The Breakdown - Why the Bitcoin ETF Will Never Be the Same as Truly Owning Bitcoin

Episode Date: February 5, 2024

A reading of "A Bitcoin ETF Will Never Be Your Bitcoin" by Pascal Gauthier, CEO of Ledger Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribe to the newsletter: https://breakdown.beehiiv.com/ Join the discussion: https://discord.gg/VrKRrfKCz8 Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. What's going on, guys? It is Sunday, February 4th, and that means it's time for Long Read Sunday. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the Breakers Discord. You can find a link in the show notes or go to bit.ly slash breakdown pod. All right, friends, well, today we are reading a piece about the Bitcoin ETF, not necessarily new territory, but one that has a very important message. The piece is by Pascal Gauthier,

the CEO and chairman at Ledger, and is called a Bitcoin ETF will never be your Bitcoin. Let's read the piece and then we will talk about it. Pascal writes, In recent weeks, newly approved U.S. Bitcoin ETFs have had stunningly popular launches, judged by trading volume and flow metrics. However, these ETFs have nothing to do with the true utility of Bitcoin, which is to facilitate peer-to-peer transactions and circumvent traditional intermediaries. Bitcoin ETF investors merely get exposure to the price of Bitcoin. They never own the asset. ETF participants don't benefit from what Bitcoin stands for in the first place, which is to allow anyone to experience financial ownership and sovereignty.

This is precisely what Bitcoin's anonymous inventor Satoshi Nakamoto aimed for when writing the Bitcoin white paper 15 years ago. The main problem with Bitcoin ETFs is that they merely replicate the functioning of our outdated financial system built on old technologies. By relying on intermediaries, Bitcoin ETFs reintroduce counterparty risks that have underpinned finance for decades. Take Lehman Brothers and more recently FTX or Silicon Valley Bank. These are just a few examples of traditional players mismanaging their client's assets and wiping

out billions of dollars in the snap of a finger. Crypto is the way out of this flawed archaic system, which currently satisfies only 9% of Americans. In addition to facing counterparty risks, Bitcoin ETF investors are also locked within the confines of the U.S. center financial system, while crypto's core attribute is to enable anyone to access a permissionless network and benefit from an unparalleled level of decentralization. ETFs have frontiers while crypto is permissionless. The two stand radically opposed. Importantly, Bitcoin ETF investors don't own what truly matters in crypto, a private key or a secret algorithmically generated code mathematically proving that users are their digital tokens sole owners.

Holding these keys is the only way for people to interact with the world of crypto, own Bitcoin, get involved with decentralized finance, and leverage decentralized apps with ownership and freedom. Private keys are entry points to the future of finance and the future of the internet. that's something ETFs will never be able to provide. Besides contradicting crypto's utility, let's not forget that Bitcoin ETFs are more expensive than the sovereign choice of secure self-custody. With Bitcoin ETFs, people pay fees ranging from 0.2% to 1.5% not to own the underlying asset. Furthermore, the need for security is as crucial for corporate players as it is for individuals onboarding crypto. Financial intermediaries engaged in ETFs,

responsible for safeguarding their clients' assets, must employ adapted security and governance frameworks to avoid FTX-like disasters. Section, pro-ETF. Does that mean that Bitcoin ETFs are a bad thing for crypto? Not at all. We're not anti-ETFs at Ledger. Despite deviating from crypto's stated end goal, these traditional financial instruments will serve Bitcoin on multiple fronts.

First, besides bringing a fresh wave of new entrants gaining crypto exposure, Bitcoin ETFs have the potential to greatly popularize Bitcoin. In fact, the Bitcoin ETF's advertisements flourishing across U.S. soil highlights that ETFs are the most powerful marketing tools ever created for Bitcoin. On top of that, as Bitcoin is now accepted into the highest fears of the financial system, it will also become much harder for skeptics to dismiss this crypto protocol as an instrument for illicit activities. Second, I believe that Bitcoin ETFs are bound to serve as gateways to crypto's promised land of self-custody, just as centralized exchanges did over the past years. A virtuous cycle might actually unfold

where millions of people get ETF exposure to Bitcoin, learn the benefits of digital ownership, and ultimately opt for true self-sovereignty. Interestingly, from 2004, the approval of the first gold ETFs didn't hinder gold's private ownership either. Instead, it popularized it. Bitcoin ETFs are a form of window dressing, but they are very real, and we should use them as a stepping stone towards the true promise of ownership and sovereignty of crypto. Contrary to the skeptic's belief, the future of Bitcoin isn't to become a speculative asset merely stored in ETF-like investment vehicles that mainstream investors would get exposure to. Instead, it's a paradigm shift poised to rewrite the rules of digital ownership and reshape

value exchange, akin to how the internet transformed information exchange for billions. Today, people are barely beginning to grasp the full range of use cases the crypto revolution will provide, just as they barely understood the true potential of the internet in the late 1990s. A revolution of this scale is a marathon, not a sprint. Bitcoin ETFs are just a step in the broader journey to crypto-enabled financial freedom. Only when mainstream users have true sovereignty over their assets will the true potential of crypto be realized. All right, back to NLW here. So, I think the piece is dead on. This is pretty much how I view things. I think that in true open markets, what inevitably happens is that all different types of access to different types of assets

that have any sort of demand ultimately find a supply. What I mean by that is that there are some people for whom the type of self-sovereignty and ownership offered and discussed by the CEO of Ledger are not appealing. They're not part of the priority. For them, the fact that instruments like ETFs exist means that they don't have to ignore the asset entirely. Second, I want to put a fine point on this idea of a gateway. Almost no one comes into Bitcoin a fully formed, excited, passionate Bitcoiner. Almost everyone comes through some other door. And frankly, most people, to some extent, in some way or another, started paying attention when the number was going up. I don't think Satoshi would be stressed about this. I think they knew that this would exactly be the

case. What happens, though, when we've seen this endlessly, is that people come for the number go up, and they stay for the revolution. Now, I don't mean to be polyanish about this. There are good conversations to be had about the problems of rehypothecation and whether these synthetic instruments effectively increase Bitcoin supply. And if you're interested in those arguments, I would recommend you go check out anything written by Caitlin Long, as she's been one of the longest standing and most outspoken critics of things like Bitcoin ETFs for this reason. But in general, the net effect that I think will happen is that ETF's existing will mean ultimately more people exposed to engaging with and ultimately passionate about and managing their own keys for Bitcoin. And to me,

that's a good thing. Until next time, be safe and take care of each other. Peace.