Bitcoin ETFs leave Satoshi Nakamoto rolling in his grave

It’s true that ETFs tracking single asset classes such as gold, oil, or gas, already exist. This makes sense as most investors wouldn’t want to hold a barrel of crude oil to get exposure to its future price movements.

But it’s also true that physical assets like gold or oil have utility for jewellery or transport. Bitcoin doesn’t have utility in the real world other than as a ticket to get rich quick or offer fee streams to insiders, which is similar to the utility of lotto tickets as a tax on the poor.

Moreover, you cannot own physical bitcoin even if you want to. In that sense, it truly is a limited supply of nothing. It doesn’t exist other than as mathematical equations expressed in computer code.

The ETFs’ owners will pay for exposure to nothing but a synthetic asset price bubble in the hope it grows larger. This is fair enough if you’re a bitcoin believer, but in a game of musical chairs, you don’t want to be the last one standing when the music stops.

Fee frenzy

It’ll also be interesting to see whether the annual management fees to own an ETF that tracks bitcoin’s market price are cheaper than those a crypto exchange charges somebody who wants to buy or sell bitcoin themselves on a smartphone app.

One of the main marketing claims of bitcoins ETFs is that your crypto is less likely to get stolen or hacked because it’s held in secure storage, rather than somewhere online. The ETFs are likely to use this “advantage” to justify charging relatively high fees, but it’s a poor advertisement for the merits of an underlying asset class where there’s little legal redress if you’re the victim of fraud.

Despite the problems, crypto has forced its way into the mainstream because public trust in central banks and sound money is the lowest in living memory for most people.

This year, an aggressive rate hike cycle is coming partly as central banks don’t want to reach a point where their currency is considered worthless and nobody wants to hold it. That is a recipe for the hyperinflation seen in Argentina, Sri Lanka, and Venezuela where monetary and fiscal discipline grew so bad governments could no longer service their debts.

The known unknown is whether a hawkish rate hike cycle and a lift in the price of money sink the valuations of cryptocurrencies right after the Australian ETFs come to market.

Either way, Satoshi Nakamoto’s vision of a currency free from the tyranny of government and fee-skimming financial intermediaries looks dead.

Now mainstream financial product providers like banks, custodians, financial advisers, asset managers, and ETF providers all earn fees from the public for the privilege of owning bitcoin or ethereum.

This turn of events comes with some systemic risk as the reach of a commercial banking system responsible for the efficient allocation of capital as part of a liberal democratic society’s key pillars comes under pressure. Where the speculative mania takes us all in the end is anyone’s guess.