After 10 years of denial, the SEC has finally given the crypto community what they wanted and approved a spot Bitcoin ETF.
This is a major milestone for the industry. It's the clearest sign yet that crypto is maturing and becoming more mainstream. And it will undoubtedly bring sizeable benefits to Bitcoin, expanding the asset's appeal and opening the door for new types of users. But could it also bring new risks? Could it even leave us wondering if we'd be better off without it?
In this piece, I'll explore the potential benefits and risks of the new ETFs.
One of the biggest benefits of ETFs is that they will make Bitcoin more accessible than ever before. That may sound strange; Bitcoin has been publicly available since its inception. Almost anyone has been able to sign up to an exchange like Coinbase or Binance to buy it for many years now. Before that, in the really early days, people could even mine Bitcoin at home or collect it for free from online faucets. In many ways, it's hard to get more accessible than that! However, there were limits to Bitcoin's accessibility. Various factors left many individual investors and financial professionals locked out of Bitcoin, despite its alleged availability. In fact, professional investors likely suffered more than individuals, so let's talk about them first.
Financial professionals are extremely limited in what they can access and invest in. For instance, it's not unusual for broker-dealers to be limited to offering investments from a specially selected list of options. This list would be curated by their investment platform based on various measures of suitability. Native bitcoin would definitely not make the list. Indeed, it's unlikely that other TradFi bitcoin products would make the list either. As a closed-end fund, GBTC had extremely high fees and did a poor job of tracking bitcoin's price, while the futures ETFs aren't designed for long-term use and 'leak' money month-to-month. As a result, this sizeable segment of the TradFi world had no realistic option for accessing bitcoin. Even those suffering from fewer limitations would have a hard time adding bitcoin to their portfolios. After all, bitcoin is very different to the assets TradFi typically deal with. Compared to almost anything else, Bitcoin would be difficult to get a hold of -- and even more difficult to safeguard once they had it. Consequently, it was likely to be ruled out for technical reasons or concerns about risk, even if there was an underlying desire to own it. All of this left bitcoin stranded, separated almost entirely from the trillions of dollars locked in the TradFi world; until the ETF.
ETFs are an incredibly powerful, flexible wrapper that can accommodate almost any asset or basket of assets. They are extremely popular and heavily used throughout the TradFi world, and for good reason. They generally operate with very low fees, they reliably track the price of their underlying asset(s), and they tend to offer a great deal of convenience. That's especially true in the case of the bitcoin ETFs as they eliminate any custodial concerns and make bitcoin tradable on highly trusted TradFi exchanges. So, while native bitcoin is difficult to deal with, presenting many challenges to would-be investors, bitcoin in an ETF acts like many other assets that TradFi types are used to. That means it can slot into almost any portfolio without headaches and drama.
Of course, the ETF wrapper won't instantly solve all accessibility issues. Bitcoin won't immediately appear on those curated lists of investment options just because it's now in ETF form. It will take many months, years even, for most trading platforms to list bitcoin as an investable asset for their clients. But, the point is, it's now realistic to expect them to list bitcoin. The biggest barriers to entry have been swept away. A bridge has been built between bitcoin and the TradFi world. That is the big unlock of the ETFs.
And it's not just the professionals that benefit here. Everyday individual investors will benefit too. Anyone who was previously too scared to hold their own bitcoin or to use shady, upstart crypto exchanges no longer needs to do those things. Bitcoin will be available on the investment platforms most people already know, use, and trust. And the bitcoin itself will be safely locked away with reliable and closely monitored custodians.
For large groups of users, the ETF will be the way to gain bitcoin exposure. For others, it may just be a stepping stone on the path to becoming a true crypto-native. This is exactly what happened in the wake of gold's ETF launch in the early 2000s. In the years that followed, ownership of physical gold also increased as people became more comfortable and familiar with the asset. In that case, the ETF gave rise to a new generation of goldbugs. I wouldn't take it as a given, but as the easiest, safest, and most convenient gateway to bitcoin, the ETF might just do the same thing for crypto.
Increasing bitcoin's accessibility is a win in its own right, but it also brings second-order benefits.
