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Could a spot Bitcoin ETF lead to ‘paper’ Bitcoin controlling the market?

Stop scaring users with your bad KYC flows

Stop scaring users with your bad KYC flows

The air is thick with speculation. Bitcoin, the flagbearer of the digital currency realm, stands at the precipice of historic transformation.

The game appears to be changing with financial titans like BlackRock, Fidelity, and Ark Invest filing for SEC approval for spot Bitcoin ETFs. But is it all sunshine and rainbows from here?

While approval could trigger a wave of institutional money, there are rising concerns that it could also lead to the emergence of “paper Bitcoin,” potentially steering the Bitcoin market away from its decentralized essence.

The Immediate Upside: An Onramp for Institutional Money

Bitcoin’s volatile past has seen it struggle for mainstream acceptance. However, filing spot Bitcoin ETFs by financial behemoths strongly indicates a more stable future. There’s an optimistic buzz in the market, not just because of these filings but also because these proposals claim to address the SEC’s concerns about fraud and market manipulation.

If the SEC green-lights these ETFs, we are looking at a potential torrent of institutional investment that could lift Bitcoin to staggering new highs.

In terms of market impact, these developments have already set the wheel in motion, with Bitcoin surging over 20% to break the $35,000 mark. With billions in inflows predicted, there’s chatter about Bitcoin soaring to over $145,000.

The Long-Term Concern: The Rise of “Paper Bitcoin”

However, the creation of spot Bitcoin ETFs also brings the risk of giving birth to “paper Bitcoin”—a representation of actual Bitcoin ownership without requiring physical custody of the digital coins.

This could mark a tectonic shift in how Bitcoin is traded, managed, and understood. Like gold ETFs, often settled in cash and not physical assets, spot Bitcoin ETFs could make it easier for investors to bet on Bitcoin’s price without owning the asset.

If paper Bitcoin gains ground, a gap between actual supply and demand may form, potentially allowing the ETFs to control price discovery and disrupting the decentralized ethos that Bitcoin was built upon. With more people investing in paper Bitcoin rather than the actual asset, there are fears that Bitcoin’s supply could be manipulated to serve the interests of larger financial entities.

However, when reviewing the latest BlackRock filing for its spot Bitcoin application, it does not seem like BlackRock could issue paper Bitcoin without holding the underlying asset.

The prospectus states that the Trust will store actual…

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