iShares Bitcoin Trust invites potential restrictions on Bitcoin with limits to altcoins that could threaten the existing freedoms that cryptocurrencies empower.
On June 15, 2023, BlackRock, the world’s largest asset manager, filed with the U.S. Securities and Exchange Commission (SEC) for a spot bitcoin exchange-traded fund (ETF). The proposed ETF, which would be called the iShares Bitcoin Trust, would track the price of bitcoin and would be physically backed by bitcoin held by Coinbase Custody.
The SEC is expected to take several months to review the iShares Bitcoin Trust filing, which is a significant development in the ongoing debate over the regulation of cryptocurrencies in the United States.
The introduction of a Bitcoin ETF would be a major milestone for the cryptocurrency industry. If the iShares Bitcoin Trust is approved, it would make it easier for investors to gain exposure to bitcoin, while further legitimizing BTC in the eyes of institutional investors.
WHAT’S AN ETF?
An ETF, or Exchange-Traded Fund, is a type of investment fund that is traded on stock exchanges, similar to individual stocks. It is designed to track the performance of a specific index, commodity, sector, or asset class.
ETFs are used in banking and investing for several reasons:
- Diversification: Instead of investing in individual stocks or bonds, investors can buy shares of an ETF that represents a basket of different securities.
- Liquidity: The ability to enter or exit positions quickly makes ETFs attractive for investors who require liquidity.
- Cost-effectiveness: ETFs generally have lower expenses because they are passively managed and aim to replicate the performance of an index rather than actively selecting and managing individual securities.
- Transparency: ETFs disclose their holdings on a daily basis, allowing investors to see exactly what assets the fund holds.
- Flexibility: ETFs can be bought and sold throughout the trading day at market prices. This allows investors to implement various trading strategies, such as buying on margin, selling short, or placing limit orders.
- Tax efficiency: ETFs are structured in a way that can help minimize taxable capital gains distributions. When investors buy or sell shares of an ETF, they generally do not trigger taxable events for the fund itself, unlike mutual funds where the buying or selling of shares can create capital gains distributions.
WHAT’S A SPOT BITCOIN ETF?
A Bitcoin ETF would work in much the same way as a traditional ETF. iShares Bitcoin Trust would hold a basket of Bitcoin assets, such as Bitcoin futures contracts or Bitcoin mining stocks to create a well-rounded portfolio. Investors could then buy shares of iShares Bitcoin Trust to gain exposure to the price of Bitcoin without having to buy and store the underlying asset.
Key differences between a Bitcoin ETF and a traditional ETF:
| Feature | Bitcoin ETF | Traditional ETF |
|---|---|---|
| Asset type | Bitcoin | Stocks, bonds, etc. |
| Volatility | High | Low to moderate |
| Risk | High | Low to moderate |
| Convenience | Easy to buy and sell | Easy to buy and sell |
| Diversification benefits | Yes | Yes |
BITCOIN ETF RISKS
- Counterparty risk: When you invest in a Bitcoin ETF, you are essentially trusting the ETF issuer to hold the underlying Bitcoin assets in a secure manner. If the ETF issuer fails or is hacked, you could lose your investment.
- Liquidity risk: Bitcoin ETFs are a relatively new investment vehicle, and they may not be as liquid as other assets, such as stocks or bonds. This means that it may be difficult to buy or sell your ETF shares quickly, especially if there is a lot of volatility in the Bitcoin market.
- Volatility risk: Bitcoin is a very volatile asset, and its price can fluctuate wildly. This means that your investment could lose value quickly if the price of Bitcoin falls.
BUYING YOUR OWN BITCOIN
- Security risk: If you store your Bitcoin in a hot wallet, you are at risk of having your coins stolen if your computer or mobile device is hacked. If you store your Bitcoin in a cold wallet, you are less likely to be hacked, but you could lose your coins if you lose your hardware wallet or forget your password.
- Tax risk: If you purchase Bitcoin directly, you may be subject to capital gains taxes when you sell your coins. The amount of tax you owe will depend on how long you held your coins before selling them.
WHICH IS RISKIER—BITCOIN ETF, OR SELF CUSTODY?
The Daily Degen doesn’t prioritize low-risk and convenience over control over your investment. For this reason, purchasing Bitcoin directly and self custody is always a better option in the eyes of this editor.
Ultimately, the decision of whether to invest in a Bitcoin ETF or self custody is a personal one. You should carefully consider your individual circumstances and risk tolerance before making a decision.
NOT YOUR KEYS, NOT YOUR CRYPTO
The Daily Degen strongly advocates for self-custody of your cryptocurrencies. The Daily Degen believes that individuals should control their private keys and have direct ownership and control over their funds. Using a Bitcoin ETF means relinquishing control to a custodian, which compromises your individual sovereignty. Centralized exchanges and ETF markets can be subject to regulatory actions, operational issues, or market manipulation, potentially leading to liquidity problems. The Daily Degen encourages the use of decentralized exchanges and peer-to-peer trading platforms to maintain your liquidity. The Daily Degen values privacy, and is concerned about the exposure of your personal financial information. Using a Bitcoin ETF might involve reporting and compliance requirements, potentially exposing you to greater scrutiny from tax authorities. If a hacker gains unauthorized access to the ETF's systems, it could compromise the security of the underlying Bitcoin holdings. A Bitcoin ETF introduces additional attack vectors and potential vulnerabilities. The Daily Degen encourages you to secure your own assets through proper cryptographic techniques and secure storage practices.
