• By Amy Castor and David Gerard

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Boy, those ETFs were the juice bitcoin really needed, eh? 

The SEC approved 11 bitcoin spot ETFs on Wednesday, January 10, with media widely reporting what a boon this would be for the coiners. Surely this would lure piles of fresh dollars into bitcoin!

Not quite. The bitcoin price held around $46,000 — but just for long enough for the whales to start cashing out.

What the crypto world needs to understand is that bitcoin ETFs are not bitcoins. They’re a traditional finance product with bitcoin flavoring.

Except for the risk — that bit is completely bitcoin.

Number go down

The first big post-ETF price drop came on Friday, January 12. Bitcoin slipped from $46,000 to $43,500 in two hours — only one hour after the day’s printing of a billion tethers was released. A few hours after that, another dump took the price from $43,500 to $41,000.

The bitcoin market is fake and in tethers. The retail securities market is real and in actual dollars. You can’t pump bitcoin ETFs with tethers.

After years of being severely discounted from the price of the bitcoins in the fund, Grayscale GBTC finally reached net asset value. This turned out to be not so great — it looks like long-frustrated GBTC holders are finally dumping now that they can. [CoinDesk; Bloomberg, archive]

Coinbase (Nasdaq: COIN) stock went down as well. It was up as high as $186 at the end of December. It dropped to $130.78 on January 12.

ETFs have put bitcoin on steroids! Asthmatic and with shrunken balls.

Bitcoins: not so great

Bitcoins are still an awful investment for ordinary people who aren’t true believers in Satoshi and just want to grow their dollars.

The ETF S-1 filings go into considerable detail on the risks — none of which should be news to anyone here.

The main risk the ETF trusts see is that the base asset is still a completely terrible investment. Crypto is insanely volatile. A pile of crypto companies went broke from being run by crooks — the filings go into some detail on this. Everyone hates bitcoin miners. The regulators, from the White House down, increasingly just despise everything about crypto. And very few people like bitcoin anyway.

Securities broker Vanguard thinks the bitcoin ETFs are such trash that they’re not only not offering these spot bitcoin ETFs — they’re withdrawing the crypto futures ETFs they presently offer. [Axios]

What happens if the ETF bitcoins are stolen?

Unlike a bitcoin futures ETF, a spot ETF is based on actual bitcoins — and these have to be stored somewhere.

Most of it, including $29 billion face value of GBTC bitcoin, is stored by Coinbase Custody. VanEck is storing their ETF coins at Gemini. Fidelity is storing their ETF coins at their own custody subsidiary.

So what happens if a hacker gets into the digital fortress and takes all the bitcoins?

In short: too bad. Sorry, your money is gone!

Coinbase Custody advised BlackRock that it has insurance covering up to $320 million losses of custodied crypto — but that’s for all its customers’ $144 billion (face value) of cryptos in custody. That’s a whole 0.2% coverage. [SEC]

The ETF trusts themselves do not have FDIC or Securities Investor Protection Corporation (SIPC) insurance.

The ETF trusts specifically disclaim liability for lost backing assets. Valkyrie, for example, says: “Shareholders’ recourse against the Trust, Trustee, Custodian and Sponsor under New York law governing their custody operations is limited.” [SEC]

Investors would likely sue anyway. BlackRock and Fidelity could cover such a loss, though it would sting. Grayscale would be utterly unable to cover it.

If Coinbase were to go bankrupt, it’s not clear legally if crypto stored in Coinbase Custody would belong to the individual customers or would be thrown into the bankruptcy estate!

The custodian just losing all the bitcoins is not a trivial risk — two crypto custodians, Prime Trust and Fortress, went bankrupt in 2023 just from losing customer coins.

At least Coinbase Custody would be unlikely to do what Prime Trust did and gamble remaining customer assets on the crypto markets to cover the hole. Probably.

Ask an expert

We spoke to Frank Paiano, who teaches finance and investing at Southwestern Community College, about what would happen if a bitcoin ETF’s backing assets vanished. [Frank Paiano]

He thinks that customers “will be fooled into thinking” that the ETF assets are protected, even though they absolutely are not. “That is mostly why Fidelity has set up their own trustee. I would guess that companies such as BlackRock would do the same.” (BlackRock is so far just using Coinbase.)

Loss of ETF-backing assets happens quite a lot, said Paiano. “A simple Internet search for ‘gold investments stolen’ yields several examples. Then there are the age-old anecdotes of people being duped into buying lead painted or plated with gold.”

Paiano thinks bitcoin ETFs are profoundly unwise investments: “prudent, long-term oriented investors should stay far away from these abominations”— but they’ll find customers.

“If there are foolish, greedy individuals willing to part with their hard-earned money, there will be scoundrels happy to oblige them.”

Other bitcoin ETF fallout

The day before the SEC announced its approval of 11 spot bitcoin ETFs, the official @SECGov Twitter posted a fake notice saying a bitcoin ETF was approved. SEC Chair Gary Gensler issued a statement on the fake tweet, saying that an unauthorized party got hold of the phone number connected to the account but didn’t get access to any SEC internal systems. [SEC]

What happens next?

The new narrative we’ve seen is that the real bitcoin pump is in 90 days when financial advisors are finally ready to push bitcoin ETFs on their customers, for some reason. Probably the halvening, or sunspots maybe.

We don’t expect the number to go up just from bitcoin ETFs existing — anyone who wanted bitcoins could already buy them, and “anyone” numbers one-eighth of what it did in the recent bubble.

We do expect downward pressure on the bitcoin price to continue from the GBTC holders who can finally cash out near par.

Tether pumps only work if nobody tries to cash out into the pumped-up price. Unfortunately, that only works as long as nobody wants real dollars. It turns out they do.

With these ETFs, bitcoin is the dog that caught the parked car.

Media stardom

David was quoted by Cointelegraph on bitcoin ETFs. A bitcoin ETF is a terrible idea, but we don’t think the threat model includes the issuers stealing the bitcoins. [Cointelegraph; Cointelegraph; Cointelegraph]

David spoke to Davar about bitcoin ETFs and our friends at Tether. (“Basket fund” is the local term for “ETF.”) [Davar, in Hebrew, Google translate]

David went on Logan Moody’s podcast The Contrarian just before the ETFs were approved to talk about the state of crypto as of early 2024. [YouTube]

Image: Grayscale Bitcoin Trust, artist’s impression.