Even worse for crypto than central exchanges

Recent weeks have seen renewed interest from traditional finance in crypto-based exchange-traded funds (ETFs). After the Securities and Exchange Commission challenged its initial filing, BlackRock submitted a new application for a Bitcoin ETF on July 3. A week earlier, Fidelity led a series of investment firms to file SEC applications for Bitcoin-based ETFs. Meanwhile, HSBC has become the first bank to offer Bitcoin (BTC) and Ether (ETH) ETFs to its customers in Hong Kong.

In the context of Bitcoin, it is often seemingly positive news that is detrimental in the longer term; and vice versa, short-term negative news often serves to bolster the ongoing case for Bitcoin. A good example of the latter is the “block size war” of 2017, when the Bitcoin community split into a large block camp that launched the Bitcoin Cash fork and a smaller block camp that implemented implements Segregated Witness upgrade in Bitcoin.

Although the result was chaotic in the short term – with many Bitcoin critics looking to dance on Bitcoin’s grave – it turned out to be one of the most important lessons about decentralized consensus and paved the way for the layered scaling via the Lightning Network that we enjoy today.

For an example of good news turned negative, we don’t need to go too far back in time. Until the end of 2022, FTX was the best example of crypto going mainstream, with its Superbowl ads, stadium naming rights, and glossy magazine features. But in the end, FTX turned out to be a ticking time bomb that exploded in everyone’s face and rolled back the legitimacy of the industry for years.

And again, as the seemingly bad news – FTX crashing and losing a lot of money for its users – will turn into positive in the long run as people take better care of their Bitcoin in the future, thus limiting the systemic risk of large expansions of guardians.

Avoid fakes

As we saw with the implosion of FTX and the subsequent market contagion, centralized exchanges were never the answer for mainstream investors looking to benefit from Bitcoin’s immense promise. Neither do ETFs. Bitcoin-linked ETFs are an even worse idea than centralized exchanges because there is no possibility of withdrawing the underlying instrument, i.e. Bitcoin. This means that holders are never able to take advantage of Bitcoin’s most important feature: the ability to control their funds without needing to trust anyone.

Related: Don’t be naive – BlackRock’s ETF won’t be bullish on Bitcoin

There are also other dangers for the broader market. With ETFs, there is a risk that “paper bitcoin,” or claims not backed by actual bitcoin, could distort the market and undermine bitcoin’s very monetary policy. Exchanges that have issued Bitcoin paper in the past – such as FTX – have been brought under control via pullbacks and eventual collapse, after which bogus Bitcoin claims have been wiped out along with the unfortunate exchanges.

This would probably not be the case with ETFs. Without the ability to withdraw the underlying asset, Bitcoin paper can be printed at will. If Bitcoin ETFs become the dominant way to invest in Bitcoin, it could very well lead to millions of paper Bitcoins flooding the market, suppressing the price of Bitcoin.

With Bitcoin, owning it means owning it

In the context of Bitcoin, ownership is very closely tied to control over the cryptographic keys associated with specific Bitcoin addresses. Now, it may be true that someone can own Bitcoin in a legal sense without having direct control over the keys – like when they own an exchange account or hold an ETF share – but that’s just not not a good idea in the bitcoin world.

Related: Gary Gensler hurts little guys for Wall Street

Bitcoin’s digital nature, perfect portability, and global liquidity make it particularly vulnerable to embezzlement, theft, or simply basic mismanagement. The only way to truly own Bitcoin is to control the keys.

Some might welcome a possible short-term price pump associated with the approval of a major Bitcoin ETF (like BlackRock’s), but the long-term impact on Bitcoin adoption would likely be negative (including the long-term Bitcoin price). The only adoption that really matters is self-care – everything else is a trap.

Josef Tetek is a Bitcoin analyst for Trezor. A lifelong bitcoiner with a background in Austrian economics and political philosophy, he founded the Czech and Slovak Ludwig von Mises Institute in 2010. He is the author of two books, Bitcoin: separation of money and state And Enemies of the State, Friends of Liberty.

This article is for general informational purposes and is not intended to be and should not be considered legal or investment advice. The views, thoughts and opinions expressed herein are those of the author alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

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