At the start of this month, the U.S. Securities and Exchange Commission (SEC) finally gave the green light to a spot Bitcoin ETF, sparking a flood of insightful commentary online. I hadn't planned on diving into this already buzzing topic, but after a nudge from several curious readers, I've decided to casually stroll into this slightly stale conversation.
What's an ETF, you ask?
Let's not get into the nitty-gritty of Bitcoin and spot trading here. Instead, let me give you a quick rundown on ETFs, and my finance gurus, please bear with my simplicity. We can't assume everyone's in the loop, right?
An ETF, or exchange-traded fund, is an investment fund traded on stock exchanges, much like stocks. These funds come in two flavors: active and passive. Active ETFs are where the fund managers play the field, picking assets and their allocations, whereas passive ETFs simply follow a specific asset or a set basket of assets, like the Hang Seng Index or the S&P 500. With active ETFs, you're buying into the fund manager's vision, but passive ETFs? They're just mindlessly tracking, so why not buy the underlying assets directly? Well, it's all about convenience.
Take Alice, for instance, who's bullish on the Hang Seng Index's components (kudos for her patriotic spirit). Buying each stock individually would be a hassle, especially with limited capital leading to lots of fractional shares, not to mention the periodic reshuffling of components. All these factors make direct purchasing a bit of a headache. So, she might as well pay a small fee and get herself a piece of the Tracker Fund of Hong Kong (2800.hk), which mirrors the Hang Seng Index.
Then there's Bob, who's all in on gold but finds storing physical gold both cumbersome and risky. Imagine having to lug it around if you need to move or flee. So, he opts for a gold ETF, where a simple record does the trick.
It's interesting to note that while both chose ETFs, the level of compromise between Bob and Alice differs. Alice's only sacrifice is the handling fee for the Tracker Fund, but Bob, aside from the fee, also gives up the autonomy of physically holding gold bars. In 99.99% of cases, having your assets managed by an ETF issuer is more convenient and makes no difference. However, if for some reason a regime targets Bob, freezing his gold ETF would be a snap; but confiscating Bob's physical gold, though not impossible for the authorities, would certainly be more challenging. You might think such scenarios are one in a million (or, to put it another way, there are 700 Bobs in Hong Kong), but remember, these assets are often meant for extreme situations.
I'm too cautious to give specific examples, but let's imagine if Bob was suspected of violating national security laws or a Hong Kong official with assets frozen by the US government. Would it be better to choose physical gold or an ETF?
Now, onto the main topic: the spot Bitcoin ETF is a passive fund that tracks the price of Bitcoin, and buying it is "equivalent" to buying Bitcoin itself. The quotes highlight the 0.01% exception, similar to the gold ETF scenario, where holding a Bitcoin ETF means enjoying the convenience of custody but also relinquishing the right to direct ownership. Ironically, the core value of Bitcoin, heralded by its white paper "A Peer-to-Peer Electronic Cash System," has always been about direct ownership without intermediaries.
The paradox of a Bitcoin ETF is, therefore, quite striking.
The inevitability of Bitcoin ETFs in history
The mainstream view leans towards a positive stance on the SEC's listing approval of Bitcoin ETFs, suggesting that it was overdue. Some believe that the delay was primarily due to SEC Chairman Gary Gensler, who seemed to be at odds with the ethos of cryptocurrencies. It took a whole decade from the first application submitted by the Winklevoss twins in 2013 until the approval of a spot Bitcoin ETF this month. However, it's hard to gauge how mainstream this opinion truly is, as it could merely be an echo chamber effect. It's not difficult to find opposing views, and even within the SEC, the decision was a close call, passing with a vote of 3:2.
Rather than debating whether the SEC should have approved the spot Bitcoin ETF, it's perhaps more accurate to view it as an inevitable historical development, bound to happen sooner or later. This isn't to say that the SEC had no choice due to a court order to reconsider the application last year, nor is it to delve into historical determinism. The point is that in the grand scheme of international power dynamics, the United States couldn't indefinitely block its approval.
To understand this inevitability, let's consider the evolution of "physical Bitcoin," i.e., gold, into a globally recognized store of value. I'm no economist, and certainly no historian, but through basic logic, one can infer that gold's status wasn't decreed by world leaders at the United Nations. Rather, the acceptance of gold as a value carrier predates modern nation-states, having emerged in a decentralized manner over centuries.
Imagine gold first gaining consensus as a store of value within a small region, Area A, while being deemed worthless in Area B. Once trade between Areas A and B begins, astute traders would buy gold cheaply in B and sell it at a higher price in A. Soon enough, the price of gold in both regions would align. Similarly, as trade expands to include Areas C, D, E, and beyond, a "Golden Age" gradually emerges, unless there's a compelling reason and ability to ban gold in these regions.
Many worry that if governments worldwide start banning Bitcoin, its value could plummet to zero. It's not an unfounded fear; I too considered this possibility when I first encountered Bitcoin. However, for all the world's nations, or at least the major economies, to unite against Bitcoin would have been more plausible in its early days. But back then, governments hardly understood what Bitcoin was, let alone how to regulate it.
