The approval of spot Bitcoin ETFs in the U.S. is a big milestone for the crypto industry in the eyes of the outside world, especially for a movement that began in 2008 as a white paper quietly proposed to an obscure mailing list.
Bloomberg’s headline read, “SEC Authorizes Bitcoin-Spot ETFs in Crypto’s Breakthrough.” The NYT’s: “Regulators Approve New Type of Bitcoin Fund, in Boon for Crypto Industry.” Coinbase called the approvals “momentous,” while Senator Cynthia Lummis said the decision was “historic.”
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And while that is all true, the reason for that is more because the approvals were hard-won in a knock-down, drag-to-court fight, and because they are an acknowledgement by an incumbent more so than because of any particular achievement by Bitcoin itself at this point in time.
This is why, when the history books are written, I believe this moment will likely be seen as a sideshow that has more to do with politics and outside validation rather than a marker of Bitcoin’s success in gaining adoption.
Spot Bitcoin ETFs Should Have Come Long Ago
During Bitcoin’s 15-year existence, it has gone from a curiosity so worthless that, in 2010, 10,000 were needed to buy two pizzas to far and away the best-performing asset of the last decade.
However, the real reason that it will now be the belle of traditional finance’s next ball is not necessarily because of its meteoric rise in price, but because of the politics that delayed its approval as the basis for an exchange-traded product.
Imagine if spot Bitcoin ETFs had been approved at some point before the launch of Bitcoin futures ETFs. While one can dispute exactly when would have been the optimal moment for it, the broad consensus, hammered home last August by a panel of three judges, is that the lack of a spot Bitcoin ETP in the U.S. entered Twilight Zone territory once the Bitcoin futures ETFs went live in November 2021.
At that point, because of how closely the two prices tracked each other, the SEC’s reasoning for denying the spot ETFs while approving the futures was as hard to swallow as a pretzel.
And that’s why last summer the three judges ruled that the decision not to approve a spot ETF despite having approved futures ETFs was “arbitrary and capricious,” which is judicial euphemism for, “you’re discriminating against Bitcoin, and it’s obvious.”
Read more: Grayscale Wins Lawsuit Against SEC Over Denial of Bid to Convert GBTC Into a Bitcoin ETFA Lawsuit Shouldn’t Have Been Necessary
Imagine also that the spot Bitcoin ETFs had been approved without a company having to sue the SEC first. If the approval had been comprised of business-as-usual deadlines being met, the spot Bitcoin ETF launch likely would have been much more run-of-the-mill.
But the high drama of Grayscale having to sue the agency that it had called its own regulator for years, the plight of the investors in the Grayscale Bitcoin Trust being trapped in an asset trading at a price far below the underlying, the purgatory of GBTC leading to the implosion of multiple crypto companies, and the “Emperor Has No Clothes” reasoning for the SEC’s denials meant that what should have been an easy, breezy 5K-run of a spot ETF approval became a bloody, sweaty, endless ultramarathon.
This, in turn, has led to the moment of approval and launch being more feverish than it would have been otherwise. As SEC Commissioner Hester Peirce, aka “Crypto Mom,” pointed out, “by failing to follow our normal standards and processes in considering spot bitcoin ETPs, we have created an artificial frenzy around them. Had these products come to market in the way other comparable products typically have, we would have avoided the circus atmosphere in which we now find ourselves.”
That mania culminated in the hacking of the SEC’s X account, which again exposed the hypocrisy of the agency—this time for not following Gensler’s own advice to use multi factor authentication.
Part of that mania is playing out in the cutthroat competition of the Bitcoin ETF “terrordome,” which has occurred in a much more brutal and compressed way, since there were now 11 potential issuers chomping at the bit. (“Terrordome” is the term used to describe the slash-and-burn rivalry amongst ETFs generally, but throwing in the world’s first digital asset and the years-long delay gave this contest an exponential oomph that caused fees to be slashed by issuer after issuer from one day to the next.)
What is likely to ensue now, due to both pent-up demand by investors and pent-up desire by issuers to get a piece of the market share, is an outrageous onslaught of Bitcoin ETF marketing.
Read More: Bitcoin ETF Fee War Could Make Investing in Bitcoin Cheaper Than Using an Exchange
Why the Approval Was So Hard-Fought
The way the U.S. acted about the Bitcoin ETFs is precisely how legacy media, Blockbuster, Kodak, Virgin Records, and other disrupted companies had acted in prior eras of technological disruption: head in sand, too good for the competition, superior, smug … and irrational.
