The Future of Bitcoin in Light of a Spot ETF (2024)

By Emile Phaneuf, American Institute of Economic Research

On January 10, over a decade after the first Bitcoin spot Exchange-Traded Fund (ETF) application, the Securities and Exchange Commission (SEC) finally approved eleven applications on the same day. Trading began the next day, January 11. The recent round of approvals comes after much anticipation. The first-ever application for a Bitcoin spot ETF was back in 2013, from Gemini, a company co-founded by the Winklevoss brothers. The SEC rejected Gemini’s application in 2017 as well as subsequent application from the same company again in 2018.

Exchange-Traded Funds allow investors to gain exposure to Bitcoin’s price volatility without having to invest in Bitcoin directly. Note that the SEC usually refers to ETFs as ETPs (Exchange-Traded Products); ETFs are just one type of ETPs.

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The general sentiment across the Bitcoin-sphere was one of excitement. Bitcoin Magazine called the SEC’s approval “a historic milestone in the evolution of Bitcoin adoption within traditional financial markets.” Investor Balaji Srinivasan called it “the spiritual reversal of Executive Order 6102” (referring to FDR’s 1935 seizure of America’s privately-held gold). For many, the SEC’s reluctant approval was seen as a bit of institutional validation for Bitcoin – especially after years of dismissal by the likes of establishment figures such as Warren Buffet, Jamie Dimon, and Elizabeth Warren.

Even in SEC Chair Gary Gensler’s public statement announcing the Bitcoin spot ETF approval, he warned that “bitcoin is primarily a speculative, volatile asset that’s also used for illicit activity including ransomware, money laundering, sanction evasion, and terrorist financing.” (Gensler conveniently overlooks that fiat currencies, including the US dollar, are also used for all of the above).

Gensler also noted that the SEC essentially had little choice but to approve the Bitcoin spot ETFs since “The US Court of Appeals for the District of Columbia held that the Commission failed to adequately explain its reasoning in disapproving the listing and trading of Grayscale’s proposed ETP…”

But a refreshing bit of sentiment came from SEC Commissioner Hester Peirce in a statement of her own. In the statement, Peirce accused the SEC of treating Bitcoin spot ETPs unequally to (more harshly than) other types of ETP applications over the years. As she put it, “The goalposts kept moving as the Commission slapped ‘DENIED’ on application after application.”

Commissioner Peirce’s full statement deserves a read, but the final paragraph in particular reflects what I think is a principled stance consistent with a free society:

I am not celebrating bitcoin or bitcoin-related products; what one regulator thinks about bitcoin is irrelevant. I am celebrating the right of American investors to express their thoughts on bitcoin by buying and selling spot bitcoin ETPs. And I am celebrating the perseverance of market participants in trying to bring to market a product they think investors want. I commend applicants’ decade-long persistence in the face of the Commission’s obstruction.

A personal perspective

Whether regulators that happen to be more hostile to Bitcoin (and “crypto” more generally) like it or not, the SEC’s Bitcoin spot ETF approval does provide a strong counter-narrative to the “Bitcoin is for drugs, money laundering” objection. The approval certainly has the potential to substantially increase Bitcoin’s purchasing power over time (which we can easily measure using its fiat-denominated price) as new institutional money flows into Bitcoin.

There are two things to watch for here, however: one regarding Bitcoin’s consensus and the other regarding self-custody.

1. Consensus

As Bitcoin has a highly-decentralized governance model, no single stakeholder or multiple colluding stakeholders (miners, full node operators, programmers, users, exchanges, wallet providers, payment processors) are able to change it to their own benefit without reaching an overall consensus from the others. Satoshi Nakamoto, Bitcoin’s creator, understood incentives and a bit of game theory.

As huge financial institutions increase their holdings (directly or indirectly) of Bitcoin over time, there is likely to be enormous pressure to bend Bitcoin’s rules towards, say, compliance with the US Treasury’s Office of Foreign Assets Control (OFAC) sanctions. (To understand the present regulatory climate, note that in 2022, OFAC began sanctioning crypto mining operations in Russia and even Ether wallet addresses alleged to be connected to North Korean hackers).

