Curmi & Partners

The SEC has approved ETFs on spot bitcoin, and it is portrayed as a game-changer by Crypto bulls. Is it?

Satoshi Nakamoto’s original vision for bitcoin was that it would be ‘digital cash’ for sending payments without involving a bank or other intermediary. Ok, there has been some progress made – you can pay a contract killer on the dark net using bitcoin, you can park your hard-earned drug-trafficked money in cryptos and of course how else would you get paid for ransoms? But still not sure how many of crypto bulls are using bitcoin to pay for their pizzas. El Salvador made bitcoin legal tender and required all businesses to accept it, that was a stellar success (I am being sarcastic!)

But then any sceptic like me is asked to shut up, ‘Stay poor’ and laughed at. They point out that bitcoin went from zero in 2009 to $36,000-ish (should not be surprised if it is $360,000 by the time this op-ed gets out), not on widespread adoption as a payment’s mechanism, but because it is a “store of value.” Huh!!

It is a classic Keynesian beauty contest.

There are two reasons to speculatively buy something. One, if there is a fundamental analysis (intrinsic value based on a real cash flow, etc.) suggesting the asset will appreciate in the future. Second, if one believes the asset will appreciate, full stop. The second argument is how the Ponzi scheme works. Not all of them become successful but then some do. Crypto has already achieved some success (remember - from zero to $36k in fifteen years).

So, the tangible, measurable benefit of bitcoin, i.e., part of the payment’s system is limited (although of immense value to certain niche users) meaning no fundamental reason to hold it, but in the name of a ‘store of value’ a demand can be created (Ponzi scheme).

Now, it is quite possible that eventually everyone will start using bitcoin to buy pizzas and houses and then one can do a fundamental analysis to value bitcoin. And that is the game crypto bulls are playing – make enough people to believe in the scheme so that it reaches critical mass and then it will be unavoidable.

Whether that day will come or not I do not know (some bank analysts call for bitcoin to hit a value of million dollars). What I can observe and tell is SEC signing off on bitcoin ETF is the fact that the crypto lobby is so strong that it can arm-twist even the mighty SEC. Sure a Supreme Court verdict late last year played its role too.

A bitcoin ETF is vastly less useful, as a payment mechanism or a way to supplant the traditional financial system than just buying bitcoin. But it is more useful as a store of value: You can hold it in your brokerage account, where you hold your stores of value. You can just isolate the (perceived/believed) store-of-value component of bitcoin and hold it directly. And so, the price of bitcoin may go up because everyone expects that the ETFs would lead to more people holding bitcoin as a store of value.

Also, by the way, the SEC’s approval is hilariously grudging. Here’s SEC Chair Gary Gensler’s statement:

“Though we are merit neutral, I’d note that ... bitcoin is primarily a speculative, volatile asset that’s also used for illicit activity including ransomware, money laundering, sanction evasion, and terrorist financing. While we approved the listing and trading of certain spot bitcoin ETP shares today, we did not approve or endorse bitcoin. Investors should remain cautious about the myriad risks associated with bitcoin and products whose value is tied to crypto.”

Another Commissioner Caroline Crenshaw who dissented said the following: “Spot bitcoin markets are subject to fraud and manipulation. One form of manipulation that appears to be pervasive in the crypto markets (and specifically bitcoin markets), is wash trading, a practice whereby traders seek to increase the appearance of high trading interest by both selling and buying the same products at the same time, often driving up prices, and then selling to unwitting third-party market participants at inflated values. Wash trading distorts price and volume, causes volatility, reduces investor confidence and participation in financial markets, and of course, results in investor harm. One analysis of 29 major crypto exchanges found that wash trading was, on average, as high as 77.5% of the total trading volume on unregulated exchanges. ...Specifically with regard to bitcoin, an analysis of 157 crypto exchanges found that 51% of the reported daily bitcoin trading volume was likely bogus. In fact, though reporting regarding bitcoin frequently discusses the enormous size of the market, one market participant who now seeks to sponsor a spot bitcoin ETP has admitted that “approximately 95%” of the data used by many participants are “fake and/or non-economic.”

In short, prices and demand for bitcoin may not actually be what they appear to be.

Another point that we must note is that Gary Gensler made the following point too: “Importantly, today’s Commission action is cabined to ETPs holding one non-security commodity, bitcoin. It should in no way signal the Commission’s willingness to approve listing standards for crypto asset securities.” bitcoin lending is a security, in Gensler’s view, and not something he wants to approve at this point.

Think of any ETF. Typically, it would mean you send money to buy the shares of the fund. The issuer uses the money to buy the underlying. That underlying is expected to generate an income and depending on whether it performs well or not, the value of your share will go up or down. This is a securities model. Not applicable to any spot bitcoin ETF. Essentially speaking none of these ETFs can use the underlying (bitcoin) to participate in decentralized financial (defi) products. All they can do is safekeep these Bitcoins in a vault. The only way the ETF will go up in value is if the Ponzi scheme works and some buyers want it at a higher price.

Thank goodness for some saving grace from the SEC. Last time I checked when the unregulated crypto exchanges and other leveraged funds were part of defi, just a few players went down (FTX, Three Arrow, etc.). It only made a small dent of tens of billions of dollars for speculators and three regional banks in the US to be bailed out by taxpayers.


The information presented in this commentary is solely provided for informational purposes and is not to be interpreted as investment advice, or to be used or considered as an offer or a solicitation to sell/buy or subscribe for any financial instruments, nor to constitute any advice or recommendation with respect to such financial instruments. Curmi and Partners Ltd. is a member of the Malta Stock Exchange and is licensed by the MFSA to conduct investment services business.