For most of 2018, the cryptocurrency media’s mood has been swept along on a rollercoaster of Bitcoin ETF headlines. Considering the severity and the timespan of the coinciding crypto bear market, the desperation for an imminent ETF approval comes as no surprise.
Although it’s understandable that many of us would pin our hopes on a crypto ETF as catalyst for a dramatic turnaround of market sentiment, the historical context shows that our wishes may be both premature and misdirected. Let me explain.
Announcements of crypto ETF applications have become more frequent than ever before, and yet the first proposal for a Bitcoin ETF was filed already on the first of July 2013 by the Winklevoss Bitcoin Trust. Since then, at least eight other firms (SolidX & Van Eck, Grayscale, ProShares, Direxion, GraniteShares, First Trust, REX Shares, and Bitwise) have submitted their own proposals with the United States’ Securities and Exchange Commission (SEC). To date, every single proposal put before the SEC regulators has either been denied, withdrawn, or is pending a (delayed) decision.
While the almost 6-year wait may seem harsh and hopeless, Bitwise Asset Management, the first company to launch a crypto index funds and the most recent firm to file for a Bitcoin ETF, casts the delay in a different light:
The truth is that every “first” in the ETF industry was preceded by multiple years of struggle. For instance, it took:
The history of long waits above already adds a more realistic perspective to the potential of a crypto ETF approval. Apart from this historical context, an honest look at the crypto industry’s present developmental stage shows that hopes of an imminent crypto ETF launch are probably premature.
On his view of the present state and long-term view of the crypto industry, Bitstocks' Cryptocurrency Investment Associate, Stephen Ierotheou stresses that the “Market is so much in its infancy that it would be unnatural for an ETF to be approved.”
Cryptocurrency Portfolio Manager, James Coughlan is much in agreement, underscoring the importance of focussing on the industry’s long-term development instead of short-term goals:
"The one thing I like to instill in potential and current investors is that this market is very much in its infancy. To be concerned about (things like) the price at this point is not the right way to evaluate the situation. What we need to be focussing on is the technology and the way that the technology is growing on a day-to-day basis with some fantastic developers working on crypto projects, and the future will only get better.
When a tech is in its very early stages, you can’t expect it to kick-off and be perfect from day one. My major point is, not to worry about the price because it’s the tech that matters. Providing we keep seeing infrastructure get built around the industry and development work happening, the price will pick up at some point.”
Although it may still be a long wait to see a crypto ETF in action, it is not too early to think about the potential impact on the industry. Will the launch of a crypto ETF pave the way to a golden age or will it become reminiscent of the old Yiddish curse, “May you get what you wish for”? Let’s imagine the potential outcomes.
If we consider the view that the crypto industry’s lack of regulated custodianship services and investment products is keeping institutional investors such as major banks from investing in crypto, it is not illogical to hope for a flood of new capital once this obstacle has been removed.
The launch of a Crypto ETF and even the NYSE’s launch of the Bakkt exchange, will decrease counterparty risk, improve liquidity, provide easy on and off ramps, so putting the industry in a much more robust position to cater for institutional investors. Having trusted exchanges in place will also clamp down on the price manipulation we have seen around Bitcoin futures contracts, and could even settle the accompanying price volatility.
In the long-term, having a crypto ETF in place could be expected to make a hugely positive contribution to the financial element, the price, of Bitcoin.
The first problematic aspect of crypto derivatives such as ETFs and Futures contracts is the question of whether these will represent actual cryptocurrency holdings. In cases where a derivative merely tracks an index or a basket of cryptos according to price without buying the underlying assets (such as with CFD’s), capital inflows seem improbable.
A second, and even more problematic aspect, is the focus on short-term trades instead of long-term investment.
Crypto ETF news headlines have fueled an enormous amount of price speculation, as can be seen from the significant market drop-offs following previous SEC delays and disapprovals. It’s clear that a large proportion of the market is currently held by day traders and speculators who are motivated by short-term profit with little or no interest in contributing to the development of the crypto industry.
While I’m pretty sure no crypto advocate will scorn a bull market, those who are involved in building on and developing the technology know that we’re only scratching the surface of blockchain’s possible applications at this point. The current bitcoin price, in comparison, is probably the least enticing aspect. In actual fact, Bitcoin is a slice of technological infrastructure that just so happens to have a tokenised monetary system attached to it. The monetary aspect is not the be-all and end-all of its utility.
The crypto ETF obsession risks diverting our attention away from uncovering and unleashing blockchain technology’s untapped potential, instead bolstering the speculative mania of #whenmoon and #whenlambo.
In the early stages of crypto derivatives and the run-up to the launch of the first crypto ETF, many unanswered questions and lingering concerns remain. Certain risks deserve serious consideration as there is likely no going back once Pandora’s box has been opened.
For a start, traditional financial markets, derivatives (more specifically, the institutions that sell them) have gained a track record for causing chaos despite the regulatory measures that are in place. Future markets, in particular, are vulnerable to manipulation by big institutions. In November 2017, Credit Suisse’s foreign exchange business was fined $135 million for market manipulation. In December of 2016, regulators ordered Goldman Sachs to pay a civil penalty of $120 million to settle charges of manipulating a global dollar benchmark. And in 2013, an Italian regulator fined the world’s biggest money manager, BlackRock 150,000 Euros ($204,600) for market manipulation.
Apart from the risk of outright market manipulation, crypto derivatives could also be implemented in a way that undermines Bitcoin’s primary economic principles. Bitstocks’ CEO and Founder, Michael Hudson’s places primary on the social and personal value of the Bitcoin economy, illustrating what we’ve got to lose:
"Humans innately do not trust the system, because everything is registered to a centralised database - i.e., the world's governments -- and we do not have full ownership because items like our cars or our houses can be taken away from us. In contrast, with the use of blockchain, we own what we own -- no questions asked. Bitcoin's byproduct is sovereignty over what you acquire."
In the case of crypto ETFs, in contrast, holders merely own a promissory note. The institution’s actual crypto holdings remain opaque, and investors simply have to ‘trust’ that their promissory note is backed up by the underlying asset at the agreed-upon rate.
In effect, the situation negates the ‘trustless’ element of cryptocurrencies like Bitcoin. It also opens the door for institutions to issue more promissory notes than reflected by assets under management, which would corrode the value of assets in circulation by increasing the supply with ‘magic money’. And just like that, we’d be saying farewell to Bitcoin’s deflationary monetary model and hello to the old Fractional-Reserve Banking system.
As a company that supports the long-term vision of Bitcoin to maintain an inclusive, uncensored, permissionless network, we firmly believe that the long-term fate of Bitcoin and cryptocurrency will not be decided by the approval or rejection of an ETF. The determining factors will be the utility and usability that results from the application of blockchain technology.
We therefore discourage trading activity according to speculative events like the potential approval of a Bitcoin ETF and stress the characteristics of Bitcoin that makes it a long-term safe haven asset and technology that just happens to have a price feed.