<img src="https://cryptoslate.com/wp-content/uploads/2024/01/btc–eth-bull.jpg” />
In recent months, the crypto Internet has been dominated by talk about bitcoin ETFs. And for good reason. With a market capitalization of $835.7 billion, the pioneering crypto accounts for 49% of the total crypto market, which consists of tens of thousands of tokens.
In bitcoin's 15-year lifecycle, an exchange-traded fund (ETF) represents a fundamental divergence, a milestone in legitimacy. Once derided as a tulip-mania-like “fraud,” “rat poison,” or “money laundering index,” bitcoin’s entry into the ETF realm sheds those rags of perception and replaces them with an entirely new coat.
Long-term drip from a deep pool
Having the blessing of the Securities and Exchange Commission (SEC) means that institutions can begin to spread their capital into a high-yielding asset. bitcoin fits the bill because, even more than gold, its supply is fixed, and while bitcoin is digital, it relies on the physical through the proof-of-work mining network.
As of October 2023, US ETFs have value of 5.6 trillion dollars of actions. Even at low single-digit percentages, the capital flowing into bitcoin is about to create a rising tide, a feedback loop due to bitcoin's limited supply. Without the hassle of custody, investors gain exposure to this tide, represented as ETF shares that track the spot price of bitcoin.
One such bitcoin ETF applicant is BlackRock. The world's largest asset manager had already raised capital worth $2 billion, according to sources.
Following the approvals on January 11, an expected selling pressure occurred in a classic “news selling event”, causing the price of btc to drop -7.4% over the week. However, the launch of a new investment vehicle has been a success, monitoring of more than 1.4 billion dollars in assets under management and $3.6 billion in volume in just two days.
But what about the shadow of bitcoin, ethereum? Having moved from proof-of-work to proof-of-stake, the ethereum project is perceived very differently from bitcoin. What are these differences and how would they be reflected in their respective ETF investment vehicles?
The Store of Value: bitcoin in the ETF Spot Market
For many years, it was unclear what bitcoin would become. After all, bitcoin underwent over 100 hard forks, splitting the bitcoin.org/bitcoin.pdf”>original technical document vision of a “purely peer-to-peer version of electronic cash.”
Following the resolution of the controversial bitcoin block size wars in 2017, the Small Blockers faction won. Instead of directly increasing the block size, they opted for soft scaling of bitcoin via the SegWit upgrade. This led to bitcoin's fate becoming a store-of-value asset rather than a low-friction P2P digital cash.
Harsh limitations make it impossible to have both. If the big block faction had won, more computing power and bandwidth would have been required to run full mining nodes, leading to network centralization and potential transaction censorship.
On the other hand, smaller blocks maintain decentralization but make it difficult to scale on the chain. How can fewer transactions fit? inside a block, more network activity results in higher transfer fees because waiting lines form. And if btc transfer fees increase, bitcoin's daily monetary proposition decreases.
At least, without using layer 2 scaling solutions like the Lightning Network, leveraged by payment apps like Strike. Such payment systems can use bitcoin as a vehicle to transfer cash and interact with the existing banking system.
I use global shipping through the Strike app for banking all the time. It is close to instant settlement of cash deposits. Our family in the Philippines is amazed by the power ofbitcoin?src=hash&ref_src=twsrc%5Etfw”>#bitcoin
– General Plebian (@GenPlebian) December 23, 2023
In the end, bitcoin cemented its position as a truly sovereign, peer-to-peer but inherently low-friction money. Rather, bitcoin is the foundation upon which a financial edifice will be built. In the era of continued debasement of fiat currency through central banking, decentralized sovereignty negates low friction, presenting bitcoin as a monetary escape hatch.
For people used to the erosion of fiat money, this is a novel concept. Still, bitcoin-etf/”>bitcoin ETF Now applicants are incentivized to bring that concept to the public.
-Hashdex (@hashdex) December 28, 2023
This competitive marketing push alone is poised to deepen the capital pool for bitcoin exposure. And the deeper it goes, the more the price of bitcoin is likely to rise, creating a feedback loop of more capital inflows.
The technological utility of ethereum: beyond mere investment
While bitcoin pioneered the concept of blockchain-based sovereign money, ethereum is an infrastructure layer in the works. One that incorporates digital assets and replaces traditional financial services.
