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Why A Bitcoin ETF Could Be A Very Bad Idea For Crypto (Explained)


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An ETF (Exchange Traded Fund) is a fund, held by a custodial/manager (such as BlackRock), that can be traded like a stock. A Bitcoin ETF would be a fund that holds Bitcoin and then sells shares in this fund that represent the price of Bitcoin, which can then be traded on traditional stock markets. Someone buying into this fund would not be buying Bitcoin directly, instead they would be buying a share of a fund that holds Bitcoin.

Does this sound like a good thing for Bitcoin?

No.

No it doesn’t.

And here’s why:

A Bitcoin ETF is going to become a very very large custodial holder of Bitcoin. Within a few years, or perhaps even months, an ETF like this (perhaps one owned and managed by the likes of BlackRock or Fidelity say) could hold a very signficant amount of Bitcoin — perhaps say 2-3% of all of the so-far-already-mined 19 million or so Bitcoin (and remember there would be multiple ETFs by various custodials).

Would this increase the price of Bitcoin? YES — almost definitely. BUT it would be completely counter to the underlying ethos of Bitcoin and the reasons why Bitcoin was originally created, i.e. to put financial freedom back in the hands of individuals.

Remember the saying “Not your keys not your coins”?

Owning a share in a fund that owns Bitcoin isn’t owning your own Bitcoin.

The custodial holding Bitcoin here won’t allow you to trade your Bitcoin on an exchange (centralized or decentralized) of your choosing, won’t allow (or even enable) you to spend your Bitcoin without an intermediary (one of the fundamental principles of owning your own Bitcoin), and won’t give you any of the same rights or influence (however small) that holding your own Bitcoin gives you.

A fund that holds a very large amount of Bitcoin (on ‘behalf’ of perhaps 10 or 20 million customers say – including very large institutions) would carry a large amount of influence that could be used to sway miners (or developers), and likely even influence government regulations — not to mention heavily influence events such as the outcome of Bitcoin forks, the direction of future Bitcoin developments, and in the consensus and general governance of Bitcoin.

Would an ETF use its influence (which could very quickly become quite substantial) to further things like Bitcoin privacy for example? For completely anonymous transactions say? Or would it use its influence to further anything-and-everything it can to make itself more profitable, even at the expense of the underlying principles behind Bitcoin that, for example, aim to increase human rights or individual sovereignty?

Or how about in the event of a Bitcoin fork? Would the ETF share any resulting airdrops or additional coins that come from a potential fork with its ‘shareholders’?

Maybe.

But maybe not.

But what about the price of Bitcoin you say? Wouldn’t a huge increase in the price of Bitcoin (that would surely be a result of an ETF that enables very large institutional investors to gain access to Bitcoin) help drive large scale adoption?

Maybe.

In fact: yes, probably.

And wouldn’t that be great for Bitcoin adoption?

Yes, it would (at least in the short-term).

But at what long-term cost?

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