One of the ways to explain the nonsensical contortions the SEC made to justify why it would not approve spot ETFs even as it had approved futures ETFs may have to do with the fact that when it comes to money, the U.S. dollar is the global reserve currency and the U.S. financial markets are the most important in the world. (This likely also explains why JPMorgan CEO Jamie Dimon disparaged Bitcoin and said it should be outlawed—though at least his staff were savvy enough to not pass up the business opportunity and jumped in to have the mega-bank serve as an authorized participant.) Bitcoin, on the other hand, is an outsider — not only a form of non-U.S. money, but non-governmental, and at least in its origins, potentially libertarian and possibly actively hostile to government (or, at the very least, banks).
While the Bitcoin community has grown far beyond the initial group of libertarians who understood its significance early on, the fact that Bitcoin is a non-governmental asset (or, possibly even a type of money) that has grassroots support, could make it seem threatening to people working in government or tasked with upholding the integrity of a nation’s financial markets.
I personally believe it’s dangerous only if the incumbent, in this case, the U.S., doesn’t just adapt to the new innovation. Honestly, so far, the crypto industry has reinforced the primacy of the U.S. dollar through the adoption of stablecoins, which are mostly denominated in USD and have gained traction in jurisdictions far from our shores. But perhaps the U.S. government has a hard time seeing it that way since it does not control Tether or the many other stablecoins that have helped further dollar-denominated transactions even in foreign markets.
If the U.S. were to embrace crypto in a bigger way, then the innovation and entrepreneurship and some substantial portion of the benefits of crypto would likely accrue here, much the way the internet revolution probably brought a bigger boost to Americans than to citizens of any other country, with American companies like Apple, Google, Amazon, Facebook, Netflix and others leading the charge.
At the moment, however, it doesn’t look like the Bitcoin ETF approvals are a harbinger of any sea change in attitude from the government. We’ll see if the 2024 elections and forthcoming generational change recast those odds.
In the Long Run, the ETFs Will Be a Historical Blip
As mentioned, the ETF approvals are only a big deal because the industry had to wage a battle with the government to get them.
But in the grand scheme of Bitcoin’s history, are the approvals truly meaningful? No. Do the ETF approvals represent some watershed moment when Bitcoin has truly reached mainstream adoption? No. Will they boost price? (Okay, that one, I’ll give you.)
Yes, they represent validation by TradFi. Yes, they symbolize Bitcoin’s evolution from a fringe asset to one that’s captured the minds of many millions worldwide. And yes, they will be a gateway for many more Bitcoin-curious people who might learn more now that they have much easier access to investment exposure.
But when it comes to Bitcoin’s original ideals of decentralization, banking the unbanked, etc., the Bitcoin ETFs don’t deliver on those metrics at all. In fact, they help further Bitcoin amongst centralized players and amongst people who have so many banking options that they have additional capital left over to allocate to an investment account.
Ironically, it is SEC Commissioner Caroline Crenshaw, who dissented from the approval of the spot Bitcoin ETFs, who called out the irony of the notion that Bitcoin’s validation could come from these ETFs or the existing financial system:
“I am aware of the grand claims made by proponents of [the spot Bitcoin ETFs] and similar products. They are disintermediating the financial system. Banking the unbanked. Enhancing freedom. Changing the world. And when I read the whitepapers, it can be hard not to buy in. Many of the goals of the crypto ecosystem are goals I support. How can you be against freedom and prosperity? But when I look at products like the ones at issue in today’s approval, I have a simple question: wasn’t bitcoin supposed to solve this? If the technology is so revolutionary, why do so many of its uses seem to revolve around recreating the existing financial system … ?”
She also even called out what she views as the insanity of trying to make Bitcoin the basis for an ETF: “Bitcoin is a peer-to-peer system. Individual investors in the U.S. who want to invest in the product may already do so, either by mining it themselves or by setting up a wallet and buying it from someone else, each of which they are able to do from the comfort of their living room. That is the whole point of creating a new, censorship-resistant digital currency. So why is so much energy being expended on linking it to the existing financial system?”
While she’s not wrong that the ETFs do not further the original ideals of Bitcoin in terms of creating an alternative, decentralized financial system, they do at least get more people interested and engaged with it, even if in an indirect way.
Even so, far in the future, the events that will be noted as significant events in the history of Bitcoin will likely have to do more with the use of Bitcoin, not in the ETF wrapper, but in its native form and in movements seen on-chain, which is where the real action will remain.
Read more: Should First-Time Bitcoin Investors Buy Now or Wait for the ETF?