Now that TradFi types can see and easily access bitcoin in a format they are comfortable with, it will suddenly seem a little less alien and scary. Previously, Bitcoin was something strange, potentially even dangerous, existing in the shadowy fringes of the financial system. It was easy to overlook, easy to disregard without a second thought. After all, why would someone spend time considering and learning about bitcoin if they couldn't realistically own it? It would be much easier to ignore it -- and perhaps wave it away as a scam if the price suddenly increased. But now bitcoin is an asset like any other. It's much less scary, less difficult to deal with, and harder to totally ignore. That doesn't mean every investor will now rush to buy bitcoin. The ETFs don't inherently make bitcoin more desirable or create new reasons to own it. They simply remove barriers to entry. They make it more difficult to immediately, automatically dismiss bitcoin as an option. And that means more people will need to actively consider and evaluate the asset -- something they haven't needed to do in the past. Some will continue to reject bitcoin after that. Others will find their opinions entirely transformed. NLW put it best in a recent episode of The Breakdown, explaining that the ETF launch provides a context for people to re-evaluate Bitcoin in a new light. They will ask is this really any worse or more risky than anything they already own. Or could it, in fact, be a credible entry in a diversified portfolio?
Having said that, the simple existence of a spot Bitcoin ETF is perhaps less impactful and beneficial than some might suggest. I don't believe an ETF launch is inherently a game-changing move for Bitcoin. There are all manner of weird and overlooked ETFs out there that are unattractive, unsuitable, or unavailable to most investors. A Bitcoin ETF could easily sit alongside those other niche products. If, for example, the only ETFs on the market were provided by crypto-native firms like Grayscale and Gemini -- or even by the ever-optimistic and tech-forward Ark Invest -- then the benefits would be somewhat muted compared to what we're seeing now. The launch just wouldn't pack the same punch. What makes this launch so special, and so pivotal for Bitcoin's future, is the fact that a string of massive financial companies were eager to have their Bitcoin ETF approved. Juggernauts like Fidelity, Franklin Templeton, and -- of course -- BlackRock have all launched their own Bitcoin products. What's more, in the run-up to the launch they all engaged in a heated battle to make their ETF the best and most desirable, whether that was through cutting fees, special launch offers, or other marketing gimmicks. That is the sort of thing that will make sceptics reconsider. After all, these firms wouldn't want to associate themselves with an asset like Bitcoin if all the worst rumours about it were true. Much less would they scrabble and stampede to become a market leader -- the TradFi face of Bitcoin. Surely, if these titans of industry are backing Bitcoin, then it can't be all bad. It can't be entirely worthless or used exclusively by criminals and money launderers. There has to be something more to it.
And it gets even better from there. Simply associating Bitcoin with these TradFi giants would be a massive boost for its image, but those same companies will also be actively advertising and advocating for Bitcoin to their clients. If the clamouring competitiveness ahead of the ETF launch was anything to go by, financial professionals across the US are about to find themselves inundated with Bitcoin marketing material. That will surely boost people's understanding and opinions of Bitcoin.
The biggest influence is surely going to be that of BlackRock and its chairman and CEO Larry Fink. The ETF launch wouldn't be a true paradigm shift without them. BlackRock exists on an almost unbelievable scale. Some even argue they are an extension of the US Government itself. The fact that they have put the time and effort into creating a Bitcoin ETF says something about Bitcoin. These guys don't play around. And it says even more when Larry Fink goes on TV and promotes Bitcoin like a true Bitcoiner, describing it as a digital gold and flight to quality asset. When Larry Fink says something, people listen -- and then follow his lead. For example, he pretty much kickstarted the financial world's focus on ESG assets by publicly embracing them in 2018. His decision to stop using that term marked the pivot back to oil, gas, and 'energy security' investments following the invasion of Ukraine. So, now that he's backing Bitcoin, it wouldn't be surprising to see others do the same. At the start of the last bull cycle, the legendary fund manager and macro trader Paul Tudor Jones called Bitcoin the 'fastest horse' in the fight against inflation and monetary debasement. That brought a significant sense of legitimacy to Bitcoin as an asset. It gave other macro traders permission to discuss and consider its place in a portfolio. Larry Fink is now fulfilling that same role but with orders of magnitude more importance and influence.
It's clear that the ETF brings some major benefits to Bitcoin -- benefits that should, in theory, expand Bitcoin's appeal and push the price much higher. But you can also argue that the ETF represents something of a poisoned chalice. After all, isn't an ETF entirely antithetical to Bitcoin's original values and intentions?
