An Open Letter to Prospective Buyers of a Bitcoin ETF

First of all, congratulations that you are finally considering what has, to date, very probably been the single greatest investment of all time. Everybody has to start somewhere, nobody grasps it immediately, and exposure to the asset is arguably a psychological prerequisite to fully appreciating its merits beyond the financial.

That said, I would like to take some time making the case that you should reconsider the method by which you hold Bitcoin. Wrapping such an asset in an ETF is rather like marvelling at the internal combustion engine so much that you parade one around in your horse and carriage. There are worse things you could do – like not own one at all – but ultimately this betrays a misunderstanding of what this technology is, does, is for, and – perhaps most enticingly – what it portends …

Below I will outline four distinct, and by no means exhaustive, reasons for believing this:

 1 – ETFs are subscription IOUs:

Bitcoin is one of the only financial assets in history that you can own directly rather than in the form of a certificate from an issuer. Only gold is remotely comparable and Bitcoin is dramatically superior across multiple relevant criteria, all of which stem from it being digital. In fact, Bitcoin enables perhaps the most powerful mode of ownership ever devised; it would be akin to gold inside a safe that can’t be penetrated with all the energy in the universe, and with a password that you know but which could not be guessed over the entire lifetime of the universe.

Why does this matter? Well, for a start, you are paying fees. You are putting this digital marvel back in an analogue box and letting the boxkeeper charge you for the privilege. You might think this doesn’t matter because the fees are low, but how long is your intended holding period? If it’s less than ten or twenty years, I would humbly suggest you don’t really understand what’s going on here. If it’s more, suddenly those fees aren’t so low anymore. 

It matters for subtler reasons also in that you have no control over “your” asset. It has already been established that in-kind redemptions will not be allowed (so even "IOU" is pushing it!) meaning you will never truly own this Bitcoin. Additionally, we have already seen somewhat baffling decisions from Vanguard and Merrill Lynch to disallow access to the best performing financial asset in history, and seemingly only letting users sell GBTC but not buy, which seems deeply suspicious (and by the way, you should be using Fidelity Investments in the first place – they have understood Bitcoin for a long time and continue to best support its growth). While likely a temporary blip that will be backtracked on and even mocked in years to come, this further underlines that you do not own the asset, the custodian does. You merely have an IOU.

(and by the way, if you think that you can only have IOUs for whatever tax or regulatory reason, I’d strongly recommend you speak to Onramp as this probably isn’t actually the case, and they can help you figure it all out).

This could become highly relevant in a world in which the state attempts to “crack down” on Bitcoin. People who actually own Bitcoin will chuckle at all this, as exactly this kind of expected incompetence is what motivated their investment of capital in the asset and investment of time in the technical understanding to use it properly. But people who own irredeemable-IOUs-as-a-service will be wiped out. You might think this is overly dystopian, but then, if it is so completely unrealistic, why are you even seeking financial exposure to Bitcoin? What is the thesis in which one of these happens but not the other? This is a theme to which we will return …

2 – No Multisig for Credit

If you’ve already put the engine in a carriage, you are foregoing putting it an automobile. Which is to say, for example, if you pay fees to put Bitcoin in an analogue wrapper, you can’t then utilize its native programmability to continue to engage in credit markets. Collateralized lending against securities is hardly new, but Bitcoin enables it with far greater flexibility, at far greater scale, and to a far wider market than has ever before existed. This practice was championed by Unchained and is likely to explode to an entirely new scale when Debifi comes to market. As Debifi CEO Max Keidun has eloquently put it: Bitcoin Is Super Collateral (https://bitcoinmagazine.com/culture/bitcoin-is-superior-lending-collateral) In short: that Bitcoin trades 24/7, always has a fair price in a liquid market, and can be escrowed in a multisignature setup, makes it materially superior collateral for fiat credit than any other high value asset. But this relies on the borrowers having access to real Bitcoin. Bitcoin is super collateral; ETFs are not.

