Regulatory Crypto Headwinds Can’t Stop a New Era of Economics
BlackRock Buys In
BlackRock filed for a bitcoin ETF with the U.S. Securities and Exchange Commission (SEC) on June 15, 2023. BlackRock listed Coinbase as their custody partner, which is a major signal to SEC Chairman Gary Gensler that his recent targeting of Coinbase hasn’t done much to shake the confidence of the world’s largest asset manager. So far, every application for a bitcoin ETF sent to the SEC, dating back to Tyler and Cameron Winklevoss in 2013, has been rejected. However, BlackRock’s record for successful ETF applications with the SEC is 575 to 1. That’s a 99.8% success rate. Still, the SEC has a long list of bitcoin ETF rejections. Apparently, we’re at the title bout (and today there’s rumors rumbling that the SEC may send this match into extra rounds).
What’s an ETF?
Exchange-Traded Funds (ETFs) are a mutual fund or bundle of stocks that trade as a single asset. It was invented in the 1990s as a new financial instrument. A famous ETF is QQQ, which trades the entire value of the NASDAQ stock exchange. In some ways, you could think of ETFs as not actually having value, but like being a side bet on a poker table that tracks the behavior of the cards in play. The advantage of an ETF is that it can track essentially anything and be treated like a stock, which means you can short it, go long, buy or sell the aggregate value of many stocks in a single trade, or as will be the case with bitcoin, purchase it on the stock exchange as an ETF.
The genius application of an ETF, beyond being a side-bet of aggregate market behavior, is that it generates a new type of liquidity that allows investors and day traders alike to speculate on mass market movements. Think tech is gonna do well in the next decade? Buy the QQQ ETF and own a fraction of every stock in the NASDAQ. This is obviously a safer bet than buying IBM or COIN, but an investor may not lose or win as much due to its aggregate nature.
How Does a Bitcoin ETF Work?
Bitcoin probably never could find its way into traditional financial portfolios if it required cold-storage keys, or actually buying bitcoin itself. The same thing is historically true of gold. Investors rarely buy the precious bullion, but instead purchase a gold ETF that tracks the indices of gold and trades as if it is gold. The same will probably become true of bitcoin. Take two minutes to listen to this explanation of how a bitcoin ETF will work from Townsend Lansing, a guest on Marty Bent’s TFTC podcast, episode 428.
The gist of what Lansing explained is that the ETF will allow speculators to arbitrage any difference between the price of bitcoin and the price of the ETF. This is a financial incentive for them which will keep the asset in line with bitcoin. The average price of bitcoin would be pulled using APIs from six different exchanges, among them Kraken, Gemini, and Coinbase.
What Does This Mean For Crypto?
Apparently, the SEC has turned a blind eye on bitcoin and instead focused its ire on many of the altcoins. Perhaps this was seen by the world’s largest asset managers as the exact window they were hoping would open for them to strike on mainstreaming bitcoin. BlackRock’s ETF application inspired a similar application from Fidelity, as well as a revised application from Ark Invest.
Evidently, institutions are taking notice of the decentralized cryptocurrency; a poorly branded crypto exchange, EDX, out of Europe, initiated by Charles Schwab, Fidelity, and Citadel, is going to offer trading of bitcoin, ether, bitcoin cash, and litecoin, with a non-custodial solution. It’s poorly branded because it means nothing as an acronym and is reminiscent of FTX. Regardless, it’s a breakthrough of seismic proportions. We’re dealing with a generational endorsement. Let’s get an idea of who these players actually are, and what their worth is based on assets under management (AUM).
BlackRock — $9.1 Trillion
Charles Schwab — $7.6 Trillion
Fidelity — $4.24 Trillion
Citadel — $60 Billion
To put it simply, with bitcoin’s market cap as of today at about $600 billion, these companies batched together are worth 33X the value of bitcoin. BlackRock alone is 15X the market cap of bitcoin. They’re unequivocally saying yes to its existence. How do you think that will play out for bitcoin over the next 5–10 years? Cathie Wood of Ark Invest is adamant bitcoin will reach $200,000 in the next few years and $1M by 2030. Tom Lee, head of research at FS Insight, agrees with her on the first point and said so publicly on CNBC.
“I think her idea of network value for bitcoin and scarcity still argues that, if this isn’t an upcycle, her numbers are correct, you know, something in the $200,000-plus range,” Lee told CNBC, pointing to the Ark Invest chief executive’s analysis of bitcoin’s limited supply and calling bitcoin “battle-tested” by the recent regulatory legal action against major exchanges Coinbase and Binance.” — Forbes.com
Lee noted that a lot of players have jumped out of the crypto picture. We’re aware of them, these are Luna/Terra, 3AC, FTX, Celsius, etc. But on the coattails of their exit, we’ve set a legitimate new stage for institutional investing. This is a generational endorsement that took time and clarity before it could even begin. And it’s only just started…
ETFs Are Like Wrapped Bitcoin
What really are ETFs and how can they truly be bitcoin? The fact is they can’t. But that hasn’t stopped wrapped bitcoin from holding its peg with bitcoin’s value though being housed on Ethereum’s Mainnet. Think of the new spot-ETF as a kind of wrapped bitcoin, but instead of being on Ethereum, it’s in a house with over 20 trillion dollars in the safe.
Welcome to the show, bitcoin…
Kornekt is a writer and editor with strong conviction in the world Web3 creates.
Hiro Kennelly is a writer, editor, and coordinator at BanklessDAO, an Associate at Bankless Consulting, and is still a DAOpunk.
Tonytad is a graphic designer who has worked locally and internationally with organisations and firms on over 200 projects, which includes branding, logos, flyers, cards, and covers.
BanklessDAO is an education and media engine dedicated to helping individuals achieve financial independence.
This post does not contain financial advice, only educational information. By reading this article, you agree and affirm the above, as well as that you are not being solicited to make a financial decision, and that you in no way are receiving any fiduciary projection, promise, or tacit inference of your ability to achieve financial gains.
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