Why Bitcoin Should Never Become a Spot ETF Part 1: Understanding the Risks and Implications
By Michelson Williams | Published January 4, 2024
In the realm of cryptocurrency, Bitcoin stands as a symbol of financial freedom, a decentralized asset meant to liberate individuals from the constraints of traditional financial systems. The prospect of Bitcoin becoming a spot Exchange-Traded Fund (ETF) raises concerns about potential consequences that may contradict its foundational principles. In this two-part series, we'll delve into why Bitcoin should avoid the path of becoming a spot ETF.
Understanding Key Terms: Spot Bitcoin ETF, SEC, CBDC, and Social Credit Score
Before delving into the core discussion, let's establish some clarity on key terms.
Spot Bitcoin ETF: This investment vehicle allows regular investors exposure to Bitcoin's price movements directly, as opposed to investing in derivatives based on Bitcoin prices.
SEC (U.S. Securities and Exchange Commission): A federal agency overseeing and enforcing federal securities laws, regulating capital markets, and purporting to "protect" investors.
CBDC (Central Bank Digital Currency): A digital form of central bank money widely available to the public, aiming to digitize traditional currency.
Social Credit Score: A system, notably seen in China, encompassing policies and systems that impact businesses and individuals, affecting financial credit reporting, travel permissions, and more.
Spot Bitcoin ETF Mechanics
A spot Bitcoin ETF, as opposed to Bitcoin futures ETFs, directly invests in bitcoins, storing them securely in a digital vault managed by custodians. This ETF mirrors Bitcoin's market price by buying and storing actual bitcoins, issuing tradable shares on traditional stock exchanges. The ETF's share price reflects Bitcoin's prevailing market value, and periodic rebalancing occurs through buying or selling tokens.
The Case Against Bitcoin as a Spot ETF
1. Separation from the Essence of Bitcoin:
Bitcoin was conceived to empower individuals, enabling them to control and safeguard their assets. A spot ETF introduces an intermediary layer between investors and their crypto investments, moving away from Bitcoin's foundational principle of direct ownership and control.
2. Government Involvement and Potential Misuse:
Once government agencies intercede in financial matters, the risk of misuse and interference rises. The history of government taxation practices raises concerns about the potential appropriation of crypto assets. Bitcoin's essence lies in liberating individuals from such encumbrances.
3. Centralization via Authorized Participants:
The creation and redemption process of Bitcoin in ETFs involve authorized participants (APs), typically large financial institutions. These same institutions often perpetuate the flaws of the current financial system. The shift towards a spot Bitcoin ETF would place substantial control in the hands of these entities, potentially compromising Bitcoin's decentralized nature.
4. Potential Regulation Complications:
While the promise of increased accessibility to crypto investments may seem attractive, the regulatory complexities associated with spot Bitcoin ETFs could result in unintended consequences. Government oversight might stifle the organic growth and evolution of the cryptocurrency market.
5. Social Credit Score Threat:
The potential tie-in of Bitcoin ETFs with a Social Credit Score system, reminiscent of practices in China, raises concerns about individual freedom and privacy. The prospect of government control over crypto usage aligns with a broader trend of increased surveillance.
Part 2 will explore the Pros and Cons, examining the risks associated with spot Bitcoin ETFs and the importance of preserving the essence of Bitcoin as a beacon of financial freedom.
by: Michaelson Williams, TSX
Founder at Goal Phoenix Crypto Infinity
Host of TSX Podcast on Substack
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