Why We Don’t Need a Bitcoin ETF

Over the past couple of years there has been a growing interest in deploying a Bitcoin ETF financial investment tool. It has gained growing attention as application after application to the SEC was denied by various, increasingly frustrated financial powerhouses. While there is much excitement surrounding a Bitcoin ETF, I am going to take the opposite stance that we do not even need a Bitcoin ETF, and that creating one is actually moving backwards. 

An ETF, or exchange traded fund, is a legacy financial institution tool that takes an underlying asset, or more commonly, an underlying basket of assets and trades as a composite price representing each asset in the ETF by weighted price averages. It can be traded daily on any stock exchange, hence “exchange traded” fund. These are different than mutual funds in two respects: they are traded by an individual person and can be traded on an exchange, whereas mutual funds cannot be traded intra-day/daily. Also, ETFs are significantly less expensive on a management cost basis compared to mutual funds and are thus the preferred investment vehicle in that regard. 

EFTs exist all over the world with various names such as ETNs (exchange traded notes), UIT (Unit Investment Trust), etc

I love ETFs. I think that they are excellent investment tools. They allow individual investors to take less risk, and to invest smaller sums of money into a diversified portfolio that otherwise would be unattainable. If you cannot afford to buy enough of a variety of stocks, then an ETF is the way to go. 

Some ETFs that I like are: The S&P500 ETF, Marijuana industry ETF (HMMJ), tech industry ETFs,  Income ETFs (usually a basket of high dividend paying stocks), Financial Sector ETFs. 

Despite my positivity and personal use of ETFs, I find that using ETFs as an investment vehicle for cryptocurrency is a bit backwards. This viewpoint of mine is shaped by Andreas Antonopoulos in his talk on How Things Change. While he does not address this exactly, I have extrapolated his ideas. 

In his talk, Andreas discusses the mechanisms by which things change. He uses examples of:

• Horse-carriage vs. motorized vehicles 
• Gas powered homes vs. Electricity 
• Telegrams vs. Telephones 
• Phone lines and the Internet 

He goes into details on how the changes were initially laughed at, and then denied their usefulness and argued that there were too many barriers or not enough adoption or use cases or the technology was too imperfect. But in each and every scenario, the technology evolved. It slowly made its way into society and as it was adopted it improved and as it improved it was adopted more, in a virtuous self-perpetuating cycle until the next, better technology came along. 

I’d like to make a parallel between Andreas’ example of the phone line vs. the Internet and ETFs vs. cryptocurrency/digital assets. 

The Internet on the Phone Line

The Internet was initially transmitted across phone lines on something called dial-up Internet. You could not use the phone to make phone calls while someone was using the internet on your phone line. The telephone was able to transmit information encoded in sound waves. However, this was severely limited in what information, how much information and how quickly the information could travel. Consequently, the internet was quite restricted in what it could do. 

There was no video calling, no social media capabilities, no video streaming, no instant text messaging, etc. You simply could not do it over dial-up. Dial up was capable of simple websites and email. 

An amazing new technology that has so much more capability was being run over a phone line and severely limited. Much like how motorized vehicles were initially used on cobblestone and mud roads, often getting stuck or damaged. 

Today it is the exact opposite – the phone lines are run over the internet. Infrastructure was built out for the internet to allow high bandwidth data streaming which allows for our modern Internet amenities. Now we have video streaming (YouTube, Netflix, Skype/FaceTime etc), Uber/Lyft, dynamic websites, online video gaming, stock trading online (live), etc. 

Enter the Bitcoin ETF. 

Bitcoin vs. ETFs

Why would we need a Bitcoin ETF?

Putting Bitcoin into a legacy financial tool such as an ETF is like putting the Internet on a phone line again. Putting a more advanced technology onto an antiquated, slow, cumbersome technology. 

I say Bitcoin because that is what some large players (Gemini and ErisX) are trying to build an ETF of first. However, once a Bitcoin ETF is built, then ETFs of all sorts of cryptocurrencies/digital assets will be built. 

The point is that digital assets are programmable money. You can program a token to represent a basket of digital assets that you can control on a crypto wallet, with which you can exercise voting rights, receive dividend payments, create token (smart contract) rules (i.e. having a percentage of the fund pay out on “x” timeframe, or increase/decrease positions based on weighting or percentage, etc) and easily transport between accounts intra- and inter-nationally. You simply cannot do that easily with today’s ETF technology. 

However, knowing that history rhymes, we will likely see a Bitcoin ETF, followed by other digital asset ETFs. 

It will be marginally acceptable if they are physically backed ETFs (i.e. the fund actually purchases and holds the underlying assets for each ETF share bought). This will likely create a vehicle for everyday investors and institutional investors to get involved in Bitcoin and digital assets. 

Once investors flood into the market via traditional ETFs, it will likely raise the price of these digital assets significantly, which will further contribute to the development of the digital asset ecosystem and infrastructure. 

Then, once the infrastructure is further built, and the general public is more familiar with digital assets we will likely see a reversal, where ETFs become obsolete and digital asset (ETF-like) smart contracts replace them. 

Markshire Crypto’s Conclusion on Why We Don’t Need a Bitcoin ETF 

We don’t need a Bitcoin ETF, but we’re likely to get one. Then we’ll get more diversified digital asset ETFs. Once the value of these cryptocurrency assets increases significantly and the ecosystem and infrastructure are built out more, then we will see a flip from traditional ETFs to smart-contract coded tokenized ETF-like investment products. 

Please feel free to drop a comment, question, or note for me. I love hearing from my readers

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