Are Bitcoin ETFs good for adoption or ‘watered-down crypto’? Debate rages

As hype builds for spot Bitcoin ETFs in the U.S., some are concerned the industry is moving away from the “core promise” of cryptocurrencies.

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CoinList founder Andy Bromberg believes that spot Bitcoin (BTC) exchange-traded funds (ETFs) are just “watered down crypto” and a sign the industry is heading in the wrong direction, amid growing hype over potential ETF approvals in the United States.

Bromberg — also CEO of payments-focused wallet app Beam — told Cointelegraph: “If a Bitcoin ETF is considered crypto, we’ve failed as an industry.”

He said a Bitcoin ETF would “absolutely” be a net positive for crypto adoption but asserted the space’s success comes from helping people self-custody assets and decouple from the traditional finance system — the antithesis of a TradFi ETF.

“If crypto adoption happens mostly through ETFs and similar centralized financial instruments, then the core promises of the technology won’t be realized — decentralization and true ownership.”

The rise of rollups & account abstraction unlock the ability to build payment apps on Ethereum as good as — or better than — web2 products.

Between self-custody’s regulatory viability and that new tech, it’s the right place to focus.

And it’s what crypto is all about.

— Andy Bromberg (@andy_bromberg) September 20, 2023

Bromberg’s take is contrary to the prevailing sentiment of excitement around the potential for spot ETFs to bring in institutional money. Some predict ETFs could see Bitcoin’s market capitalization double and the price hit $150,000 by the end of 2024.

CoinShares head of research James Butterfill told Cointelegraph that setting up a wallet for safe self-custody was still a daunting task for many non-tech-savvy institutional and retail investors. He believes an ETF will improve market access and will “help further democratize Bitcoin.”

“Self-custody simply isn’t possible for many institutional funds, as it steps outside the regulated framework they must operate in,” Butterfill said, adding that it’s also the case for some retail investors.

Matrixport research head and Crypto Titans author Markus Thielen agreed and argued the reason so much crypto remains on exchanges despite a string of collapses is because self-custody is “still problematic for most users and has clumsy interfaces.”

Bromberg conceded that self-custody has historically been a challenge but pointed to technology such as account abstraction — which allows for wallet creation without using a seed phrase and more recovery options if access is lost — as proof it was possible to make “mainstream-usable self-custody.”

Institutional investors need legal clarity, not ETFs

Bromberg thinks the real solution to giving institutional investors who want to hold crypto a way to do so lies in regulatory agencies providing legal clarity and the industry giving education on technology and products for institutions to comfortably self-custody.

“There are institutions that hold crypto on their balance sheet already, and others could follow,” Bromberg said.

Many public companies report crypto holdings, including car maker Tesla, business intelligence firm MicroStrategy and a host of crypto miners — although it’s unknown what the custody arrangements are for most.

Whenever the spot bitcoin ETF is approved, we will see what the true global demand looks like for the investment asset.

Large institutions aren’t buying bitcoin for transactions, they will want exposure to the best store of value currently available.

— Pomp (@APompliano) November 13, 2023

Butterfill said ETF-based Bitcoin holdings would come under a regulatory purview that would “ensure high standards for custody.” He explained that some Bitcoin ETF providers could offer physical redemption, similar to some gold-backed ETFs.

Wall Street suits won’t change Bitcoin

Other Bitcoin advocates are concerned about the possible influence that massive asset managers such as BlackRock could have over the Bitcoin network.

In October, Bitcoiner Peter McCormack told Altcoin Daily that a BlackRock ETF would be “good for price but bad for Bitcoin” and expressed concern that it could end up the largest Bitcoin holder by way of its ETF.

The playbook:

1. BlackRock files for an ETF.

2. Retail buys #Bitcoin sending it higher in anticipation of being able to sell even higher to institutions who “gEt iN LaTe”.

3. BlackRock dumps on retail (you) after the pump.

4. BlackRock FUDs your bags back down so they can… https://t.co/SxBBKeAoI7

— SHELDON EVANS (@SheldonEvans) November 14, 2023

Butterfill said, however, that BlackRock would represent a “large and diverse set of clients” within a regulated structure, which is “very different to an individual or the control a government could exert if there were such a large holder.”

Trading volumes of existing Bitcoin exchange-traded products typically make up a maximum of 5% of total Bitcoin volumes daily, “so we have a very long way to go before ETPs could challenge the overall market,” he explained.

Thielen welcomed the possible new Bitcoin holders, saying BlackRock’s ETF would “open the door to thousands of institutional players” who he believes will use Bitcoin to replace “gold and other safe-haven assets such as Treasurys.”

He added that everybody has a right to own Bitcoin and that the cryptocurrency has become a speculative asset, mostly moving away from its peer-to-peer cash beginnings.