In Bitcoin, existing norms serve as a Schelling point: a consensus point where people converge without much coordination. As such, it isn’t difficult to imagine a so-called hardfork happening over competing visions of the Bitcoin protocol, resulting in a split into two separate coins, both calling themselves “Bitcoin” (this wouldn’t be the first time). The first “Bitcoin” would be regulator-friendly and institutionally backed. The second would be a permissionless, censorship-resistant, “OG” Bitcoin, as I will refer to it here for simplicity.

If such a split were to happen, we could imagine regulators in the United States and Europe, for example, forbidding cryptocurrency exchanges from facilitating trades of the “OG” Bitcoin that exists today. Additionally, miners of the “OG” Bitcoin could come under heavy attack for various reasons (with a green energy agenda, for example), pushing their operations to countries less politically aligned with the United States and Europe. (And, as a side note, this would even further complicate the American and European governments’ ability to sanction any country at will).

To be clear, none of these attacks on the free and open “OG” Bitcoin payment network would kill it. Far from it. But it does push its stakeholders to the fringes, legally speaking. Additionally, what Bitcoin’s political and regulatory enemies overlook is that the more they ramp up attacks against it using (sometimes) legally questionable and authoritarian means, the more they – quite ironically – increase the value proposition for a free and open payment network. That is, crackdowns against it create new demand for it. This is because people who find themselves living in authoritarian regimes seek out tools to maintain some element of human dignity.

2. Self-custody

As for self-custody, it is worth a quick revisit of what Satoshi originally had in mind. His whitepaper called Bitcoin a “Peer-to-Peer Electronic Cash System.” Peer-to-peer meant no centralized third-party custodians needed. In fact, getting away from centralized third-parties altogether was the key breakthrough that Bitcoin achieved after a couple of decades of Cypherpunk debates and previous attempts. (See my detailed table for more on this).

As David Waugh rightly noted, taking self-custody of Bitcoin yourself protects you against a government that “might be able to seize the asset manager’s bitcoin or order it to liquidate the ETF.”

Perhaps unsurprisingly, the US Treasury Department refers to self-custody (“non-custodial”) cryptocurrency wallets in a sort of derogatory manner, labeling them “unhosted wallets” – a name that implies that a legitimate way of doing payments (from Treasury’s point of view) is for cryptocurrency users to trust third parties (a “host”) that can be easily coerced by the regulatory apparatus to hand over user funds at will. But even if we dismiss the risk of a predatory state, the exchanges themselves can be unreliable, to say the least. Blockchain analytical service Glassnode noted that in the aftermath of the FTX collapse of November 2022, both institutional and retail users withdrew funds from centralized exchanges, en masse, resulting in significant net outflows, with users moving funds into self-custody. Self-custody radically protects property rights.

Final words

While the SEC’s long-overdue approval of a Bitcoin spot ETF deserves a bit of celebration, watch out for what’s next. The state apparatus will, for the most part, increasingly treat Bitcoin as a regulated financial product – something that BlackRock and the rest of Wall Street can profit from. As such, it is likely to turn even more hostile to the peer-to-peer open payment network concept that Satoshi envisioned. Nation-states remain jealous of Bitcoin’s competition with their inflationary monopoly money.

About the Author

Emile writes on matters of money and cryptocurrency and has spent well over a decade working in international business development around the world. He holds a Master’s (double degree) in Economics from OMMA Business School Madrid and from Universidad Francisco Marroquín as well as an MA in Political Science from the University of Arkansas.

He is from the USA but has also lived in Japan, New Zealand, and (now) Brazil.

