It’s been almost two weeks since several investment products tied to Bitcoin started trading on old-school financial markets.
These exchange-traded funds have made it easier for everyday investors to place bets on the cryptocurrency market like they would buy and sell stocks on Wall Street.
In the days since federal regulators finally gave the green light, investors have poured nearly $2 billion into the new Bitcoin funds. But probably not the crypto purists, says Joel Khalili, who reports on the industry for Wired.
Marketplace’s Meghan McCarty Carino spoke with Khalili about crypto early adopters, who, he says, are pretty happy to stay on the fringes of the financial system.
The following is an edited transcript of their conversation.
Joel Khalili: It harkens back to the underlying ideology of Bitcoin, that it would be a technology that underpinned a payment network whereby people would store their wealth and transact directly with one another, essentially cutting these giant Wall Street intermediaries out of the picture. And the reality is that the ETFs are just not that; they’re the opposite. They’re a vehicle exclusively for financial speculation. They’re managed by a host of sort of the “who’s who” of Wall Street, these large financial institutions. Users don’t hold the underlying bitcoin themselves; they invest in representation. You can’t use ETF shares as a means of peer-to-peer payment, that’s for sure.
Meghan McCarty Carino: So, investing in ETFs is not direct ownership of a cryptocurrency, but that kind of ownership is a core principle for this group.
Khalili: That’s right. That’s one of the reasons crypto ideologues like the idea of bitcoin ETFs, partly because they see it as a source of new legitimacy for bitcoin and hope it will legitimize the asset in the eyes of large institutional investors. They also see it as something that will unlock this pent-up demand for Bitcoin among people who are typically unwilling to deal with the hassles, frictions, and perils of storing crypto. So, on the one hand, bitcoins are excited about the arrival of bitcoin ETFs, but they won’t touch them themselves because, as you say, what ETF investors aren’t doing is buying bitcoin directly; they’re buying a representation. There’s a saying among Bitcoiners: “Not your keys, not your coins.” And that means that it’s not under your control unless you keep Bitcoin in a self-managed wallet. That is the case with the ETFs. A third-party custodian has control of the underlying Bitcoin.
McCarty Carino: Can you explain some of the hassles and frictions of buying and storing Bitcoin directly?
Khalili: One issue is that some people have tended to prefer not to do business with crypto exchanges like Coinbase or Gemini or offshore exchanges like FTX, which is a name familiar to everyone that ended pretty poorly. So, purchasing crypto directly still involves transacting with a crypto exchange, where you take dollars, and they will, in return, give you a cryptocurrency. Then, you can choose if you’d like to take the cryptocurrency off the exchange and keep it in your wallet. But it’s that piece where most of the friction lies. The reality with cryptocurrency is that there is no room for error. So I can take the cryptocurrency and put it in my wallet. But if I lose access to that wallet, forget my password, or haven’t correctly recorded what’s known as a seed phrase, a 12-word sequence of words that will allow you to recover access to a wallet. If you forget any of those pieces and lose access, your crypto is gone. It’s into the ether. It’s unrecoverable. So, it’s that piece where the peril lies in terms of people participating in what’s known as self-custody. That’s the term that Bitcoiners would use.
McCarty Carino: So, who is excited about this?
Khalili: It’s a funny one. Bitcoiners believe that the greater awareness surrounding the asset among regular people can only be a good thing in the long term. One person put it to me, thinking it’ll have a mosquito bite effect. It’s a bit of a crude phrase, but it effectively infects people with Bitcoin fever, right? So they’re excited about this prospect that Bitcoin will be effectively passing into the hands of a much broader range of people, and a much more comprehensive range of investors are coming to the space. A lot more cash in terms of dollar value will enter the Bitcoin system and potentially drive up the price. But then, on the other hand, none of that means that they’ll be buying ETFs themselves for the reasons we’ve discussed.
McCarty Carino: If we see this kind of sustained flood of mainstream investment into crypto, could that stabilize this ecosystem?
Khalili: Yeah, I mean, it’s one theory. I’m not a market analyst, but the analysts I spoke to generally believe that the arrival of ETFs and capital from these large institutional investment houses into the asset class will result in an upward trend in demand. Perhaps that will have a stabilizing effect. On the other hand, analysts predicted there was a lot of hype around what it might do to the bitcoin price in the lead-up to ETF approval. There were a lot of posts flying around on Twitter peppered with rocket ship emojis, and there were predictions that ETFs would suddenly drive Bitcoin to new all-time highs. And the reality – and this is something that analysts had predicted – is that the preapproval hype drove up the price, but then the approval led to a dip. People bought the rumor, so to speak, and then sold the news.
McCarty Carino: This moment comes after a tough few years in crypto. Things seem to have been on the upswing lately, but how would you define this moment crypto after the last few years?
Khalili: People within the industry have a sense of optimism after the trial of Sam Bankman-Fried, the founder of FTX, which is the collapsed crypto exchange I referred to earlier. There is a sense that there’s an opportunity for crypto to start fresh now. Whether that’s borne out in reality is another question, but there’s a sense of optimism, and part of it surrounds the approval of these ETFs. And I can’t understate how much this was something that members of crypto circles latched on to as something to celebrate. It was the talk of the virtual town for months in the lead-up. So, crypto circles have a sense of optimism that the industry can move on from the trauma caused by the collapse of FTX and the series of other companies that fell in around the same time frame in 2022.
In my conversation with Joel Khalili, we talked about some of the significant philosophical tensions with crypto going mainstream, but there are also practical considerations.
One of the perceived benefits of Bitcoin is real-time, around-the-clock availability. The blockchain stays online 24 hours a day, 365 days a year. But stock exchanges and investment firms are more of a 9-to-5 crowd.
So, that first weekend after ETFs hit the scene, bitcoin’s value fell more than $1,000 after markets closed. As The Wall Street Journal noted, “those who owned it directly or via a crypto broker could keep trading, as bitcoin runs 24/7. Those who held a bitcoin ETF could only watch and wait for Wall Street to open.”