Will ETFs Really "Centralize" Bitcoin?
Concerns that institutional involvement will detract from Bitcoin's P2P nature may be overblown.
It's finally done: On Wednesday, January 10, 2024, the SEC approved 11 bitcoin spot ETFs. (As it happens, it was the 15th anniversary of Hal Finney's famous "Running Bitcoin" tweet.) The following day, they launched on the NASDAQ.
It's the end of an era: The age when Bitcoin was a niche technology, when Wall Street couldn't easily access it, when regular people had the chance to front run trillion-dollar institutions. Community members have characterized the launch of ETFs as "the end of the beginning", and "the point when you can no longer call yourself an early adopter".
But there are also critics who believe that the rise of ETFs will represent a point of centralization for Bitcoin, as large amounts of coins are held by institutions. Originally conceived by Satoshi as a form of peer-to-peer cash, are ETFs destined to undermine the very ethos on which Bitcoin was based?
Distribution != Mining Infrastructure
The first objection to this idea is that Bitcoin is a proof-of-work (PoW) crypto. While a small number of entities accumulating coins is not ideal from a security point of view, and concentrates wealth in a few wallets, this is independent of Bitcoin's mining infrastructure and the security of the protocol.
That might be different for a proof-of-stake coin, but Bitcoin's miners will not be compromised by institutions like BlackRock hoovering up coins.
Concentration Of Institutional Holdings Will Be Limited
In any case, institutions are unlikely to acquire a sizable percentage of coins. Much has been made of the fact that there aren't many coins available on exchanges; around 1.8 million BTC at the last count.
Moreover, inflows will likely be limited, especially to begin with. For all the hype, estimates are relatively low. Eric Balchunas, an ETF analyst with Bloomberg, guesses that $15 billion might find its way into BTC ETFs in the first year. Standard Chartered's estimates are more bullish, suggesting $50-100 billion inflows in 2024. Day 1 volume was strong (though volume does not reliably translate to inflows).
Investment adviser Bernstein estimates inflows of over $10 billion this year, increasing to $80 billion in 2025. Over the next five years, analysts believe BTC ETFs may see $300 billion inflows, potentially driving the price up to a point where that might be around 10% of Bitcoin's total supply.
All told, that's not much. 10% wouldn't give anything like outright control, even for a PoS coin (which, of course, Bitcoin is not).
10% of coins held in a handful of wallets is a huge honeypot, and you can guarantee that the Lazarus Group and every other hacking collective worth the name is looking at ways to breach the security these organizations have in place.
That won't be an easy task, with MPC platforms like Fireblocks protecting the vast majority of assets.
In any case, concentrating holdings in these highly-secure, institutional-grade custody solutions is a whole lot better than centralizing them on a series of unregulated exchanges with dubious technology, employees, and processes—as we know from bitter experience.
While self-custody is the ideal, unfortunately, a lot of people are unwilling or unable to do that, and default to insecure second-best options. Harsh though it sounds, every bitcoin custodied by an ETF provider rather than an old-school crypto exchange is a coin that is less likely to be stolen.
There is one area in which institutions may exert some influence on the Bitcoin ecosystem. As Big Money gets in, money for development and marketing might come with strings attached.
VanEck has differentiated themselves by promising 5% of their commission fee to Bitcoin development, supporting the ecosystem. It's a great gesture, though it could have a shadow side.
It's not hard to foresee a world in which, for example, BlackRock-sponsored developers push a new version the Bitcoin node software that filters certain transactions, and pushes it hard with an advertising campaign and subsidies for miners.
Could they really control a large enough percentage of the network to make a difference, though?
If they can, then Bitcoin has failed. But if that happens, then Bitcoin wasn't as robust as we thought it was, and wouldn't survive against the attacks that will no doubt be coming in the future.
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