ETFs make Bitcoin’s problems even worse

livemint.com:

The new wave of U.S. bitcoin ETFs risk being doubly bad for investors.

As holders of bitcoin they undermine the very purpose, and so the long-term value, of a cryptocurrency. And as ETFs launched at a moment of popularity they might be repeating the mistake of many past thematic funds by buying at a peak.

Start with the first problem. What is bitcoin for? It was originally designed to allow small online transactions, but has failed miserably at that due to high costs and cumbersome payment processes.

As a cryptocurrency it could perhaps be used for larger payments, although so far it mostly isn’t. As a pseudonymous currency it can to some extent hide use from governments, making it popular with criminals, if less useful than they think, and with those willing to pay a lot for secrecy.

But the more that’s held in funds, the less that’s available for actual users—not a problem when there are so few, but the new funds must hurt the chances of bitcoin finally finding an actual use.

Many cryptocurrency advocates like bitcoin because it isn’t tied to traditional banks and is independent of any country, unlike “fiat" currencies such as the dollar. The new ETFs reconnect bitcoin both to Wall Street’s old financial infrastructure and to the dollar, in which all are priced and which all use to buy and sell bitcoin.

The pitch now being made by many, including Lawrence Fink, chairman and CEO of BlackRock, one of those launching an ETF, is that bitcoin should be digital gold, holding its value in a crisis.

So far there’s zero evidence that bitcoin works as digital gold. And bitcoin ETFs are likely to make its bad performance in crises even worse, by bringing in even more speculators to what’s already mostly a speculative asset.

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