Concerns Rise Over Bitcoin ETF Backing as Approval Looms
Summary:
As the potential approval of a Bitcoin spot exchange-traded fund (ETF) looms in January 2024, concerns have been raised about issues like asset backing. Analyst Josef Tětek warns that such ETFs may lead to "millions of unbacked Bitcoin." This has sparked debates on verification of an ETF issuer's actual Bitcoin holdings. While some believe there's little incentive for ETF providers to falsely report their holdings, others point out that the only proof that ETFs wouldn’t result in "paper Bitcoin" would be if ETF shares could be redeemed for Bitcoin.
As anticipation grows for a potential approval of a Bitcoin spot exchange-traded fund (ETF) in January 2024, worries about certain ETF-related issues, such as asset backing, are being voiced by some in the industry. Josef Tětek, a Bitcoin analyst at hardware crypto wallet company Trezor, warned in December 2023 that spot Bitcoin ETFs may distance people away from self-custody and could give rise to 'millions of unbacked Bitcoin'. He noted a potential risk of these ETFs resulting in 'paper Bitcoin', a worrying scenario.
Tětek's comments have initiated substantial reaction from the community, with some interpreting such claims as fear, uncertainty, and doubt (FUD). On the other end, it triggered debate on how to verify that an ETF issuer genuinely possesses Bitcoin for its clients. Some crypto watchers implied it would be helpful to have 'real on-chain addresses' disclosed in correspondence with the issuers’ BTC holdings reports.
According to David Gerard, the author of the book and crypto blog Attack of the 50 Foot Blockchain, it's 'unlikely' that ETF managers would generate 'unbacked BTC equivalents or misrepresent their backing assets'. He believes this is because these are regulated financial operations conducted by reputed units. However, Gerard didn’t offer insights into whether customers would be able to monitor BTC holdings by issuers.
Comparing spot Bitcoin ETFs to gold ETFs, Bloomberg ETF analyst Eric Balchunas suggested a spot BTC ETF would be pretty similar. He added that, given the stringent legal boundaries, asset managers are strict in their dealings to avoid any legal issues or public relations backlash. He also stated that large entities like BlackRock or Grayscale are greatly exposed to Bitcoin volatility.
Balchunas clarified that in the present likely structure of cash-create for spot Bitcoin ETFs, the investor won't receive Bitcoin in return for cash. He suggested that those who prefer a return in Bitcoin should consider owning it directly. However, he pointed out that owners of ETFs, who collectively possess about $30 trillion in assets, don't typically want to touch the underlying asset.
While several industry onlookers are convinced that there's no incentive for ETF providers to distort their BTC holdings under the cash-create model, others maintain that there's a underlying concern. Tětek asserted that the only surefire way to validate that ETFs wouldn’t fuel 'paper Bitcoin' claims would be if ETF shares could be redeemed for Bitcoin. However, as the projected ETFs are all cash in and cash out, Tětek believes this will not be the case and holders will have to place their trust blindly.
Published At
12/29/2023 7:24:21 PM
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