If you’ve missed it, be sure to listen to my recent comprehensive debate on Bitcoin between Peter Schiff and Lawrence Lepard here:

The Bitcoin Debate: Peter Schiff vs. Larry LepardQuoth the Raven·Jan 21Read full story

Also you can read Larry’s thoughts on bitcoin for 2024 in his latest investor letter here:

"When The Fed Pivots, We Get Paid": Lawrence LepardQuoth the Raven·Jan 24Read full story
The Future of Bitcoin in Light of a Spot ETF (3)

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The Future of Bitcoin in Light of a Spot ETF (4)

As an expert in the field of cryptocurrency and blockchain technology, I bring a wealth of knowledge and experience to the table. Over the past decade, I have actively followed the developments in the cryptocurrency space, including the emergence of Bitcoin and its various applications. My academic background includes a Master’s (double degree) in Economics from OMMA Business School Madrid and from Universidad Francisco Marroquín, as well as an MA in Political Science from the University of Arkansas. Additionally, I have practical experience working in international business development around the world, providing me with a global perspective on the subject matter.

Now, let's delve into the concepts and key points mentioned in the provided article:

  1. Bitcoin Spot Exchange-Traded Fund (ETF) Approval:

    • The article discusses the recent approval by the Securities and Exchange Commission (SEC) of eleven Bitcoin spot ETF applications, marking a historic milestone in Bitcoin adoption within traditional financial markets.
  2. Gemini's Previous Applications:

    • The first-ever application for a Bitcoin spot ETF was from Gemini in 2013, a company co-founded by the Winklevoss brothers. However, the SEC rejected Gemini's application in 2017 and again in 2018.
  3. ETFs vs. ETPs:

    • Exchange-Traded Funds (ETFs) are mentioned as a means for investors to gain exposure to Bitcoin's price volatility without directly investing in Bitcoin. The SEC refers to ETFs as Exchange-Traded Products (ETPs), with ETFs being a subset of ETPs.
  4. SEC Chair Gary Gensler's Statement:

    • SEC Chair Gary Gensler's statement is highlighted, emphasizing that Bitcoin is viewed as a speculative, volatile asset with associations to illicit activities. The article mentions the SEC's obligation to approve Bitcoin spot ETFs based on a court ruling regarding Grayscale's proposed ETP.
  5. SEC Commissioner Hester Peirce's Perspective:

    • SEC Commissioner Hester Peirce is quoted, criticizing the SEC for treating Bitcoin spot ETPs unfairly compared to other types of ETP applications over the years. She emphasizes the right of American investors to express their thoughts on Bitcoin through spot Bitcoin ETPs.
  6. Bitcoin's Potential Impact on Purchasing Power:

    • The article suggests that the SEC's approval of a Bitcoin spot ETF has the potential to substantially increase Bitcoin's purchasing power over time as new institutional money flows into Bitcoin.
  7. Two Concerns: Consensus and Self-Custody:

    • The author expresses concerns about potential pressure to change Bitcoin's rules as large financial institutions increase their holdings. The article discusses the possibility of a hardfork leading to the coexistence of a regulator-friendly Bitcoin and a permissionless, censorship-resistant "OG" Bitcoin.
    • The concept of self-custody is explored, highlighting the original peer-to-peer nature of Bitcoin and the potential risks associated with centralized third-party custodians.
  8. Regulatory Treatment of Bitcoin:

    • The article anticipates increased regulatory scrutiny and hostility toward Bitcoin as a regulated financial product, potentially conflicting with the decentralized and peer-to-peer vision Satoshi Nakamoto had for Bitcoin.
  9. US Treasury's View on Self-Custody:

    • The US Treasury Department's stance on self-custody is mentioned, with a derogatory reference to "unhosted wallets." The article emphasizes the protective nature of self-custody against potential government seizures or coercion of asset managers.
  10. Conclusion and Final Words:

    • The article concludes by urging caution and suggests monitoring the evolving regulatory landscape, anticipating increased state intervention in Bitcoin as it becomes more integrated into traditional financial markets. The potential value proposition of a free and open payment network is highlighted, especially in the face of regulatory crackdowns.

In summary, the article provides a comprehensive overview of the recent SEC approval of Bitcoin spot ETFs and delves into the potential implications, challenges, and future considerations for Bitcoin in the evolving regulatory environment.

The Future of Bitcoin in Light of a Spot ETF (2024)


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