Approval of Spot Bitcoin ETFs Would Hasten the Demise of Crypto
A quick housekeeping note: The TradeSmith offices will be closed on Friday, Sept. 1 (tomorrow), to give the TradeSmith family a headstart on the long Labor Day weekend. As such there will not be a Decoder broadcast — we'll see you again on Tuesday.
The way to spark a rally in crypto these days is first to get a federal court ruling in your favor.
Thanks to a new ruling in favor of Grayscale Investments LLC, and against the Securities Exchange Commission (SEC), crypto assets saw a broad-based rally on Aug. 29, with Coinbase (COIN) and MicroStrategy (MSTR) surging in particular.
And yet, if COIN fully retraces the Aug. 29 surge, and falls below its 200-day moving average again in doing so, we may add to our COIN short position. And if MSTR does the same, we may add a new MSTR short as well.
Why? Because, while crypto may be winning over sympathetic judges, it is losing the war for relevance. And the arrival of a spot Bitcoin ETF — the thing the latest court ruling was about — could actually hasten the demise of crypto exchanges as a business model.
Here is the logic:
Crypto as an ecosystem has failed. The underlying technology of crypto is non-economic, meaning it cannot compete in the marketplace on its own merits. It may sound odd to talk about "crypto" failing generally, but the shoe fits, in our view, because blockchain technology as a concept has shown itself to be broadly non-viable. The supposed core benefit of blockchain — decentralization — is not worth the cost in real-world-friction terms (transaction costs, bugginess, hackability, energy use, and so on). You can market the concept to true believers, but can't scale it profitably in a manner that competes with centralized competitors.
The most straightforward piece of evidence that crypto has failed is this: After all this time, there aren't any scalable-profitable business models, nor anything with a viable path to scalable profitability. Think about how extraordinary that is at this late date. More than five years after initial coin offerings (ICOs) exploded on the scene in 2018... and 14 years after the birth of Bitcoin... there are no cryptos on their way to making money at scale from a legitimate use case that does not rely on retail speculation or regulatory arbitrage.
Some will point to dollar-backed stablecoins as a business model — but this doesn't really work because the use case for stablecoins is either off-the-books transmission of U.S. dollars, a kind of regulatory arbitrage, or the facilitation of speculative trading in other cryptos, which lack a profitable use case. There is a relatively new stablecoin, TrueUSD, growing in popularity even though it isn't clear who owns it, and the ticking-time-bomb nature of the big kahuna stablecoin, Tether (USDT), has never been cleared up — it just continues to be ignored. (The time it takes for a fraudulent scheme to blow up does not count as evidence in favor of the scheme being legitimate; just ask one-time investors in Wirecard, a multi-billion-dollar German fintech fraud that spent years denying the allegations against it, then went to zero.)
Bitcoin, meanwhile, is not scalable either as a payments mechanism. For evidence of that look to El Salvador, where they literally made BTC legal tender. Nobody talks much about how the El Salvador experiment is going these days, because it isn't going anywhere at all.
Bitcoin does, however, still retain an appeal to some as a form of "digital gold." Decoder made the Bitcoin-as-digital-gold use case emphatically a few years back, and did extremely well on the long side of Bitcoin and related crypto assets 2020 and early 2021. But that was before Bitcoin lashed itself to the mast of the bubble speculation and, by way of embedded leverage, became a kind of Ponzi asset timebomb at the heart of the crypto ecosystem. (We still contend that the fractional reserve lending going on behind the scenes in crypto, on a relative scale basis, makes what the banks were doing in 2008 look like child's play.)
While Decoder now sees Bitcoin as a kind of doomsday device due to the hidden leverage embedded in BTC transactions waiting to be unwound — with the destruction of Tether a potential catalyst — others who still want exposure to Bitcoin would be delighted to get that exposure through the wrapper of a spot Bitcoin ETF, available through a normal brokerage account, without having to jump through any of the weird shady hoops of hard-to-use, high-fee crypto exchanges.
To shorten the above, while interest in crypto on the whole is waning, there is still a spark of enthusiasm from Bitcoin enthusiasts who see the Bitcoin digital-gold proposition, or store-of-money proposition, as a separate thing from all the rest of crypto.
And so, if you give those Bitcoin enthusiasts an easy way to get access to Bitcoin without having to mess with crypto exchanges at all, they will likely take that road and be done with it.
The crypto exchanges can put on a brave face and argue that, if legal pushback against the SEC paves the way for a new crop of spot Bitcoin ETFs — which are logistically superior to Bitcon futures ETFs because you can just sit on spot Bitcoin in perpetuity, without the cost of rolling the futures contracts — then somehow that new on-ramp of spot Bitcoin ETF usage will translate into a crypto renaissance.
To which we say, nope: If you enable spot Bitcoin ETFs, you will take the last real reason to mess with crypto exchanges at all and hand it over to the likes of Fidelity and BlackRock.
To use another metaphor: If crypto is a party that is winding down... and Bitcoin is the last guest at the party who is even remotely interesting... then the introduction of a spot Bitcoin ETF (or more than one), which trades on normal exchanges along with stocks and bonds, is like an invitation for Bitcoin to leave the crypto party, too, and head to the fiat exchange bar across the street.
And to make one last point in the "crypto is busto" department, there is this:
Crypto as a payments ecosystem was supposed to kill off legacy giants like Visa (V) and Mastercard (MA). And yet, as of this writing, the revenue-generating power of V and MA is at all-time highs... and is expected to increase by another $500 million or so by year's end... and the share prices of V and MA are pushing all-time highs too.
Long live centralized legacy payment providers. If a spot Bitcoin ETF is introduced (the thing the lawsuit win was about), one-click access to BTC will be made available through legacy routes, and high-cost, low-value crypto exchanges like COIN and pseudo-vehicles like MSTR will have that much less reason to exist.
Until next time,
Justice Clark Litle Chief Research Officer, TradeSmith
TradeSmith is not registered as an investment adviser and operates under the publishers' exemption of the Investment Advisers Act of 1940. The investments and strategies discussed in TradeSmith's content do not constitute personalized investment advice. Any trading or investment decisions you take are in reliance on your own analysis and judgment and not in reliance on TradeSmith. There are risks inherent in investing and past investment performance is not indicative of future results.
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