Protection Against The Financial System Requires More Than A Spot Bitcoin ETF
July 14, 2023

Protection Against The Financial System Requires More Than A Spot Bitcoin ETF

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This is an opinion editorial by David Waugh, a business development and communications specialist at bitcoin investing platform Coinbits.

A few weeks ago, BlackRock and other major financial firms filed for permission to offer spot bitcoin exchange-traded funds (ETFs).

Though the U.S. Securities And Exchange Commission(SEC) stated that these initial filings were inadequate, forcing the firms to refile, many investors believe that they will eventually be approved, creating the first-such products on the market. These new financial instruments would allow institutional and retail investors to access exposure to bitcoin’s price without having to purchase actual bitcoin.

On the surface, this would be a major win for Bitcoin adoption because it will become easier for financial advisors, previously hesitant or unable to enter this market, to assist clients with a form of bitcoin allocation.

Banks and other traditional financial players will also use the spot ETF to increase their exposures, which may increase bitcoin’s exchange rate with the dollar. For families and individuals, however, shares of a bitcoin product through spot ETFs are not a substitute for holding bitcoin in self custody.

Ultimately, Bitcoin ETF products still exist within the traditional financial system and do not offer complete protection from market, government or compliance risk. As such, market forces can affect the ETF issuers, and governments can enact and enforce regulations by decree that devalue or debase the consumer’s assets.

In contrast, holding real bitcoin allows individuals to access a digital bearer asset outside of control of governments and traditional financial institutions. Though it introduces new risks associated with private key management, every diversified portfolio should have a real bitcoin allocation, regardless of any additional allocation to a bitcoin ETF.

As investors seek to diversify to spread risk and protect themselves from geopolitical and market shocks, there is no substitute for bitcoin in self custody.

Advice Outside Of The Financial System

For years, financial advisors have dutifully allocated clients’ wealth across a variety of traditional financial assets (stocks, bonds, real estate, insurance). In aggregate, they have performed reasonably well. Vanguard analysts have calculated that advisors can increase the value of client portfolios by up to 3% by simply ensuring that they follow best practices, rather than trying to chase returns. Advisors benefit from a typical 1% annual fee on assets under management (AUM).

Yet good financial advisors are more than outsourced portfolio allocators who recommend the right “blend” of assets to match a client’s goals and risk profile. They work with clients to ensure protection from a wide range of outcomes and ensure wealth preservation through retirement and for future generations.

Some advisors ignore the reality that allocations entirely within the traditional financial system are exposed to risk stemming from the “boom and bust” financial market cycle. As a result, sometimes clients must risk being unable to retire or change jobs until the market picks up again, placing them at a significant lifestyle setback.

Proper diversification requires liquid assets outside of the traditional financial system. For generations, the best asset for doing so was physical gold. In 2009, however, Satoshi Nakamoto released the next-best bearer asset, bitcoin, and with it a novel system with a credibly fixed monetary policy. Now, anyone can use bitcoin to free up liquidity during a crisis.

A Spot ETF Vs. Real Bitcoin

The potential spot bitcoin ETF would provide benefits, such as exposure to bitcoin’s price movements, some diversification from traditional financial markets and ease of purchase. Despite these advantages, it falters in saleability, a key feature of a diversified portfolio.

Bitcoin operates on a monetary network that runs 24 hours a day, 365 days per year. Individuals and institutions can use it to instantly transfer value without third-party approval. They can also sell bitcoin for fiat currencies at any time via centralized exchanges or peer to peer.

In contrast, individuals and institutions can only exchange shares of a spot bitcoin ETF for fiat liquidity when financial markets are open, which, for retail investors, is 9:30 a.m. to 4:00 p.m., Eastern Standard Time on weekdays, excluding holidays. Exchanges can also halt trading at will or because they receive a regulatory order, further limiting the saleability of ETF shares.

In another scenario, if a government attempts to restrict the acquisition of bitcoin, it might be able to seize the asset manager’s bitcoin or order it to liquidate the ETF. Holding real bitcoin yourself by managing your own private keys offers exit ability from a system with strong capital controls, rather than suffering the consequences of an unpredictable future.

Essential Protection, Meaningful Diversification

Owning shares of a bitcoin product is not equivalent to directly holding bitcoin. Spot bitcoin ETFs would remain tethered to the conventional financial system. This has some mild advantages, but ultimately this limits the ability of bitcoin to be used as a shield against the risk inherent in the traditional financial system.

Including actual bitcoin is essential to a diversified portfolio, even if that portfolio already has a spot bitcoin ETF position.

This is a guest post by David Waugh. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.

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