Wall Street Bitcoin: What it Means For Bitcoin and You

With the successful launch of ten Bitcoin ETFs, Wall Street has come into Bitcoin in a big way, and it will only get bigger. Is this good or bad for Bitcoin? Like many things in life, the answer is nuanced and uncertain.

That said, I’d argue that Wall Street coming into Bitcoin has two significant impacts.

The first is a net negative for the long-term financial freedom Bitcoin offers.

The second is quite positive in the shorter-term for the price of Bitcoin going up, along with reduced volatility in its price.

I call this:

When I say “Wall Street Bitcoin,” I mean everything on Wall Street directly affecting Bitcoin.

The current prominent example is the U.S. spot Bitcoin ETFs. Trading volumes have exploded in the first few weeks. And net inflows are promising and significant despite the conversion of GBTC from a closed trust to an ETF. This led to about $1 billion in selling pressure from the FTX bankruptcy estate and several billion more dollars from other GBTC holders, who finally were able to exit that investment at spot price rather than the discount that had plagued the investment for years.

But that is not all that I mean when I say Wall Street Bitcoin. I also mean the extensive over-financialization of Bitcoin, I bet, will come.

I worry that Wall Street Bitcoin is probably pretty bad for financial freedom, self-custody, self-sovereignty, and privacy. It is even potentially bad for security due to layers of counterparty risks and especially custodian concentration risk (since most of the Bitcoin ETF sponsors use the same single custodian, Coinbase, for their ETFs).

Bitcoin offers a breakthrough in financial freedom. That breakthrough is the ability to eliminate intermediaries in financial transactions. In the opening sentence of the Bitcoin white paper, Satoshi Nakamoto said of Bitcoin that it "Would allow online payments to be sent directly from one party to another without going through a financial institution." Yet here comes Wall Street Bitcoin, which presents itself as a substitute for holding native Bitcoin but reintroduces into the mix, at a minimum, custodians, managers, market makers, and brokers — a cornucopia of middlemen. Contrary to Satoshi’s principal aim for Bitcoin itself, you simply cannot send Bitcoin ETF units to another party without going through a financial institution.

Bitcoin ETF units are not even meant to be sent to another party. They’re meant to be bought and sold to and from one Wall Street firm through another Wall Street firm.

ETFs are simply more of the same pre-Bitcoin structures and middlemen wrapping themselves around assets, but this time, an asset that was specifically designed to work without their getting involved. ETFs deliver none of the financial freedom that native Bitcoin offers.

We can be fairly certain that the marketing efforts of the Wall Street titans operating these ETFs will not mention this fact. BlackRock, for example, whose ETF has seen the highest net inflows so far, promotes its ETF on the basis of ease, convenience, and quality. They justify “ease” based on using your existing broker, who is a middleman. “Convenience” is touted as eliminating logistical challenges, high fees, and tax complexities of “holding Bitcoin directly,” which are frankly dubious claims, in my opinion. “Quality” is said to be the integration between Coinbase and BlackRock that will "minimize tracking error and expenses,” but there is no mention of the quality of directly holding the world’s most pristine and pure asset ever, which is Bitcoin itself — where there are zero tracking errors and holding expenses.

This all adds up to Wall Street Bitcoin acting as a discouragement to holding Bitcoin directly and diminishing the principal reason Satoshi cites for creating Bitcoin in the first place. It positions Bitcoin only as an investment rather than as a bearer instrument or a form of cash that can be used to make payments between any two parties anywhere in the world.

Nevertheless, despite these drawbacks, on the whole, as the popular saying goes, this is good for Bitcoin. I’ll explain why a little later in this article.

Another unfortunate outcome I expect is that Wall Street Bitcoin will herald another cycle of speculation and wealth destruction into more “crypto” investments. The complexity of what Bitcoin does and how it does it has proved in the past to be an obstacle standing in the way of people being able to ascertain what constitutes its real value and what all of its imitations — those tens of thousands of “crypto” projects — lack. Not only do the ETFs lack those benefits of Bitcoin, but we can expect with the significant likelihood that eventually, we will see ETFs that include other “cryptos” in them. BlackRock has already filed for a spot ETH ETF.

Despite the fact that only Bitcoin ETFs have been approved so far, the market for altcoins has not fallen dramatically behind Bitcoin since then, as many of those who favor Bitcoin-only had hoped for.

"Wall Street Bitcoin" has already and will continue to further legitimize Bitcoin in the minds of many. But Wall Street is not really behind Bitcoin for principled reasons. They are in it to make money — dollars, that is. I am concerned that they will use the success of Wall Street Bitcoin to attempt to legitimize crypto, which merely scales up the problem we have seen in previous cycles where many people lost significant sums to what turned out to be worthless projects.

The "Initial Coin Offering" bubble of 2017 that saw tens of thousands of projects raise money and then crash to zero was in many ways an echo of Wall Street’s own dot-com bubble of the mid-90s, where the same thing happened around the hype and misinformation about what the Internet would bring.

On the other hand, Wall Street Bitcoin also has some big upsides. It’s likely going to be great for price increases overall and also for volatility dampening. For people who aren’t prepared to take the basic and relatively easy steps to buy native Bitcoin, ETFs do make it easier to buy, rebalance, and dollar-cost-average with recurring buys. Behind the scenes, these ETFs buy real Bitcoin, even if they don’t give it to the customers buying the ETF units. And this volume of activity bids up the price of Bitcoin and reduces the volatility because the asset class size becomes much bigger.