PROBLEMS WITH BLACKROCK
The Daily Degen believes in distributing power and control. The introduction of a Bitcoin ETF, controlled by a centralized entity, concentrates power and influence in the hands of a few. This concentration could potentially undermine the principles of financial sovereignty and autonomy we strive for in this space.
One of the primary concerns is the sheer size and influence of BlackRock in the global financial system. As the world’s largest asset management company, its massive size and extensive holdings give it significant power and influence over markets, companies, and governments. This concentration of power could lead to potential conflicts of interest or systemic risks.
BlackRock manages trillions of dollars in assets across different investment strategies. It serves a diverse client base, including pension funds, sovereign wealth funds, corporations, governments, foundations, and individual investors.
With its headquarters in New York City, BlackRock operates globally, with operations in 30 countries. 70 BlackRock offices are located in major financial centers in North and South America, Europe, Asia, Australia, the Middle East, and Africa.
Being a private company, BlackRock lacks sufficient transparency and accountability. Due to its vast holdings and influence, BlackRock should be subject to stricter regulations and oversight to ensure that its actions do not unduly impact markets or create conflicts of interest.
For instance, BlackRock advises governments and central banks on economic policy while also managing significant assets and investment portfolios. Dual roles could lead to conflicts or favoritism.
| Rank | Company | AUM (trillions USD) | Smaller than BlackRock by (trillions USD) |
|---|---|---|---|
| 1 | BlackRock | 9.46 | – |
| 2 | Vanguard | 8.4 | 1.06 |
| 3 | State Street Global Advisors | 3.86 | 5.59 |
| 4 | Fidelity Investments | 2.3 | 7.16 |
| 5 | J.P. Morgan Asset Management | 1.9 | 7.56 |
BlackRock is the largest asset management company in the world, with over $10 trillion in assets under management (AUM). Vanguard is $1.06 trillion USD smaller than BlackRock, which illustrates just how dominant BlackRock is in the asset management industry.
BlackRock has been investigated, and fined:
- In 2013, BlackRock was fined $10 million by the Securities and Exchange Commission (SEC) for failing to disclose conflicts of interest in its investment decisions.
- In 2015, BlackRock was fined $20 million by the SEC for failing to properly supervise its investment in a Chinese company that was later accused of fraud.
- In 2017, BlackRock was investigated by the SEC for its role in the manipulation of LIBOR, a benchmark interest rate. However, the SEC did not bring any charges against BlackRock.
Public criticism of BlackRock:
- In 2012, BlackRock was criticized for its decision to vote against a shareholder proposal that would have required the company to disclose more information about its environmental and social impact.
- In 2016, BlackRock was criticized for its decision to invest in companies that were involved in the Dakota Access Pipeline.
Protests at BlackRock headquarters:
Protests against BlackRock are part of a growing movement against the power of large asset managers with too much influence over the global economy, and too little action to address climate change and other environmental issues.
BlackRock has attempted to defend its record, stating that it is committed to investing in sustainable companies—even while investing in fossil fuels.
- April 2023: Protesters stormed BlackRock’s Paris office, holding red flares and firing smoke bombs. The protest was against the French government’s pension reforms, but demonstrators targeted BlackRock because of its work for private pension funds.
- January 2023: Protesters gathered outside BlackRock’s New York headquarters to demand that the company divest from fossil fuels. The protest was organized by a coalition of environmental groups, including Oil Change International and 350.org.
- There have been smaller protests at BlackRock headquarters in other cities, such as London and Frankfurt.
Collectively, these protests have raised awareness of the power of asset managers and the need for greater transparency and accountability in the financial sector.
PREVIOUSLY REJECTED SPOT BITCOIN ETFs:
The SEC has rejected several applications for spot bitcoin ETFs since 2021, citing concerns about market manipulation and investor protection. However, the filing by BlackRock, a well-respected asset manager, could give the SEC more confidence in the ETF’s potential.
- Grayscale Bitcoin Trust: The SEC rejected Grayscale’s application to convert its $13.5 billion Grayscale Bitcoin Trust (GBTC) into a spot-based bitcoin exchange-traded fund (ETF) on June 30, 2022.
- Bitwise Bitcoin ETF: The SEC rejected Bitwise’s application for approval of a spot bitcoin ETF on June 30, 2022.
- VanEck Bitcoin Trust: The SEC rejected VanEck’s application for a spot bitcoin ETF for the third time on March 10, 2023.
- Ark 21Shares Spot Bitcoin ETF: The SEC rejected a joint effort by Ark Investment Management and 21Shares to list a spot bitcoin exchange-traded fund (ETF) for the second time on January 26, 2023.
- WisdomTree Bitcoin ETF: The SEC rejected WisdomTree’s application for a spot bitcoin ETF for the second time on December 15, 2021.
