This article is also available in Spanish.
On a new YouTube video Titled “There is no paper bitcoin ETF,” Fred Krueger, an investor at crypto hedge fund 2718.fund, delved into the growing concerns surrounding US and US spot bitcoin exchange-traded funds (ETFs). its impact on the price of the cryptocurrency. Krueger aimed to dispel the fear, uncertainty, and doubt (FUD) that has been circulating about “paper bitcoin” (the notion that ETFs could be selling bitcoin that they don't actually own) and explain why the price of bitcoin has not risen as dramatically as some might expect, despite significant ETF purchases.
Krueger began his analysis by acknowledging the prevailing skepticism in the market. “There is all this bitcoin on paper, and ETFs don't really hold bitcoin, and if they were buying all this bitcoin, why isn't the price of bitcoin higher?” he stated, summarizing the main concerns of many investors.
Historically, the concept of “Paper bitcoin” has been associated with exchanges that sold bitcoin to customers without actually owning the underlying assets. Krueger highlighted several high-profile cases where this practice resulted in significant losses for investors. He cited the case of Mt. Gox.
Another example he provided was QuadrigaCX, a Canadian exchange that crashed under mysterious circumstances. Founder Gerald Cotten reportedly died in India, taking with him the private keys to the exchange's cold wallets, effectively locking customer funds. “Many Canadians lost all their Bitcoins on this Quad exchange,” Krueger noted.
Are “Paper bitcoin ETFs” Real?
These historical events have contributed to the current apprehension about ETFs and the possibility that they may be engaging in similar practices: selling bitcoin that they do not actually own, thereby suppressing the price of btc through artificial supply. However, Krueger argued that ETFs, particularly those managed by established financial institutions, operate under a fundamentally different framework compared to unregulated exchanges.
Related reading
Focusing on two leading ETFs (IBIT, BlackRock ETF and FBTC, Fidelity ETF), Krueger emphasized the strict regulatory oversight that governs these entities. “Both ETFs are subject to very strict regulatory oversight, including the SEC but also other US agencies,” he said. This comprehensive oversight includes full transparency requirements, regular audits, and the use of third-party custodians for asset verification. “They literally have to get a receipt for an asset from a third-party custodian,” Krueger added.
In the case of IBIT, Coinbase acts as a third-party custodian. “Coinbase itself is a public company that is audited,” Krueger said, noting that Coinbase's public nature adds an additional layer of scrutiny and accountability. IBIT conducts audits of Coinbase and both entities are subject to audits by the SEC and other regulatory bodies. For FBTC, custody is handled by Fidelity Digital Assets, a separate entity within Fidelity that specializes in the custody of digital assets, ensuring specialized oversight and management.
“The issuers of IBIT and FBTC are BlackRock and Fidelity, two of the largest and oldest financial institutions, and they have a vested interest in maintaining their reputations,” Krueger said. “Their reputation is at stake, and this is a big problem,” he emphasized, suggesting that these institutions would not risk their credibility by engaging in the sale of non-existent bitcoin.
Krueger compared BlackRock to entities like QuadrigaCX to highlight the disparity in regulatory compliance and operational scale. “BlackRock is highly regulated (…) BlackRock has a strong corporate governance structure with extensive audit, risk and compliance committees and internal controls,” Krueger added.
Related reading
Addressing the central concern about ETFs containing “paper bitcoin,” Krueger provided specific data to refute this notion. “The reality is that ETFs do not hold pure paper bitcoin,” he stated unequivocally. He highlighted that IBIT holds approximately 403,000 real Bitcoins, while FBTC holds around 185,000 real Bitcoins. “Together, these two ETFs hold almost 3% of the world's total bitcoin, or 588,000 Bitcoins; I think it's 2.9%,” he calculated.
Krueger acknowledged that some skeptics have attempted to analyze bitcoin's movement between specific dates to question these holdings. However, he emphasized that the facts are clear and verifiable. “We know how much bitcoin these ETFs hold; We know that it is accounted for and that is a reality,” he insisted.
As for the question of why bitcoin's price hasn't risen more dramatically despite significant ETF inflows, Krueger offered a nuanced explanation. He noted that bitcoin has, in fact, risen 60% since the introduction of ETFs, translating to a $600 billion increase in market capitalization. This growth has been driven by approximately $20 billion in net inflows to ETFs, resulting in a roughly 30x price multiplier effect. “This is historically normal, maybe a little low, but not too much,” he assessed.
Krueger attributed the moderation of bitcoin price growth to significant selling pressures from various sources. “There have been a lot of sales,” he explained. He detailed that Germany sold bitcoin worth $3 billion, as well as stakes in Mt. Gox. Additionally, FTX sold its stake in GBTC (Grayscale bitcoin Trust) earlier in the year, and Digital Currency Group (DCG) sold assets to settle lawsuits. “We had a lot of sales,” Krueger summarized.
Speculating on the potential impact without these selling pressures, Krueger suggested that the price of bitcoin could have been significantly higher. “We would probably be at $90,000 if there were no sales,” he said.
At the time of publication, btc was trading at $68,752.
Featured image created with DALL.E, chart from TradingView.com
