KanawatTH
I wrote an article in November suggesting that BlackRock’s Bitcoin (BTC-USD) application meant an Exchange Traded Fund (ETFs) was a done deal. I also noted that a blow-off top to around $50,000 was possible. The situation for Bitcoin is worse as not one, but eleven, ETFs were approved and the Wall Street takeover is now complete.
Bitcoin and BlackRock – It’s worse than I thought
“In my opinion, BlackRock’s filing of ETFs for Bitcoin, and now for Ethereum USD (ETH-USD), make it a certainty that the Securities and Exchange Commission will give their blessing to a spot market-based ETF.”
I also said the following:
“When BlackRock gets its ETF approved, it is highly likely in my view that the other ETF giants, such as Vanguard and State Street, join the show…”
That also proved correct as the Securities and Exchange Commission (SEC) also approved ETF applications from big-name investment management firms Fidelity, WisdomTree, and Franklin.
No cryptocurrency event comes without a circus, and the ETF approval had been floated a day earlier in a supposed hack of the SEC’s X account.
As I suggested back in November, this is the end of decentralization for Bitcoin, and its original use case as an anti-establishment monetary system is now dead.
Wall Street firms are the new Bitcoin whales
Wall Street moved fast to cement its takeover of the cryptocurrency industry with applications for the second-largest crypto by market cap, Ethereum. At present metrics, Bitcoin and Ethereum together make up $1.15 trillion of the industry’s $1.69 trillion market cap, according to CoinMarketCap data.
As I said in my previous article, BlackRock’s application said that any shares issued in their ETF will be physically backed. That means that anyone who buys a share in a Bitcoin ETF is paying for a derivative that BlackRock and Co. will own in physical custody. They will even give the asset managers a management fee for the pleasure.
In reality, the benefits of a spot versus futures ETF were a marketing gimmick. There is either Bitcoin demand or there is not, and the latest funds will now make Wall Street firms the new whales of BTC.
Buy the rumor, sell the fact, wait 90 days
Bitcoin came within an inch of my $50,000 target this week, trading at a high of $49,058 before crashing back to $43,830.28. With the ETF speculation now confirmed, we may now see a “buy the rumor, sell the fact” environment. A Bitcoin correction would arguably be good for the new ETF providers, as they can tout the pullback as a chance to get in on the next boom.
There is another driver of a potential pullback as many institutions cannot buy Bitcoin ETFs on their initial release. Ophelia Snyder, co-founder of crypto custodian 21Shares which has teamed up with Ark Invest on an ETF said that the adoption could take months for the listed products.
Wealth-management firms must adhere to in-house processes before they can start trading new ETFs on their approved list.
“That typically takes 90 days, so we’re not even going to begin to see what this actually looks like for at least a quarter,” Snyder said. “Just because a product’s available to trade on does not actually mean that every adviser in America can buy it … it requires a lot of compliance for them to add the tickers – they don’t get added by default.”
So, an ETF provider has just told you that there will be almost zero institutional adoption of crypto ETFs for three months. With a speculative fervor in Bitcoin since BlackRock’s September application, there is now a chance of a pullback. Any volatility on the downside could create a mini-panic as the post-approval surge fails to materialize. BTC investors could have learned from the Ethereum “Merge” hype in September 2022, which was supposed to bring “massive” price gains, but the coin dropped around 40% after the event.
The other big problem for Bitcoin is that the three-month timeframe for institutional entry into ETFs also coincides with the end of the Federal Reserve’s emergency lending program that was enacted after the collapse of Silicon Valley Bank.
A prominent crypto founder said that the end of Fed liquidity and the arrival of ETFs could be a huge negative for BTC.
BitMEX founder says ETFs could ‘destroy Bitcoin’
My fears for Bitcoin were echoed by crypto CEO and BitMEX trading founder Arthur Hayes. In a recent blog post, Hayes said that spot BTC ETFs are built to “vacuum up assets” and “store them in a metaphorical vault.”
He warned of a big problem for miners with the arrival of the new ETF firms, saying that if issuers store all of the BTC, and investors turn to derivatives, transactions on the BTC (and ETH) network will dry up. That removes an incentive for miners to validate new transactions. Hayes said that BTC only has value when it moves.
“The end result is miners turn off their machines as they can no longer pay for the energy required to run them,” said Hayes. “Without the miners, the network dies, and Bitcoin vanishes.”
“Imagine a future where the largest Western and Chinese asset managers hold all the Bitcoin in circulation,” he added.
The vacuum effect has already begun with BlackRock buying up 11,500 BTC in the recent dip. That represents 13 days’ worth of Bitcoin mining. The first two trading days of the ETFs saw net inflows of $819 million BlackRock’s iShares Bitcoin Trust (IBIT) led with $497.7 million in total flows. Fidelity’s Advantage Bitcoin ETF (FBTC:CA) was close behind, with $422.3 million. Bitwise (BITB) had $237.90 million, while the Grayscale Bitcoin Trust (GBTC), saw an outflow of $579 million during the same period.
In predicting a correction of up to 40%, Hayes added his fears over the Fed’s BTFP emergency program that is about to end.
“Imagine if the anticipation of hundreds of billions of fiat flowing into these ETFs at a future date propels Bitcoin above $60,000 and close to its 2021 all-time high of $70,000. I could easily see a 30% to 40% correction due to a dollar liquidity rug pull.”
The end of Bitcoin volatility and a reverse CBDC merger?
When I look at the reality of this Wall Street takeover, it is clear that BTC is not going to be the great enricher of Main Street. So, what comes next?
Arthur Hayes is right that asset management firms will vacuum up the coins in circulation. The more adoption that Bitcoin ETFs get, the more chance there is that the network will die and miners go out of business.
I have always said that Central Bank Digital Currencies are likely the end goal for the monetary system. The government was never going to allow a gang of tech nerds and rogue whales to control the monetary supply outside the SEC’s jurisdiction. If Wall Street owns the bulk of crypto in circulation, retail investors may have their coins in self-custody, but I don’t see that being the generational wealth provider they expect.
Bitcoin has always been criticized as a store of value due to its volatility. If BlackRock and other institutions control the bulk of the BTC circulation, I believe it will end the volatility issue. In my opinion, Bitcoin could become a stablecoin and a store of wealth for the government CBDCs. It is possible at that point that the BTC ETFs are reversed into a U.S. dollar peg with the digital dollar, similar to the 1933 gold confiscation of Executive Order 6102. That type of outcome would not hurt the likes of BlackRock because Main Street investors pay for the ETF derivative that the institution then buys in the spot market. Retail investors also pay the asset manager a fee to allow them to have BTC price exposure, but not hold the cryptocurrency keys.
The risks to my bearish prediction is speculative behavior, and BTC may see a flood of investors that can push the price higher before the issues I have described could play out. To back their ETFs, Wall St. firms need buyers and that can happen from current prices or a lower level. As BlackRock showed, they will also be supporting the price of BTC with spot buying for initial retail demand.
Conclusion
With the post-ETF rally lining up to be another “buy the rumor, sell the fact” bust, investors should consider selling around this $50k level. I noted in my last article that this is still officially a retracement from the all-time highs and not a new bull market on some timeframes.
I believe that Arthur Hayes’ comments on Bitcoin ETFs back up everything I have said. The SEC ETF approval was a done deal and Wall St’s asset management giants will now soak up the coin supply, as we have seen in the first trading week. If it continues, the network could die, miners go bust, and Bitcoin is resigned to being a stablecoin. That will remove the volatility criticisms, but in my view, this is a win-win for the traditional finance system and the end of Bitcoin’s initial use case and its anti-establishment monetary system goal.