3 – No Yield from Lightning

There may be all kinds of comical ways of trying to power horses with engines, but if you don’t want an ugly mishap, you are best designing a car instead. Which is to say, for example, that there are all kinds of a fiat shenanigans a custodian could get up to with Bitcoin that you can’t  know for sure is even there. Has it been rehypothecated? Is it currently being shorted somewhere else in the market with no onchain footprint or audit trail?

Or, on the other hand, if you have decided to hold it yourself, could you generate a yield in a digitally- and programmatically-native manner by providing routing liquidity to the Lightning Network? As theorized by Nik Bhatia, CFA, CMT (https://timevalueofbtc.medium.com/the-lightning-network-reference-rate-98e41a9dadfa) and brought to fruition in part by Amboss Technologies (https://ambosstech.medium.com/the-liner-index-how-amboss-is-shaping-a-more-inclusive-future-for-finance-777e887e6781) the Lightning Network Reference Rate is a fundamentally new financial phenomenon: leasing of dormant capital for yield without giving up custody such that there is zero economic counterparty risk (n.b. that is, given competent management: there are still other varieties of risk and it is possible to achieve a negative return by underestimating technical risk, by ineffective coordination with operational counterparties, or just by doing all this poorly)

Even without the direct technical expertise and social and economic connections, you can utilize tools from the likes of Voltage, Lightning Labs, Blockstream, ACINQ, Block, Breez, Torq, and many more, to automate parts of this process while retaining control of your asset. Once again, these practices rely on cryptographic manipulation of real Bitcoin.

You can absolutely revert to point 1 and put Bitcoin in cold storage for free rather than in a relatively riskier hot wallet to try to monetize it. But if you buy an ETF you have neither of these options. You can’t put an ETF in a Lightning channel.

4 – The Investment Thesis is Self-Contradictory

Now your response to all of the above might well be something along the lines of: I don’t want any of this, I just want exposure to the price, thank you very much.

This instinct is understandable at first, but on under more thorough analysis, I believe it makes no sense. How little sense it makes will be forced on you over a longer and longer period of time, as you more and more realise what you want is real Bitcoin, which is exactly the timeframe over which a thesis for Bitcoin ought to play out in the first place.

Bitcoin is sound, censorship resistant, peer-to-peer, programmable money. Its value proposition is precisely that fiat money is none of these things: fiat has unbounded (and profoundly unfair) issuance, it can be censored at a whim, it is institution-to-institution, and while it has developed a digital overlay, its “digitization” is across a dimension that is completely irrelevant to the function of money given tokens of stored value are just about the only thing for which the ability to costlessly replicate is a bug rather than a feature. Bitcoin is a digital manifestation of unforgeable costliness (https://nakamotoinstitute.org/shelling-out/) and therefore is the only real digital money around. 

As if fiat money was bad enough on these counts, ETFs are worse still because there isn’t even a pretense that they are money. If your overall thesis on Bitcoin (which I assume is something along the lines of “number go up”) is correct, then one day you are going to want to use it to pay for something, never mind the more exotic options listed above. But nobody is going to accept your IOU because it isn’t real Bitcoin. It’s not sound, it’s not censorship resistant, it’s not peer-to-peer and it’s not programmable. It’s an IOU (and a bad one). It’s analogue credit.

But the entire thesis for Bitcoin is that an exclusively credit-based financial system has been an unmitigated disaster! We are moving (back) to a system rooted in equity; in tangible value; in real money rather than fiduciary media. Number Goes Up because this model is superior.

Now maybe you don’t believe in any of this and hence you don’t think the number will go up. That’s a perfectly reasonable thesis. But then why are you buying an ETF? :D

The ETF is a bet on a future in which ETFs are unnecessary. There is no world in which ETFs perform well and there is any point in owning one. The investment thesis is self-contradictory.

The mandatory plug here is that if you are interested in learning more about this – perhaps investing in some of the companies making all of the above possible ;) – I’d be delighted to talk to you and/or for you to check out Axiom at axiombtc.capital.

But the real punchline is that the very first step has to be to just buy some Bitcoin.

Some real Bitcoin, that is. Not an ETF. Not an IOU.

Sound, censorship-resistant, peer-to-peer, programmable money 👍