Traditional financial interest in cryptocurrency-based exchange-traded funds (ETFs) has surged in recent weeks. BlackRock filed a new bitcoin ETF application on July 3 after the SEC challenged its initial application. A week ago, Fidelity led a group of investment companies to submit an application for a Bitcoin-based ETF to the SEC. Meanwhile, HSBC has become the first bank to offer bitcoin (BTC) and ether (ETH) ETFs to customers in Hong Kong.
In the context of Bitcoin, what appears to be positive news is often harmful in the long run; and vice versa, short-term negative news tends to reinforce Bitcoin’s continued outlook. A good example of the latter is the “block size war” in 2017, when the Bitcoin community split into the big block camp that launched the Bitcoin Cash fork and the small block camp that implemented the Segregated Witness upgrade in Bitcoin.
While the results were muddled in the short term—many Bitcoin critics tried to dance on Bitcoin’s grave—it turned out to be one of the most important lessons about decentralized consensus, and one that we like to pass The Lightning Network paved the way for layered scaling today.
We don’t have to go back too far in the past for examples of good news turning into bad news. Until the end of 2022, FTX is a prime example of cryptocurrency going mainstream, with Super Bowl commercials, stadium naming rights, and fancy magazine features. But in the end, FTX proved to be a ticking time bomb that exploded in front of everyone and de-legitimized the industry for years.
Today is the tenth anniversary @Taylor I applied for my first spot bitcoin ETF.this @SECGovA decade of refusal to approve these products has been a total disaster for U.S. investors and shows that the SEC is a failed regulator. The reasons are as follows:
— Cameron Winklevoss (@cameron) July 2, 2023
Again, seemingly bad news – FTX crashing and losing a lot of money for its users – will turn into positive news in the long run, as people will take better custody of their bitcoins in the future, limiting systemic risk with large custodians explosion incident.
As we have seen with the FTX debacle and subsequent market contagion, centralized exchanges have never been the answer for the average investor looking to benefit from Bitcoin’s massive prospects. Neither are ETFs. An ETF pegged to bitcoin is a worse idea than a centralized exchange because there is zero possibility of extracting the underlying instrument (i.e. bitcoin). This means that holders can never take advantage of one of Bitcoin’s most important features: the ability to control their funds without trusting anyone.
related: Don’t Be Naive — BlackRock’s ETF Won’t Be Bullish on Bitcoin
There are other dangers to the broader market. With ETFs, there is a risk of “paper bitcoin,” or claims not backed by actual bitcoin, potentially distorting markets and undermining bitcoin’s monetary policy. Exchanges that have issued paper bitcoins in the past, such as FTX, have been subject to withdrawal runs and eventual crashes, after which false bitcoin claims are wiped out along with the hapless exchanges.
That may not be the case with ETFs. Since the underlying asset cannot be extracted, paper bitcoins can be printed at will. If Bitcoin ETFs become the main way to invest in Bitcoin, it is likely to cause millions of paper Bitcoins to flood the market, thereby depressing the price of Bitcoin.
With Bitcoin, owning it means owning it
In the context of Bitcoin, ownership is closely related to control over the encryption keys associated with a particular Bitcoin address. Now, someone may indeed own bitcoins in a legal sense without directly controlling the keys — such as owning a trading account or holding shares in an ETF — but that’s not a good idea at all in the bitcoin world.
related: Gary Gensler is hurting the little guys on Wall Street
Bitcoin’s digital nature, perfect portability, and global liquidity make it especially vulnerable to corruption, theft, or basic mismanagement. The only way to truly own bitcoins is to control the keys.
Some may welcome the short-term price gains associated with the approval of major Bitcoin ETFs (e.g. BlackRock), but the long-term impact on Bitcoin adoption may be negative (including the long-term price of Bitcoin). The only adoption that really matters involves self-custody — everything else is a trap.
Joseph Tetek Is a Bitcoin analyst at Trezor. A longtime Bitcoin enthusiast with a background in Austrian economics and political philosophy, he founded the Czech and Slovak Ludwig von Mises Institute in 2010. He is the author of two books, Bitcoin: The Separation of Money and State and Enemy of the State, Friend of Liberty.
This article is for general informational purposes only and is not intended and should not be construed as legal or investment advice. The views, ideas and opinions expressed here are solely those of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.