As Bitcoin grows, the likelihood of a global coalition against it diminishes. If America and Britain oppose Bitcoin, why should China join the opposition instead of capitalizing on the lucrative Bitcoin trading market? If ABC countries all oppose it, why would second-tier countries like DEF or smaller nations like XYZ miss out on this "golden opportunity" to attract international capital and reduce reliance on the dollar? The competitive dynamics between countries mean that no government can outright ban Bitcoin, driven not by ideology but by self-interest.
Bringing it back to reality, even China, with its history of various crackdowns on Bitcoin, eventually moved towards establishing a "Virtual Asset Hub" in Hong Kong(, China). This wasn't likely due to the autonomous decision-making of Hong Kong officials but a strategic move, making the introduction of a Bitcoin ETF a matter of when, not if. Had the SEC once again rejected the spot Bitcoin ETF application at the beginning of the month, it wouldn't have been surprising. Yet, to avoid ceding the lucrative Bitcoin market to other nations, even a powerhouse like the United States couldn't perpetually say no.
With countries like the UK, Canada and Singapore adopting a positive stance towards Bitcoin, Hong Kong gearing up, and the US reluctantly approving ETFs, the era of potential global bans on Bitcoin is over. The SEC's approval of the spot Bitcoin ETF this month marks a significant milestone, symbolizing that Bitcoin is now "too big to ban."
“True Bitcoin Now!”
A hotly debated topic is whether Bitcoin ETFs are a blessing or a curse for the overall development of cryptocurrencies.
Clearly, the advantage of ETFs is that they significantly lower the barrier to buying and "holding" Bitcoin, making it accessible to everyone. But focusing solely on retail investors who prefer not to learn how to directly purchase and hold Bitcoin isn't enough, nor is it the main point; the real game-changers are corporations, institutions, and retirement funds—essentially, the "old money."
Speaking of retirement funds, as someone without a job, I can only look on enviously at the Mandatory Provident Fund savings I've accumulated over twenty years, unable to withdraw them or use them to buy even a single Bitcoin, due to lack of options. Pathetic, right? However, if Hong Kong were to have a Bitcoin ETF and the government didn't force citizens to buy local stocks in a bid to "save the nation," I'd jump at the chance to convert all my retirement savings into a Bitcoin ETF, preserving my past labor's value in Bitcoin. By the time I'm 60, if the government hasn't mandated a patriotic oath to withdraw my "mandatory savings", I could reclaim them, by then valued who knows how much. My own retirement fund might be insignificant, but the collective might of American retirement funds, along with other capitals previously unable to directly invest in Bitcoin due to procedural or regulatory hurdles, is substantial. Their participation could not only boost Bitcoin's price but also facilitate public engagement with Bitcoin.
But is this truly "bringing Bitcoin to the masses", and is it meaningful? Or, as critics argue, does it risk absorbing a potentially enlightening force into the system through ETFs, turning it into part of the centralized financial system? We can draw parallels with the history of email.
The Internet, now an integral part of human life, initially sought true decentralization, much like blockchain. The term "Internet" encompasses many protocols at different layers, such as the foundational TCP/IP for transmission, SMTP, and POP3 for handling emails, FTP for file transfers, and so on. Among these, HTTP, which handles web page transfers, became dominant, leading to the worldwide web (www) phenomenon and the dot-com boom, causing many to equate the Internet with web browsing. The rise of smartphones and the app generation, which may not recognize HTTP and URLs, is another story altogether.
In those idealistic, truly decentralized days, embracing the internet meant getting your hands dirty—not just by signing up for an email account, but by setting up your own SMTP server, registering a domain, configuring usernames, and so on. And let's not forget, this was before the era of cloud computing; it was all about “iron” (physical servers). As history unfolded, most people found this too cumbersome and technical. Services like Hotmail, Yahoo Mail, and later Gmail, became ubiquitous, simplifying email for the masses. In China, QQmail took the lead, although email usage there has declined. Nowadays, most people rely on these platforms for email services, with a few registering domains for branding purposes, still relying on backend services provided by giants like Google, Microsoft or Proton. The ones setting up their own SMTP servers are likely just the tech purists.
So, was the open, decentralized email protocol absorbed by the system? It boils down to whether the public still has a choice. Can they still set up their own systems, choosing convenience over control, or has the protocol been hijacked, forcing users to go through a handful of service providers, some of which might be too cozy with government surveillance? Generally, with email, users still have choices, with some country-specific exceptions. The essence of happiness lies in choice, and the freedom to choose is the essence of liberty.
The history of email could well mirror the development of Bitcoin. The number of people today registering their own domains might equate to those who will choose to hold Bitcoin directly in the future. If the script holds, Bitcoin will become a household name in a decade, with everyone holding a bit through banks, exchanges, retirement funds, etc. Yet, the original vision of democratizing currency, the hassle of setting up wallets or even nodes, might become just a tale for the old-timers. The key option to hold Bitcoin directly might technically exist, but the real question is how many will care. This will be a tug-of-war between the financial actors and public intellectuals, between the domesticated and the wild, the system and the individual. I might not know the outcome, but I know what I must do.
The Bitcoin ETF is the system's "pocket it first" response to the public demand, whether it becomes the kiss of death for Bitcoin or aids in bringing blockchain to the masses depends on how many stick to the original ethos: True Bitcoin now!
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