There’s a lot of talk right now in the Bitcoin community about the new Bitcoin ETFs. Some of the discussion has been negative in tone because let’s face it – the whole idea goes against the original value proposition of Bitcoin as “being your own bank” – i.e. a permissionless, decentralized, and censorship-resistant peer-to-peer currency that doesn’t rely on centralized institutions and trusted third parties.
That being said, I can also understand why some people might prefer to invest in a Bitcoin ETF instead of holding actual coins. Bitcoin ETFs do have a place even though they aren’t for someone like me. Older people for example who tend to know little about computers and technology but might be interested in this fancy new Bitcoin thing that everyone seems to be talking about could be well served by throwing some money into a Bitcoin ETF. Such people are likely to fall victim to hacks, scams, or otherwise accidentally lose their private keys if they attempted to buy and store bitcoins themselves so it can be safer to let other people who are (hopefully) more knowledgeable than them deal with the security issues involved – even if it comes with a 1.5% annual management fee in the case of BlackRock’s offering.
But if you have the technical skills and know-how to purchase bitcoins and safely store your own private keys then I would stay away from these ETFs. Bitcoin isn’t like gold where self-custody is a difficult and expensive ordeal. Bitcoins don’t require a pickup truck to haul or take up valuable space in your basement. You don’t need to worry about declaring your bitcoins to state authorities when crossing between national borders. As long as you can remember a 12-word passphrase, your coins will always be yours.
The Song dynasty in China was the first to issue paper money called jiaozi. These were valued at a certain exchange rate for gold, silver, or silk. Originally, the notes were meant be redeemed after three years, to be replaced by new notes for a 3% service charge. However, as more of them were printed without older notes being retired, inflation became rampant and all of the notes eventually became worthless. It’s stories like these that provide historical precedent as to why some people in the Bitcoin community dismiss these Bitcoin ETFs as “paper coins”.
In 1933, the US government enacted Executive Order 6102 which forbid its citizens from owning gold outside of small amounts of gold jewelry and coins. Bitcoin is unique among asset classes because it threatens the role of the US dollar as the global reserve currency. Could the state attempt to nationalize the bitcoin holdings of its citizens in a last-ditch attempt to save a collapsing dollar? If anti-cryptocurrency politicians like Elizabeth Warren manage to secure key positions of power then such a scenario could be more likely than you think.
In 1938, Nazi Germany enacted the Decree on the Registration of Jewish Property – a law that forced Jewish people to register their wealth with the government – paving the way for state-sanctioned theft on a massive scale. Those who were fortunate enough to leave Germany before the Holocaust were forced to relinquish up to 90% of their wealth. More recently, the government of Cyprus seized a portion of their citizens’ bank accounts in 2013 in order to make up for its own mismanagement of their economy. If the majority of people had their savings in Bitcoin and cryptocurrencies which they held their own private keys to, then these governments would have been powerless to confiscate their citizens’ wealth.
Coinbase is listed as the custodian for 8 out of 11 Bitcoin ETFs in the US including Grayscale’s and BlackRock’s offerings. Will Coinbase become the next Inputs.io? The next Mt. Gox? The next Cryptsy, QuadrigaCX, Celsius Network, and FTX? Wallets can be hacked and employees can go rogue. The only way to protect yourself from situations like these is to hold the private keys to your bitcoins. However, if you don’t trust yourself to safely store your own private keys and are only interested in speculating on the price of Bitcoin (rather than using it as a currency) then a Bitcoin ETF might be the best option for you. Just understand that you’re not holding actual bitcoins. “Not your keys, not your Bitcoin” is a often quoted phrase in the Bitcoin community and it’s specifically situations like these where it matters most.