ETF Euphoria Shows Bitcoin Needs Wall Street After All

Is an ETF at odds with Bitcoin’s goal of breaking away from Wall Street? Absolutely. Is that same ETF also necessary for crypto to grow? Also yes.

AccessTimeIconJan 10, 2024 at 9:48 p.m. UTC
Updated Mar 8, 2024 at 7:40 p.m. UTC
AccessTimeIconJan 10, 2024 at 9:48 p.m. UTCUpdated Mar 8, 2024 at 7:40 p.m. UTC
AccessTimeIconJan 10, 2024 at 9:48 p.m. UTCUpdated Mar 8, 2024 at 7:40 p.m. UTC

It’s the moment the crypto world has been waiting for: The Securities and Exchange Commission (SEC) has finally approved the first spot Bitcoin exchange-traded fund (ETF) in the United States.

Is this mainstream-friendly investment vehicle at odds with Bitcoin’s original goal of breaking away from Wall Street? Absolutely. Is that same ETF also necessary for crypto to grow? Also yes. The crypto industry has simply not been able to reach mainstream adoption on its own.

That’s why, despite the obvious contradictions, much of the crypto community has been eagerly anticipating this ETF for years. The SEC turned down application after application, but recently the tide started to turn. We never know for sure what drives up the price of Bitcoin, but ETF euphoria has been a pretty good guess. Bitcoin rallied nearly 160% in 2023 and has gained 50% in the last six months alone, a surge widely acknowledged to be driven by ETF dreams.

So let’s just take a moment to talk about the elephant in the room. Bitcoin’s pseudonymous founder Satoshi Nakamoto created the world’s first major cryptocurrency specifically to decrease reliance on financial institutions. Bitcoin’s invention followed the 2008 financial crisis and the related collapse in trust in the banking system. The very first sentence of the Bitcoin white paper abstract envisions “a purely peer to peer version of electronic cash [that] would allow online payments to be sent from one party to another without going through a financial institution.”

In other words, Bitcoin was designed to be everything an ETF is not.

An ETF gives investors exposure to bitcoin in their traditional brokerage accounts via the stock market. The institutions applying for ETFs include Blackrock, Grayscale and Fidelity, the very “intermediaries” that Satoshi Nakamoto wanted to eliminate.

Then there’s that favorite phrase of crypto purists, “not your keys, not your coins.” This basically means that if you are holding bitcoin on a crypto exchange as opposed to in your own wallet, for example, then that bitcoin is not truly yours. ETFs introduce yet another degree of separation. Investors in an ETF aren’t even buying actual bitcoin, they are just buying price exposure to that bitcoin.

And finally, there was Nakamoto’s warning that “the cost of mediation increases transaction costs.” A Bitcoin ETF certainly doesn’t solve this problem. Instead, it comes with management fees, with Grayscale’s fees reaching up to 1.5%, even if competition is already driving some issuers' fees down.

So why is the crypto world so excited about this Diet Coke version of digital currency? This is pretty far from the decentralized future that we’ve all been supposedly fighting for.

The mostly simple answer, of course, is price. With some exceptions, much of the industry still remains highly vulnerable to the whims of token prices. When the markets are down, venture capitalists lose interest and sponsorships and advertising budgets suffer. Consumer-facing services find it harder to onboard new users. Furthermore, various altcoins tend to rise or sink with bitcoin. This time, bitcoin’s rise seems to be largely thanks to major financial institutions and the SEC. But the industry is not complaining about it too much.

Then there is the whole mainstream adoption argument – namely that spot ETF approvals will unleash a flood of new investors who can’t be bothered to open an account at a crypto exchange, much less set up a wallet on their phone or run a node on their home computer. On a more basic level, involvement by brand-name institutions in the market may assuage investors who associate crypto with fraud. Thanks to ETFs, the crypto community has enjoyed a few weeks of relatively positive media attention, a nice break from all the Sam Bankman-Fried headlines of 2023.

What the ETF really brings is more credibility. In this case, Wall Street involvement is contingent on government approval. The SEC finally approving an ETF after years of rejections based on fears of “market manipulation” indicates a degree of acceptance, however begrudging, of this asset class by one of its fiercest critics, SEC chair Gary Gensler. In theory, crypto is also independent of governments, and so the SEC shouldn’t matter that much. In reality, crypto Twitter is basically obsessed with most everything Gensler says and does.

That said, Gensler’s apparent antipathy to the industry, which manifests itself in a lack of regulatory clarity and a slew of lawsuits against major industry players, has not killed the industry. Nor has it stopped crypto from booming in other parts of the world, particularly in Asia. But it has come at a cost. Some crypto companies spend years embroiled in SEC lawsuits. Others choose to avoid the U.S. entirely, despite it being the world's largest economy and a major source of capital and talent.

Crypto needs some degree of government approval. It needs Wall Street involvement. The future of crypto does not look like the Wild West, it looks more like Japan, Hong Kong and Singapore, three jurisdictions with some of the toughest regulations in the world.

It’s hard enough to build a decentralized project, let alone in a bear market with hostile regulators, cautious investors and wary consumers. Hopefully Wall Street’s culture will not define the industry, but will provide a stamp of credibility that allows more crypto projects to thrive.

Edited by Marc Hochstein.

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Emily Parker

Emily Parker was CoinDesk's executive director of global content. She was member of the State Department's Policy Planning Staff, a writer/editor at The Wall Street Journal and editor at New York Times. She is author of "Now I Know Who my Comrades Are: Voices from the Internet Underground" (FSG). She speaks Chinese, Japanese, French and Spanish.

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