Crypto Market Commentary – A bitcoin ETF is unnecessary – 02/21/17

As I said on the Feb 9th crash:

I am leaning toward this being a “buy the dip” opportunity

The latest amendment to the bitcoin ETF proposed by the Winklevoss brothers, also known as COIN, is all the buzz lately as the deadline for SEC approval occurs on March 11. From a socionomic perspective, there is a good chance this ETF will be approved because bitcoin prices have been steadily rising for 2 years now.

However, I see this as the same old routine of trying to fit a brand new, superior class of digital investment into a legacy, inferior framework of digital investment. Several problems emerge here. One is the way the ETF proposes to deal with hard forks. In my opinion, at least one hard fork is nearly an inevitability on the bitcoin network. Per the amendment:

In the event of an upcoming modification to the Bitcoin Network that could potentially result in a hard fork with two separate and incompatible Bitcoin Networks, the Custodian, in consultation with the Sponsor, will elect to support the Bitcoin Network that has the greatest cumulative computational difficulty for the forty-eight (48) hour period following a given hard fork, in order to engage in bitcoin transactions and the valuation of bitcoin. During this forty-eight (48) hour period and for the twenty-four (24) hour period prior to the anticipated fork, creation and redemption of baskets will be halted. The greatest cumulative computational difficulty is defined as the total threshold number of hash attempts required to mine all existing blocks in the respective Blockchain, accounting for potential differences in relative hash difficulty. If the Custodian, in consultation with the Sponsor, is unable to make a conclusive determination about which Bitcoin Network has the greatest cumulative computational difficulty after forty-eight (48) hours, or determines in good faith that this is not a reasonable criterion upon which to make a determination, the Custodian will support the Bitcoin Network which it deems in good faith is most likely to be supported by a greater number of users and miners. Under the terms of the Trust Custody Agreement, the Trust may be required to indemnify the Custodian for any losses arising in connection with its determination to elect the Bitcoin Network with the greatest computational difficulty in the event of a hard fork.

This potentially prevents COIN owners from realizing important gains if there is a fork split where on-chain bitcoin owners wind up owning bitcoins on both chains while COIN owners wind up owning only bitcoins on one chain, potentially subject to the discretion of management of COIN.

The document thoroughly covers its bases in terms of risks and vulnerabilities but, in my opinion, the entire crypto space should be allowed to mature over a period of time before introducing something like an ETF, if one should ever be introduced at all. Many competing projects are in the early stages of development and have potential to supersede bitcoin. A quick look at the top ten or twenty systems in terms of market capitalization will give you a good idea of systems that could overtake bitcoin. I think it would be prudent to wait a few years to see how this industry develops before introducing an ETF.

Perhaps an easier and more efficient solution would be to connect traditional brokerages to fully regulated and compliant digital currency exchanges such as Gemini. As the entire process is digital, I’m sure this connection could be made in a seamless fashion to allow users of traditional brokerages easy access to the bitcoin market and potentially other digital currency markets. Imagine having to create a new ETF for ETH, DASH, XMR, XRP, MAID, and STEEM. We don’t see ETFs for each individual stock in the stock market or each fiat currency pair in the currency markets. The path of least resistance is to connect traditional brokerages to exchanges that have already done the hard work in creating a mechanism for cryptocurrency trade and investment. The bottleneck would lie in the regulatory process, but it could be done eventually.