Pouring cold water on the much-anticipated Bitcoin ETF: Why I am not optimistic about ETFs

In addition to the price of coins and capacity expansion, the hottest topic in the cryptocurrency circle recently is probably ETF. It is said that the sharp rise in the price of coins in the past two days is also related to ETF. It is estimated that most investors believe that the US Securities and Exchange Commission (SEC) will eventually nod its approval. In any case, the answer will not be revealed until March 11. Given that the community is widely optimistic about ETFs, here, the author of this article poured a bucket of cold water on everyone at the most appropriate time. Whether you agree with the author's point of view or not, at least he has brought new views to investors and encouraged everyone to stay calm and not lose their minds. Without further ado, the following is the translation of the original text.

Putting money directly into government-approved ETFs will only succumb to the centralized power of regulators and lead to market manipulation.

Fork

Essentially, Bitcoin is an entry point to a large distributed ledger called the blockchain. You hold Bitcoins through your keys, which give you ownership of transactions on the blockchain.

However, in most cases, things can get quite complicated. The Bitcoin network can fork at any time, and your funds could be scattered across two competing blockchains (see ETC and ETH).

Forks due to mistakes are rare, but disagreements in the community over issues such as block capacity and mining rewards are likely to cause forks.

In theory, anyone can create a fork in the Bitcoin network at any time using a number of available methods.

A fork that represents the interests of a few is unlikely to be appealing or valuable, but it is precisely because such a fork is insignificant that it increases the likelihood that it will occur frequently, and even worse, just for fun.

If you control the keys to your Bitcoin, you have nothing to worry about. Your funds will exist in both blockchains at the same time, and you can freely predict the trends of both and adjust the investment ratio appropriately.

Generally, there are two ways that ETFs can control your Bitcoin:

1. Track and understand all forks

2. Defining forks

Tracking and understanding all forks is difficult. Once an ETF requires Bitcoin transactions (whether buying or selling) or fund transfers to be audited, it is unlikely to keep track of all forks.

What an ETF is more likely to do is define a fork, whether by software (by version number or hash), some other metric (a mostly working chain), or simply by semantic notation.

Given its potential size and market power, giving an ETF or the SEC a chance to define Bitcoin is always dangerous.

Because ETFs can invest directly in one chain and sell off in other chains in large quantities, they are likely to influence the factors that determine whether Bitcoin forks or not. Once the scale of ETFs increases, they are likely to prevent some necessary updates in the Bitcoin network, or even add some unnecessary or dangerous improvements.

Investment and prices

ETFs will bring a lot of funds, banks and institutional investors to Bitcoin. Indeed, it can raise the price of the currency, but it may also cause some investors to abandon the method of directly purchasing Bitcoin (such as a wallet with their own private keys) and instead invest their money directly in ETFs, thus strengthening the control of ETFs, banks and the SEC over Bitcoin.

If Bitcoin’s innovation is really that attractive, then even without an ETF, a lot of money will eventually flow into Bitcoin, and the price of the currency will eventually rise. Therefore, an ETF will only cause unnecessary centralization.

Market manipulation and theft

It is easy to verify whether you hold Bitcoin through specific calculation methods. You can download the blockchain, verify its authenticity, view the balance of each account, and verify the integrity of the key.

You might also be able to verify that Bitcoin is in an ETF, but you first need to believe that:

1. For every X number of bitcoins, the ETF will only issue X shares

2. Banks or brokers will not sell their own shares multiple times

3. The bank or broker will actually use your money to buy stocks after receiving it.

4. No one will steal your investment

5. The SEC will verify the system

Each of the above steps could potentially be used to manipulate the price of a currency and profit from it, as the same methods have been successful in manipulating prices in other markets, including gold.

Besides, the financial system itself is risky: your money in an ETF could be seized at any time, converted into war bonds, or simply turned into a letter thanking you for your great service to the country.

Summarize

If a Bitcoin ETF is approved, it will accelerate investment in the Bitcoin space at the expense of decentralization. If you buy a Bitcoin ETF for anything other than short-term speculation, then you are making an unwise choice because you are exposing yourself to the systemic risks that Bitcoin was designed to protect against: fractional reserve banking ^[1] , government power, and reliance on trust.

Notes (↵ returns to text)

1. The fractional reserve system, also known as the deposit legal reserve system, is relative to the full reserve system. It refers to a system in which commercial banks keep a portion of their reserves and lend out the rest of their funds. Banks do not have to keep all the deposits they absorb as reserves in the vault or deposit them with the central bank; the legal reserve ratio is the minimum reserve-to-deposit ratio set by the central bank and maintained by the bank. ↵