This purpose drove ethereum's proof-of-stake transition, as such blockchain networks rely on economic interests rather than energy-intensive computing power. However, having a negligent energy footprint (compared to bitcoin) is just the starting point for scaling.
Daily operating financial infrastructure requires low friction (minimum fees) to be accessible and truly take on TradFi. ethereum has not yet achieved low friction, but instead relies on many layer 2 scaling solutions.
This was made even clearer in the latest roadmap, emphasizing ethereum's interoperability and security against Cyber attacksinstead of scaling L1 for low transaction fees.
By popular demand, an updated roadmap diagram for 2023! pic.twitter.com/oxo58A2KuG
— vitalik.eth (@VitalikButerin) December 30, 2023
This approach raises two major problems:
- By getting rid of proof of work, the ethereum blockchain becomes dependent on large stakeholders and cloud computing services like Amazon Web Services (AWS). This reduces the perception of ethereum as a decentralized network that could be a true substitute for TradFi.
- In turn, ethereum was positioned among other PoS network alternatives, with similar centralization issues, but were built from the ground up for L1 scaling, without the additional complexity of L2 scaling for the end user to interact with.
In this cycle, this dynamic became more evident. Although eth is the second largest cryptocurrency by market capitalization, it fell behind bitcoin with a year-over-year return of +64%. ethereum fell far behind its direct competitors Avalanche (AVAX) with +118% YoY and Solana (SOL) with +321% YoY performance.
ethereum's lackluster performance came despite having an even lower inflation rate than bitcoin. This could indicate that the perception of ethereum is much more precarious than that of bitcoin, which has a more coherent and focused “sound money” proposition.
That proposal cannot be duplicated due to bitcoin's mining network effect. For example, if bitcoin code had to be modified to become a PoS chain, per Greenpeace's preference, it would simply be dead code without network users.
ethereum's network effect arises from maintaining dApp dominance among PoS chains. However, it is unclear whether that domain will not be moved to AVAX, SOL, or another PoS network. Furthermore, while it is clear that regulatory bodies view bitcoin as a commodity, ethereum is still in the fog of regulatory confusion.
Regulatory and market dynamics
To date, SEC Chairman Gary Gensler has not explicitly announced whether eth is a security or commodity. Based on the latest speculation, Bloomberg ETF analyst James Seyffart believes the SEC is leaning toward the commodity designation by already approving ethereum futures ETFs in August.
James Seyffart at the CryptoQuant webinar on January 4:
“Again, Gary Gensler won't explicitly say whether ethereum is a security or a commodity, but in their action, by approving those ethereum futures ETFs, they are implicitly accepting those ethereum futures as commodity futures.”
Other PoS chains like SOL, ADA, and AVAX are in the same boat of regulatory uncertainty. In last year's lawsuit against Coinbase, the SEC named them all “crypto asset securities.” If Seyffart is right and eth becomes a commodity per the CFTC's preference, this could give ethereum an advantage over its competitors.
Currently, spot traded ethereum ETFs are delayed until May 2024, from the Grayscale ethereum Futures ETF to the Hashdex Nasdaq ethereum ETF. Likewise, the SEC delayed Cathie Wood's ARK Invest, 21Shares, and VanEck's ethereum ETF.
Given the limited market liquidity, compared to the Fed's money supply spectacle in 2021, bitcoin is poised to be the biggest beneficiary of first-mover advantage than ethereum.
Conclusion
There's a reason the SEC hasn't approved a single spot-traded bitcoin ETF since Cameron and Tyler Winklevoss first filed in 2013. Not only was bitcoin less mature, but the banking sector didn't cede an advantage to its P2P. competence.
Since those days, bitcoin has surpassed its underground detractors, tulips, of money laundering. The digital asset is now protected by the world's most powerful computer network, creating an ecosystem of mining companies. This further bolstered investor confidence due to bitcoin's conservative coding practices.
On the other hand, ethereum is perceived as a more fragmented crypto project that has yet to establish itself as a DeFi vanguard to address TradFi. Weighed down by technical and regulatory uncertainty, the conservative bitcoin is a much more likely candidate to receive sustained retail and institutional attention from the first ETF vehicle.