That's a point that has been made by many of Bitcoin's critics and detractors recently -- though a fair few supporters have aired the same view. And, to an extent, they are correct. Bitcoin is very much 'the people's money'. It was built to take power away from governments, central banks, and financial institutions. It was designed to eliminate reliance on third-party companies, instead enabling sovereign individuals -- giving people complete control and ownership of their assets. Therefore, packaging bitcoin in a product offered by a financial giant like BlackRock raises an inevitable sense of irony. But there's also a degree of nuance here that is often overlooked. Being a sovereign individual doesn't mean you must take full possession and control of your Bitcoin. It means you have the choice, ability, and freedom to do that -- just as you have the choice, ability, and freedom to let a financial institution hold that bitcoin for you. I strongly believe in the principle of self-custody. It's one of Bitcoin's greatest innovations and a feature that must be preserved at all costs. But I recognise it's not right for everyone, and that a broad spectrum of custodial solutions should be available -- including solutions where bitcoin is little more than an IOU in an ETF wrapper. The existence of those alternative solutions does not diminish or detract from Bitcoin or its original values. Additionally, Bitcoin is an open and permissionless system that is owned equally by everyone and no one. On one hand, that does mean it's 'the people's money', but, at the same time, it makes it equally accessible and useable to financial institutions. At the end of the day, anyone can use it however they like. Anyone can build products and services around it, including companies like BlackRock. It belongs to them as much as it belongs to us. And, crucially, Bitcoin does not become immediately dependent on someone just because they're using it or building products around it. Nor does it treat them specially or differently from anyone else, even if they are an incredibly wealthy and powerful financial institution. There certainly is a chance that Bitcoin is captured and altered beyond recognition by these companies -- we'll touch on that in a moment -- but it's by no means a given.
With all this in mind, it's pretty clear that it would be oversimplifying things to claim that Bitcoin has 'sold out' or lost itself with the launch of the ETF. Plus, it would be totally unrealistic to expect Bitcoin to continue its growth in a vacuum, without ever gaining the support of any TradFi giants. Their support was inevitable if Bitcoin is ever going to become a widely used and respected financial asset. At the same time, there is an undeniable sense of incongruity seeing Bitcoin tamed and wrapped up in products offered by some of Wall Street's biggest firms. But that's not necessarily a betrayal of its core values. However, the ETFs do raise some questions and concerns about Bitcoin's future.
For example, there are questions about the influence of ETF issuers on Bitcoin's governance.
In some cases, these firms might want to support the maintenance and development of Bitcoin. In fact, Bitwise and VanEck are already donating a portion of their ETF fees to Brink to help fund Bitcoin developers. This is likely the start of a trend of institutions building on and contributing to crypto development -- just as they already do with other open-source projects like Linux. To an extent, this is a good thing. Long-term developer funding has always been a concern around any crypto project, especially Bitcoin. But it also raises questions about how much influence these firms could gain. What if they were to push for developments that crypto-natives and Bitcoiners find unpalatable? If the majority of Bitcoin developers are working for TradFi firms, then it may be difficult to oppose. I'm sure that most of the developments they fund will not be sinister in the slightest. After all, any attempt to radically alter Bitcoin would almost certainly destroy both its reputation and value. Plus, as far as I know, Linux has never been infiltrated and corrupted by evil, corporate-backed developers. However, that doesn't eliminate the concern entirely.
Something that does help is the knowledge that any controversial change to Bitcoin would inevitably result in a chain split. But that raises questions of its own. These financial giants will surely wield outsized influence in the event of any chain split, regardless of who caused it and why it's happening.
Crypto-natives will argue that it doesn't really matter what these companies do as long as users run their own nodes. By doing this, users define the specifications and rules of the chain they believe is real -- anything not conforming to those rules is ultimately irrelevant. The Blocksize War proved that this was a very powerful mechanism for settling disputes. In that case, many crypto companies and exchanges stood against the community in their desire to increase Bitcoin's block size, and they ultimately lost. However, it's not clear if the same tactic would work against companies with the scale and resources of BlackRock. Yes, some individuals running nodes would continue to enforce their own version of Bitcoin. But that version would almost certainly be economically smaller and less secure than the Wall Street-backed alternative. Plus, the general awareness of the breakaway blockchain would be much lower. I suspect that the vast majority of people would happily go along with whatever the big financial companies declare Bitcoin to be, blissfully unaware that alternatives exist. And, even if they did know about the smaller fork, there would be little incentive to use it. Depending on your view, that could represent the death of Bitcoin. Others would disagree, arguing it doesn't matter what most people are doing and using. The alternative chain would continue to function as if nothing had happened; therefore, Bitcoin lives on. Maybe we'd even see history repeating itself, with Bitcoin's life playing out in cycles. Maybe the smaller, ideologically driven Bitcoin fork would steadily grow and gain momentum over the years, backed by those who want to free themselves from Wall Street tyranny -- only to see it captured and commoditised again!
