for an immediate ETF and the combined willingness to settle for custodial services is somewhat misguided. Certainly, a large influx of investment would drive the price of Bitcoin up in the short term, but it’s antithetical to the purpose of Bitcoin in the long run and will leave it vulnerable to greater manipulation. After all, nobody has more experience than Wall Street in that particular skill — they’ve been doing it in the stock market for centuries. In the ETF and futures case, fund managers and custodians will also have the full weight of their investor’s voting power and decision making as pertains to how they interact with the currency: the exchange they use, the forks they adopt and so on. This takes power away from individuals and hands it to organizations — the opposite of Bitcoin’s stated purpose.
Of course, given the liberating elements of operating with the currency, large institutional investors even to the scale of endowments and pensions are free to purchase or not purchase as much as they please. But Bitcoin survived and thrived so far and as the four points listed here suggest, there’s no reason to believe it won’t continue to do so without them.
Article by Byron Murphy, Editor at Viewnodes. All opinions are the author’s alone.
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