“Even if we win! Even if we play so far over our heads that our noses bleed for a week to ten days, even if God in Heaven above comes down and points his hand at our side of the field, even if every man, woman, and child held hands together and prayed for us to win, it just wouldn’t matter!” — Tripper (Bill Murray) — Meatballs.
On the eve of what the most pop-news websites would have you believe is an event second only to Cambrian explosion (the start of trading for some number of bitcoin ETFs), I thought I would take up my well-earned mantle of Financial Curmudgeon and point out a few uncomfortable realities about these impending products.
I mean, it’s hard to say that bitcoin doesn’t matter when we got these juicy entertainments this afternoon:
First the Good News
The good news is that most of the headlines are right about the “number go up” part of the “Yay, Bitcoin” narrative. Here are things I believe to be true:
- BTC ETFs will start trading shortly. They will trade well, with high volumes, narrow spreads, and minimal deviations from the value of bitcoin they hold. No, I don’t expect any to trade to an 8% premium on the open, but hey, wild stuff happens. In short, stuff will work. Yay!
- There exists a class of investor who would like to own bitcoin, but for asset-domicile reasons, has not yet bothered. People with Schwab IRAs and unfettered brokerage windows? Some of those folks will want to make a long-term allocation. That’s net new buyers. Heck, VettaFi and Bitwise just published a pretty extensive survey of advisors, and y’all report that there is at least some, difficult-to-quantify level of pent-up demand. Yay!
- The Bitcoin Halving is a thing, and it takes new supply off the market, as bitcoin slides further and further away from a growing pool of liquidity to a fixed pool of liquidity. There are 19 million coins extant (minus deadweight loss). By design, no more than 21 million are ever gonna exist. So what happens in 100 days does in fact limit supply, almost like a big catastrophe in a major gold mine would restrict supply. So supply down! Yay!
- If the long-term vision of an alternative non-fiat monetary system is going to ever come to fruition, crypto — and really, bitcoin — needs to be enormous to handle the liquidity. If BTC is the ultimate winner and never gets MySpaced, it needs to be very expensive if there are only 21 million coins in the box. So, yay, Bitcoin Bigger I guess moves the needle.
But to my mind, that’s it. That’s the good news. A bunch of money in “TradFi” land will get access to “DeFi” land (or at least the thin edge of DeFi that bitcoin represents), while supply remains very constrained. Sounds great, right? And it probably is. How much of the good news is baked in right now? Nobody has any idea. And if they pretend to, sell them something fast.
The Reality Check
At the risk of being a massive Debbie Downer, let me start by reaffirming my belief that there’s REAL innovation that crypto in general, and DeFi in particular, are driving. I’m all in on tokenization. But, while the toddler-ball scrum around being the BTC ETF winner is entertaining …
- While constructive to the price of bitcoin at least in the moment, it doesn’t actually change anything in the ETF industry. The whole point of the Grayscale lawsuit was that the SEC hadn’t been following its own precedent and rules around what can go in an ETF. The SEC lost, so we’re back to where we were some years ago. Yes, there’s now some legal precedent about fair treatment of variations of an asset class, but that’s pretty much it. There’s no new “rule” or “regulation” in the ETF space that suddenly makes anything but a BTC ETF easier or safer or better.
- Similarly, the arrival of the bitcoin ETFs doesn’t actually change anything in the crypto space. The U.S. remains singularly stupid in how we’re handling the regulatory framework for crypto. I suppose I could celebrate the fact that the house managed to get the most very basic first step — Stablecoin Regulation — out of committee last year. But I’m a realist: We don’t have a functional legislative process. And there’s zero chance any actual, real, deliberate crypto regulation happens in 2024. I suppose someone could slide something in to a must-pass budget bill or something. But I’m not holding my breath.
- Meanwhile, the rest of the world is moving on. From the headline-grabbing Markets in Crypto-Assets rules going into effect in the EU, or the serious, pro-innovation (compared to the U.S.) regulatory frameworks actively going through legislative processes in 42 jurisdictions (just ask PWC).
- “Europe and Middle East have made significant progress towards forming comprehensive guidance and enabling digital asset firms to move forward with a semblance of clarity. Others, including the US, have complex and fragmented regulatory systems, where federal and state agencies have overlapping and sometimes conflicting mandates or rules… Countries including Switzerland, Singapore, Hong Kong SAR, and Malta have emerged as hubs for digital asset talent, due to the supportive regulatory frameworks and investment in blockchain education and research. They have a strong ecosystem of digital asset professionals, developers, engineers, legal experts and financial analysts.”
- Malta, people. We’re losing the innovation battle for talent, capital, and growth to Malta.
- There is no bridge. While I have long said that ETFs and Stablecoins are the ultimate bridges between TradFi/ciat and DeFi/crypto, that’s only true if there’s an ecosystem to bridge into. But this bridge seems to me to be rather one-way. It will deeply and immediately enable the further financialization of bitcoin. That’s a given. Whoever gets the options-volume wins most of the ball game — something we’ll know in the coming weeks after launch. But that doesn’t make crypto Sstronger." It just means that a whole lotta TradFi money is going to play BTC even more like a trading sardine, passing it among themselves in a game of number-go-up, with no real interest or skin in the game about the genuine, long-term promise of stateless value systems or decentralized services and management. Bitcoin Bigger helps, but doesn’t itself solve any of the problems with the existing monetary regime.
I, For One, Welcome Our Robot Overlords
Finally, a few myths to bust for our new crypto-oriented friends!
- “Cash Creates.” Many of our new friends from crypto read that the BTC ETFs will be cash-create (as opposed to in-kind) and immediately made some bad assumptions. The biggest is “it’s paper bitcoin” — implying that creations in cash meant somehow the funds won’t own bitcoin. Rest assured, all that cash created mean is that the market maker’s job is SUPER simple. They arbitrage out price differences just by sending a wire to the issuer. No BTC buying necessary. Of course, the funds themselves have to go buy BTC, but given the folks were talking about, they’ve been doing that for years already. The whole reason to go “cash” first is to remove a chaos vector. But the bitcoin are gonna be in there. Just like the gold was always in the vault (something I spent years defending).
- Taxes are mostly a yawner. There was some social media confusion even among we ETF nerds (hand up) about the exact treatment of redemptions given that these are cash in/out (as opposed to precious metals ETFs, which use the same grantor trust structure, but in-kind created generally). But then I spent a second thinking it through and remembered grantor trusts will just get treated like “Widely Held Fixed Income Trusts.” which just means cost basis will be passed out to redeemers. Since the redeemers are market makers, this has the effect of ignoring any short-term gain or loss from internal trading in the ETF. There are details, but I don’t see any land mines. If you trade a BTC ETF, you’re going to face the same tax regime as if you traded bitcoin. Just like the gold ETFs give you gold’s tax treatment.
- Options will probably really matter. While there are ways to get bitcoin options exposure now, having a regular-old options market with the ETF as the delivery makes the options dealer’s job so much easier, and gets whichever ticker the exchanges and dealers settle on a lot of exposure and hedging volume.
- Don’t believe Twitter.
Good luck folks. Be careful out there.
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