BlackRock has entered the chat

BlackRock is the largest asset manager in the world ($10T AUM). It has been obvious to those of us watching the Bitcoin space for some time that they are aware of Bitcoin and are looking for ways to capitalize on the asset. It was previously known that they had a small position in one of their funds, and have also invested in some bitcoin mining companies.

On June 15, 2023, BlackRock filed with the SEC for the creation of a Spot Bitcoin ETF. Numerous companies have previously filed to create a spot bitcoin ETF over the years, and have been denied. Indeed, Grayscale is currently suing the SEC for denying their application to convert their Bitcoin Trust ($GBTC) into an ETF. I personally believe the lawsuit has merit and that Grayscale will win, although I do not know how long it will be before that occurs, and subsequently how long it will be before the SEC allows Grayscale's application to proceed.

So, why is this news, and what is different about BlackRock's application? Well, for one, BlackRock has a mighty track record of getting their applications approved. BlackRock currently has 531 funds in the United States alone, and 1084 globally. They are the gorilla in the space. It is likely they have used their weight and resources to find a path that will make "this time different." Right on their heels, WisdomTree ($87B AUM), Invesco, and Valkyre have filed applications. There is rumor that Fidelity ($4.5T AUM) will as well. Fidelity has already created a Bitcoin fund in the Canadian market since the SEC wouldn't allow one in the U.S.

Furthermore, the big TradFi players have created their own exchange to trade digital assets called EDX. This week it was announced that Charles Schwab, Citadel Securities, Fidelity Digital Assets, Paradigm, Sequoia Capital, and Virtu Financial has launched and completed a new funding round for EDX. The platform offers the trading of four cryptocurrencies: Bitcoin ($BTC), Ethereum ($ETH), Litecoin ($LTC) and BitcoinCash ($BCH). The SEC had previously stated that Ethereum WAS NOT a security, although the current chair, Gary Gensler, has been trying to say that it IS a security. (And even he had previously stated that it was not, back in 2018 when he was teaching a class at MIT). The other 3 assets certainly are not, but Ethereum is a bit of a question-mark. My supposition is that if the big TradFi players are going to start trading it as if it is not a security, that they are going to make sure that Gensler isn't able to reverse the prior SEC position.

What does all of this mean for Bitcoin? It means newfound encouragement, enthusiasm, and ultimately, investment. Because of the scarce supply, this means that bitcoin price will go up. Asset managers have been wanting to tap into the US market for years. So far, the best vehicles have been Grayscale's Bitcoin Trust ($GBTC) and Osprey's Bitcoin Trust ($OBTC). I wrote about these back in Oct 2021. Unfortunately, these trusts are closed-end funds which operate as one-way streets, where bitcoin goes in, and none comes out. Until those asset managers allow redemptions, these two will likely trade at a discount to their NAV (Net Asset Value). The discount has been in the 30-40% range for a long while, although this week's enthusiasm may change that.

BlackRock et al entering the Spot Bitcoin ETF market is going to be good for the price, and hopefully also for paving the way for other custodians to enter the space, but this is not all roses. BlackRock introduces the risk of rehypothecating the bitcoin, and making "paper bitcoin." This becomes a claim on bitcoin, rather than holding your own bitcoin, and this paper bitcoin (and other crypto) is large part of the downfall of the 2022. Celsius, Voyager, Genesis, BlockFi, and FTX all told their users that they owned Bitcoin on those platforms, but in reality the Bitcoin had been lent out, and when the customers tried to withdraw, these entities could not give it back, because they didn't have it. BlackRock did not disable this rehypothecation ability in their filing, so one can assume that they lend it out.

I would argue that this will be a useful differentiation vector for other ETFs to say they are better than BlackRock. Certainly the first US Spot Bitcoin ETF to market is going to have a huge advantage, even if only by a few days.

It is also known that Larry Fink, CEO of BlackRock, is a major influencer in the ESG movement. He may push for a 'green bitcoin' or otherwise try to say certain bitcoin is better than others, or tainted based on prior use of the coins. The Bitcoin energy farce has been around for a long time, and will likely take a long time to die, but I could see BlackRock adding fuel to this fire. Claiming certain coins are 'good' or 'bad' is antithetical to the permissionless ecosystem of Bitcoin.

Furthermore, BlackRock specifically is stating that they get to chose which chain is the Bitcoin blockchain. If another fork occurs, They are reserving their right to chose which one is good for us (or good for them), even if it is not the most valuable fork!

So, BlackRock and the TradFi entities entering the market is good for the short term price (the next year or two), but ultimately you need to hold onto your own Bitcoin. Don't rely on someone else to do it for you. This self-custody is the beauty and genius of Bitcoin. We no longer have to trust someone else to be the custodian of our assets. Eliminate CounterParty Risk and take custody of your assets today!