Of course, I'm being somewhat facetious. And maybe I'm overthinking an event that will never come to pass. But there's definitely a risk here that should be taken seriously. And it makes me wonder, how much worse could such an event get? What if, say, running your own node was made illegal? In that case, there would be almost no defence against the capture of Bitcoin. Thankfully, such a law is incredibly unlikely to pass -- at least in liberal democracies. But it's not totally inconceivable. Especially if my next concern is ever realised.
The ETF issuers are now stakeholders in the Bitcoin and crypto ecosystem. And, while crypto-natives would surely recoil at the idea, they're also representatives of it -- at least to an extent. But they are by no means aligned with the industry; they don't hold the same values and beliefs as most crypto-natives. And, that makes for a particularly dangerous combination.
Many countries are still in the early stages of regulating crypto, with relatively few examples of comprehensive, tailor-made crypto rules anywhere in the world. Lawmakers and regulators continue to consider and debate the best way forward. And, far too frequently for my liking, they will sometimes make ill-judged or even malicious proposals that could cripple the industry in a given jurisdiction. This is where the influence of these TradFi giants comes in. Up until now, the industry has been incredibly effective at mobilising to fend off or amend harmful proposals -- especially in the US. This has relied on the incredible efforts of industry advocates and lobbyists, but also on thousands of passionate individuals who have written to or called those in power and urged them to reconsider their rules. But what happens when colossal, highly respected, and influential financial companies like BlackRock get in the middle of this? What happens when Larry Fink weighs in on policy discussions? Sadly, their opinions will likely hold more weight than those of a thousand anonymous individuals. And, as much as we can hope they're on our side, they aren't likely to argue our case for us. Crypto-natives care deeply about maintaining open, permissionless standards. They tend to care about privacy and the right to self-custody assets. TradFi firms won't care about any of these things. If anything, they are incentivised to oppose them. As the biggest purveyors of highly controlled, permissioned, and custodial crypto, they would be the winners if true crypto was ever outlawed.
Consider things like the Digital Asset Anti-Money Laundering Act. This bill, proposed by Elizabeth Warren, is seen by many crypto-natives as a thinly veiled attempt to kill the industry in the US. The Act intends to extend KYC requirementsRe across almost every aspect of a crypto network, covering everything from validators and miners to wallet providers. However, many of those participants would never have access to the information they need to satisfy the rules. It would be impossible for them to comply even if they wanted to. Despite its many flaws, it wouldn't be surprising to see TradFi firms supporting regulations like this. After all, if they offered any crypto products they would be highly permissioned, KYC'd, and therefore largely unaffected by the rules. In fact, the Bank Policy Institute -- a lobby group representing Wall Street banks -- have already shown support for it. And that support will count for much more if the banks providing it can also be considered 'industry participants'. That would change the conversation entirely. While some rule makers would still take the time to understand the issues at hand and the flaws of the Act, others would look at the TradFi support and say "If these companies can meet the requirements with their crypto products, why can't everyone else". They wouldn't feel a need to dig in any further. Especially if critics use the industry's resistance to the rules as some sort of evidence of the industry's unruly and crime-ridden nature that needs to be cleaned up.
The political influence of these companies, combined with their ability to change the perception of our fight against draconian rules, means the threat of harmful regulation cannot be underestimated -- now more than ever before. For the crypto's enemies, the entry of TradFi firms into crypto represents a new opportunity to push through destructive regulation, all while appearing pragmatic enough to gain the support of these supposed industry representatives. Elizabeth Warren's Act is unlikely to succeed. But other, similar proposals will be made, and some of those will have a genuine chance of becoming law. When that happens, and the ETF providers weigh in on the debate, then we'll finally find out if we've made a deal with the devil in getting these ETFs approved.
While the potential impact of the TradFi ETF issuers on governance and regulation are my primary concern, I've seen a few other issues that are worth mentioning.
