Post-Bitcoin ETF Approval—Tradeoffs For a New Bitcoin Era

Bitcoin is poised to at last gain institutional adoption in a way that’s been imagined and discussed for many years, now 15 years after the release of the Bitcoin white paper. For those that haven’t been following along, there is now a growing cohort of traditional finance institutions with filings before the SEC to launch spot Bitcoin exchange traded funds (ETFs). This type of financial instrument will allow the masses to invest in Bitcoin without having to learn the technology. Soon we’ll hear rulings on these filings. From the standpoint of Bitcoin adoption, the remainder of 2023 and early 2024 should prove very interesting—regardless of acceptance of these ETF applications.

The current crop of ETF applicants includes serious organizations like Invesco, Fidelity, BlackRock, Wisdom Tree, ARK and others. Many of these institutions influence politicians and policy decisions and are systemically important both to the United States and the global economy. Many both within the Bitcoin space and among larger traditional finance institutions have a sense of inevitability that approval of a Bitcoin exchange-traded fund (ETF) is on the near-term horizon.

For many bitcoin community members, an ETF approval would feel like a delightful nice-to-have. However, the new ability for institutions and individual investors to gain exposure to bitcoin through traditional investment systems is expected to drive a significant increase in bitcoin demand. This change is expected to coincide with the periodic “halving” of the bitcoin block reward in mid-April 2024. The bitcoin reward is a process whereby new bitcoin are minted to fund the security of the network alongside transaction fees. This reward is cut in half every four years or so, as defined by the underlying software that powers the Bitcoin network. The having has historically led to increased upward price pressure, as fewer new bitcoin are made available. Around this time, institutions will be fighting to position their ETF most strongly and as a result will broadcast a real message about the legitimacy and security of Bitcoin. The flow of newly minted bitcoin will be cut in half at a time when demand will see a sudden shift higher.

Bitcoin has long been seen as a risk-on asset, whereby investors with higher risk appetites engage with the asset. However, in this backdrop, we are seeing participants speak to what is, in fact, the relatively low risk nature of Bitcoin when observed from different perspectives. Discussing the rally in bitcoin price on October 18^th, Larry Fink, Chairman and CEO of BlackRock, said, “I think the rally today is about a flight to quality.” In this concerning global macro and geopolitical environment, some view the stable nature of supply of Bitcoin in the face of often outlandish increases in money supply by various global central banks as an inherently less risky characteristic.

Despite the strong signal that an institutional anointing of Bitcoin brings, there are trade-offs worth highlighting. One trade off that could well play out in the coming years is regulatory moat building around these spot bitcoin-based securities. Many Bitcoin industry insiders point to an adversarial contingent in Washington that would make possession of one’s own bitcoin illegal. Scary issues like criminal activity and terrorist financing are often used to support the idea that a centralized and regulated security product would allow for more oversight. While objectively the amount of this illicit activity that takes place with Bitcoin is a small fraction of that involving the legacy financial system and dollars, Bitcoin opponents are using this argument as they seek to prevent direct ownership and possession of bitcoin.

My perspective is that this is simply a fundamental property rights issue. Indeed, “self-custody” is contrived terminology. A Bitcoin fundamental is that it has cash-like, provably scarce bearer asset qualities. We don’t think of a $20 note in our wallet as “self-custodied dollars.” Yet, post-ETF approvals, large pools of custodied bitcoin will grow. Given the future existence of these pools, two possible threats emerge:

1. With many individuals only having indirect ownership through ETFs, politicians adversarial to Bitcoin will have a more powerful kill switch;
2. Early ETF industry players can take advantage by lobbying for regulatory capture to solidify any early advantages.

These large, aggregated holdings of bitcoin also demonstrate another tradeoff on an important facet of the Bitcoin network: decentralization. Since the inception of the Bitcoin network, the count of individual Bitcoin addresses holding one or more Bitcoin has continued to increase. This is generally viewed as a positive—more people owning more bitcoin in more wallets around the world means the system is more decentralized. The launch of Bitcoin ETFs may impair this trend.

Despite these trade-offs, the majority of market participants see the advent of bitcoin ETFs as a generally good thing. For years, we’ve looked forward to the day where institutions would get involved with Bitcoin, which would bring a certain amount of credibility and speak to the long-term viability and staying power of Bitcoin. The serious organizations sponsoring these proposed ETFs are almost exclusively talking about Bitcoin as opposed to other kinds of cryptoassets, given the overall stability of the network and the community that surrounds it.

Presumably, the introduction of a Bitcoin ETF will serve as an onramp for more people and organizations to engage with the asset. This will only serve to further increase interest and engagement with the network, further fueling new innovations and opportunities to leverage the native properties of Bitcoin. While individual investors are understandably excited about these developments, the increasing institutional adoption of Bitcoin means that these tools and assets are increasingly becoming part of the strategic and economic landscape that all organizations need to understand. Not every business needs to have a cryptocurrency strategy, but leaders at all organizations need to understand what cryptocurrency is and how it is being used. ETF acceptance signals a broader institutional acceptance of this technology, which in our view means that it will be a relevant factor for decades to come.

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Christopher is the Managing Director of Trammell Venture Partners, an early stage venture capital firm focused on Bitcoin-native opportunities. For more on the firm’s thesis on Bitcoin, download TVP’s white paper on the Bitcoin-native venture capital landscape.