Bitcoin ETFs ‘just another speculation’ doing nothing to help crypto adoption?

Exchange-traded funds for Bitcoin and other cryptocurrencies are simply another way to speculate on rampant price volatility, say industry insiders, and will do nothing to help wider adoption.

Last month the US Securities and Exchange Commission (SEC) denied a second application from serial investors the Winklevoss twins to list ETFs on their Bats BZX Exchange. The decision came with a series of caveats from SEC head Hester M. Peirce, who said the move gave off the impression that “innovation is unwelcome” in the sector, and that it would undermine the ability for new investors to enter the market by putting a dampener on stronger regulation.

The creation and sale of cryptocurrency ETFs would tend to indicate a maturing market, Peirce believes, one where investors can be protected and one which can be more closely controlled by regulation.

What is a Bitcoin ETF?

ETF stands for exchange-traded fund. It’s a basket of the best-performing assets in any particular market, which are bundled together as one fund, which investors can then put their money into.

Retail investors in the UK can put their money into ETFs by adding them to popular investment models like stocks and shares ISAs, so they don’t even have to speak to a broker or set up a professional account with the exorbitant fees that tends to accrue.

When we’re talking about Bitcoin ETFs, really we’re talking about a collection of the top-performing cryptocurrencies at any one time. That might include Bitcoin, Ethereum, Bitcoin Cash, Ripple and Monero, for example, and the prices of all five would be tracked together. It offers a way for investors to put money into cryptocurrencies at a lower risk point than investing in multiple individual altcoins at the same time.

The first ETF, which tracked the US S&P 500, launched in 1993 – they have matured in the last 25 years to become one of the biggest investment trends of the last decade. Indeed, $4 trillion is now invested in ETFs worldwide.

These types of asset are very popular with investors who don’t want to ‘stock pick’ individual assets to invest in, and are also easy to enter and exit. In terms of cryptocurrencies, such instruments should also offer a lower-risk entry point than crypto-trading currently offers – or than investing in a single, or limited range of cryptocurrencies..

One of the strongest criticisms of ETFs, though, is that they tend to promote the largest companies or best-performing shares within a market, so in effect the winners keep on winning and the losers will keep losing. This makes it difficult for analysts to properly price any particular share, and takes focus away from good new ideas, teams, businesses or models that happen to have a smaller market cap.

What The Experts Say

Ethereum co-founder Vitalik Buterin said in response to the Winklevoss loss: “I think there’s too much emphasis on BTC/ETH/whatever ETFs, and not enough emphasis on making it easier for people to buy $5 to $100 in cryptocurrency via cards at corner stores.”

ETFs are only good for “pumping prices”, he said, rather than encouraging further adoption of cryptocurrencies as a payment method.

This is the key point that most investors miss. Without widespread adoption of cryptocurrencies as real currencies, the fear is that each will become just another asset to trade, without decentralisation, without taking on central banks and governments worldwide, without innovation and without changing the global order.

Daniel Wolfe is the CEO of algorithmic trading engine Tradingene. He told he wasn’t surprised by the SEC decision to deny the Winklevoss application on a Bitcoin ETF because of the “inbuilt conservatism in the system” as a response to the “first genuine threat to the dollar’s position as the global reserve currency”.

Speaking from Russia, he said: “Bitcoin has not become a retail phenomenon in the United States and I think the SEC is very pleased to keep it that way. Once they do [allow ETFs] it becomes much easier for retail investors to gain exposure to cryptocurrencies.”

“The SEC has been quite concerned about currency manipulation on cryptocurrency, I think that’s very real, and that also provides them with very valid reasons to be concerned about ETFs, because ETFs assume a transparent market.”

Wolfe agreed with Buterin’s assertion that ETFs and other financial instruments that allow for easier access from individual investors would not in themselves help bring Bitcoin into the mainstream.

Wolfe noted: “If I understand what Vitalik is saying – and I agree with it – the real transformation that is going to drive the increase in capitalisation is going to be driven by the adoption of more and more use cases for tokens and cryptocurrencies, and much less price speculation.

“As demonstrated in every emerging asset class, speculative interest is so-called ‘hot money’. It goes in in big amounts, and it goes out in big amounts so it’s not going to create the kind of stability that is also required for most average people to become involved. Even last year when Bitcoin went on a rocket ride up to $19,000, there were five drops of 30% or more, in a year. Most people don’t have the tolerance for the kind of volatility that we see in cryptocurrency markets.”

The Future of Bitcoin

Echoing blockchain lawyer Tamara Rogers, who negotiated the first public stock buy with a cryptocurrency, Wolfe proposes that the main players will fall away, to be replaced with better payment technologies.

“If you look at so-called Bitcoin dominance, the amount of cryptocurrency capitalisation that is reflected in the capitalisation of Bitcoin, over the last three years we’ve gone from 90% to we’re now hovering around 43%, so we’re actually seeing a move away from Bitcoin winning.

“Bitcoin has a huge first mover advantage and a huge branding advantage and everybody knows what Bitcoin is, but almost nobody has heard of Neo or EOS or any of the other emerging cryptocurrencies. But the flipside of that is the technology is evolving. We’re seeing an evolution from the Proof of Work that Bitcoin uses, to confirm transactions, to Proof of Stake or Delegated Proof of Stake and other solutions to the cryptographic proof of double spending, that are much more efficient and allow for much higher levels of transactions per second.”

Wolfe concludes: “My guess is that five years from now, the top five cryptocurrencies are going to be mostly things we haven’t heard of yet.”

While there is considerable separation – both in law and in sentiment – between Bitcoin and the blockchain technology that underpins it, the two are inherently linked. When IBM says it is developing off-the-shelf decentralised apps for banks like Barclays and Citigroup to use, we should sit up and take notice. This will in itself help to legitimise cryptocurrencies and further the cause of greater adoption.

Bitcoin’s Tipping Point

While UK retailers tell us that cryptocurrencies are not even being discussed by their trade associations and virtually none accept them as payment, there is a huge opportunity to divert attention away from speculative vehicles like ETFs and move back towards the original intent of cryptocurrencies – to be a fast, easy, peer-to-peer payment method that cuts out the traditional banking middleman.

Wolfe agrees, saying: “The next big jumps in valuation and adoption are going to come from creating uses that are not speculative in nature and that are much easier to understand for the broader public.

“So far blockchain and cryptocurrency have not provided the kind of easy to use application for the broader market.

“Until they do, we’re going to be stuck in this early adopter model and never develop into the ‘early majority’ model, where you have a broader subset of people who are not technically-oriented, gaining access because things have become easier to use and understand as a value proposition.”