Some have highlighted that a single custodian -- Coinbase -- will be responsible for looking after most of the ETFs' bitcoin. That creates a giant honeypot for hackers and a massive single point of failure for Bitcoin. It's worth noting that Coinbase Custody has already held a lot of Bitcoin for a long time without any problems, so there's no reason to be particularly worried about this. The inflow of new bitcoin won't dramatically increase the risk of an incident, it would just worsen the impact.
If anything were to go wrong with Coinbase, or with any other custodian, it would create another intriguing scenario. Would the scale of the hack be enough for the ETF issuers to call for a rollback of the Bitcoin blockchain? Of course, they wouldn't be able to click their fingers and demand a change. That's not how Bitcoin works. But they could offer a massive bounty to any miners willing to build an alternative history where the hack never happened. The idea of an incentivised reorg was thrown around a few years ago after Binance was hacked. It didn't make sense at the time due to the size of the loss, the time since it occurred, and the fact that it could damage Bitcoin's reputation and credibility. But would these TradFi firms, less enamoured with Bitcoin ideals such as immutability, be more willing to give it a try? If the loss represented a significant portion of their AUM, it's certainly conceivable. And the question would then become, how much would Bitcoin's reputation suffer as a result?
The other risk of holding so much Bitcoin in one place is that it makes it much easier to seize. Bitcoiners love to talk -- and worry -- about Executive Order 6102, which made gold ownership illegal in the US in 1933. While it's incredibly unlikely to happen today, I suppose it's possible to imagine some extreme form of financial repression that involves the confiscation of all hard assets. In that case, it would be easy for a government to seize any bitcoin held through centralised entities like the ETFs. Again, I really don't think this is worth worrying about. Not least because a world in which governments are seizing people's crypto is probably suffering from many, far worse problems as well. But, as this would likely rank surprisingly high on many Bitcoiner's list of concerns, it felt right to include it.
The final concern I've heard that is worth mentioning is that the ETFs could represent the beginning of the final financialisation of Bitcoin. Eventually, this could weaken Bitcoin's hard cap and dilute the supply through the creation of synthetic coins. The idea is that as the TradFi world embraces crypto, they will introduce large-scale, leveraged products where bitcoin are leant out and rehypothecated. This would lead to some people thinking they owned bitcoins that simply don't exist, something they may not find out until disaster strikes and their IOU turns up worthless. While this concern is technically valid, it's neither a new nor immediate threat. None of the ETFs currently approved for trading are allowed to lend out their Bitcoin; they must hold them one-for-one. This will surely change down the line. At some point, Bitcoin will become heavily financialised and will likely suffer some of the consequences of this. But that's also an inevitable part of Bitcoin growing up and gaining widespread adoption. Plus, we've already seen smaller examples of financialisation -- and the dangers of it -- through the various Bitcoin banks that have emerged -- and exploded -- in recent years.
To me, all of these issues are worthy of brief consideration, but they pale in comparison to the more pressing existential threats discussed earlier.
I've heard the ETFs being described as a Trojan Horse on a few occasions. Usually, the speaker is excited about the prospect of Bitcoin infiltrating the TradFi world, priming it to disrupt and crypto-ify Wall Street. But the analogy works the other way too. Perhaps this is TradFi's way of infiltrating and taming crypto.
The ETFs are certainly worth getting excited about. They have brought Bitcoin into the big leagues, making the asset more accessible and respectable than ever before. They've given massively influential players like Larry Fink an excuse to promote Bitcoin, potentially leading to the biggest orange-pilling moment in all of Bitcoin's history. They're clearly a big deal and, if nothing else, Bitcoin's price is likely to benefit from them over the next few years. But they also introduce new risks, threatening to pacify Bitcoin's cypherpunk nature and corrupt its ideals in worst-case scenarios. While many in the industry are feeling joyous now, there's a chance that we are watching the beginning of Bitcoin's downfall.
For those of us who want to see more than just 'number go up', the next few years may be the most critical and future-defining period in the industry's history. We may need to work harder than ever before to preserve everything we like about this technology, to keep its essential features legal and accessible to all. Some might argue that the ETF approval represents an endpoint -- some kind of victory over TradFi and the SEC. I can't help but think this is just a beginning. Yes, the beginning of a new era for Bitcoin in which it may be respected and widely held. But also the beginning of a new battle for the future of crypto, and for the future of the digital and financial worlds as a whole.