Until now, Bitcoin has been a black sheep in Wall Street’s investment world. For the most part, Wall Street couldn’t and wouldn’t touch Bitcoin. But all this has changed. With multi-trillion dollar asset managers like BlackRock and Fidelity launching Bitcoin ETFs, and market makers like Goldman Sachs, Jane Street, and JP Morgan acting as 'Authorized Participants' to these ETFs, Bitcoin is legitimized as an asset class of its very own, right in the heart of Wall Street. This legitimization includes not only those firms listed above but also happens in the minds of many money managers, family offices, and registered investment advisers (RIAs) worldwide!

As Swan’s CEO and founder, Cory Klippsten, and many others like him have also noted, (once outflows from GBTC subside) there should be a significant multiplier effect to boost the price. The value of Bitcoin will go up by more than just the inflows.

As I said earlier, I believe the GBTC outflows are destined to subside — although perhaps not right away. Why? I expect there are still GBTC holders holding out for Bitcoin to hit, for example, $50K and $60K to sell when those investors are “flat” again.

Psychologically, many investors don’t like selling at a loss. Some have a cost basis at or around those numbers. While technical analysis is generally astrology for men, big round numbers can often act as a ceiling. I think some investors will accept that, especially because of the reduced price volatility already happening in Bitcoin. The liquidation of GBTC units is the primary offset right now against the buying action spurred on by the ETFs. Demand will substantially outstrip supply when it does subside, leading to significant price appreciation. This is because the ETFs are creating a lot of incremental demand for Bitcoin.

Let’s step back and take a quick look at U.S. spot Bitcoin ETFs. Since the eleven ETFs were launched on January 11, the total trading volume (as of February 6, 2024) has been $31.2 billion.

In addition, total net inflows since the Bitcoin ETFs launched exceed $1.6 billion, despite $6.1 billion in GBTC total net outflows.

These are some good numbers.

Finally, there are also unknowns, especially as we look further into the future. Wall Street Bitcoin means financialization. That means a lot of derivatives, leverage, hedging, speculating, cash-settled Bitcoin financial products, and pressure on public Bitcoin companies to focus on quarterly results, etc.

What might we expect to see?

Wall Street is going to come out with too many paper Bitcoin products. These will include Bitcoin derivatives. Just like they came out with too many derivatives before the 2008 financial crisis. Rapha Zagury, Swan’s CIO & Mining Head, said as much recently.

Personally, I expect mostly bad products to come out of Wall Street, as per usual. The 2008 financial crisis was in no small part due to concentration risk at AIG as the insurer of last resort on credit products such as credit default swaps and collateralized debt obligations.

Examples of things that I will not be surprised to see Bitcoin options, Bitcoin-backed loans, interest-bearing Bitcoin deposits, structured notes, and anything complex, leveraged, and risky that distracts from Bitcoin’s main true properties as pristine, stable, predictable, and self-directed money.

This is not to say that every single thing Wall Street comes up with will be negative. There are always some valuable instruments that make it to the market. Examples of what I think would be beneficial are things like five-year principal protection and Bitcoin-linked notes with Bitcoin’s appreciation replacing the coupons. Instruments like this help people invest in the long-term potential of Bitcoin, trading off some upside for protection from losses that they haven’t yet convinced themselves are unlikely. Few investors know how to price these, so this is more theory than practice.

Wall Street Bitcoin is here, and it is here to stay. While only a few of the eleven Bitcoin ETFs will have staying power, and the majority are eventually going to throw in the towel or get acquired, the size and acceptance of the winners will be substantial.

The details of the impact of Wall Street’s embrace of Bitcoin remain to be seen, but the broad strokes are quite predictable: Wall Street Bitcoin will become widespread. This is a mixed blessing. It will deter and distract many people from ever holding Bitcoin themselves, which is unfortunate for them. On the other hand, it will likely be a gateway into Bitcoin for many others, especially if it contributes to price appreciation and stability as expected.

Wall Street will be unable to resist “innovating” new financial products around Bitcoin.

This will also lead to many people holding things with the word “Bitcoin” that will not perform like Bitcoin. "Mess around and find out" will be the lesson many learn the hard way.

However, when the dust eventually settles, I expect Bitcoin to adapt very well to life with its new frenemy, Wall Street. Bitcoin is resilient and thrives on well-monied stakeholders who are looking out for themselves — and Wall Street is probably where the highest concentration of such people and entities exist. On the other hand, whether Wall Street can adapt to Bitcoin is an even more interesting question. We will have to wait and see what the answer to that is.

My money is on Bitcoin.

I conceived of Swan’s tax loss harvesting program and IRA product. I helped Jeremy Showalter, Swan’s Chief Product Officer, his team, and many others build these products.

Please email me at terrence@swan.com to let me know your top challenges, frustrations, and unmet needs in Bitcoin. I’m working on some great projects I hope to bring to market soon for you, and I would love to chat.

I’m looking for folks to test pilot some new product and service ideas that Swan Private MD John Haar & I are cooking up in inheritance planning. Let me know if you’d like to learn more. You will get free access to top experts in the space we are evaluating as potential partners and get many questions answered to upgrade your estate planning.