Are ‘Bitcoin Paper ETFs’ Suppressing BTC Prices? Expert analysis

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This article is also available in Spanish.

In the fresh YouTube video titled “There Is No Paper Bitcoin ETF,” Fred Krueger, an investor at crypto hedge fund 2718.fund, delved into growing concerns about U.S. spot Bitcoin Exchange-Traded Funds (ETFs) and their impact on the price of the cryptocurrency. Krueger’s goal was to dispel the fear, uncertainty and doubt (FUD) that has been swirling around “paper Bitcoin” – the notion that ETFs can sell Bitcoin that they don’t actually own – and explain why the price of Bitcoin hasn’t risen as dramatically as some might. expected, despite significant purchases in ETFs.

Krueger began his analysis by acknowledging widespread skepticism in the market. “There’s all this paper Bitcoin and ETFs don’t actually have Bitcoin, and if they were buying all this Bitcoin, why isn’t the price of Bitcoin higher?” he said, summing up the main concerns of many investors.

Historically, the concept of “paper Bitcoin” was associated with exchanges that sold Bitcoin to customers without actually owning the underlying asset. Krueger pointed to several high-profile cases where this practice led to significant losses for investors. He cited the case of Mt.Gox.

Another example he gave was QuadrigaCX, a Canadian exchange that collapsed under mysterious circumstances. Founder Gerald Cotten allegedly died in India, taking with him the private keys to the exchange’s frosty wallets, effectively locking up customer funds. “Many Canadians lost all their Bitcoin on this Quad exchange,” Krueger noted.

Is “Bitcoin Paper ETF” Real?

These historical events have contributed to current concerns about ETFs and the possibility that they may engage in similar practices – selling Bitcoin they do not actually own, thereby depressing the price of BTC through artificial supply. However, Krueger argued that ETFs, especially those managed by established financial institutions, operate in a fundamentally different framework compared to unregulated exchanges.

Focusing on two leading ETFs – IBIT, BlackRock ETF and FBTC, Fidelity ETF – Krueger emphasized the exacting regulatory oversight that governs these entities. “Both ETFs are subject to very strict regulatory supervision, including by the SEC, but also by other agencies in the US,” he said. This comprehensive supervision includes requirements for complete transparency, regular audits and the employ of third-party custodians to verify assets. “They literally have to get confirmation of ownership of the assets from a third-party custodian,” Krueger added.

In the case of IBIT, Coinbase acts as a third-party custodian. “Coinbase itself is an audited public company,” Krueger noted, noting that Coinbase’s public nature provides an additional level of scrutiny and accountability. IBIT audits Coinbase, and both entities are subject to audits by the SEC and other regulators. In the case of FBTC, custody is handled by Fidelity Digital Assets, a separate entity within Fidelity that specializes in the custody of digital assets, thus providing specialized supervision and management.

“The issuers of IBIT and FBTC are BlackRock and Fidelity, two of the largest and oldest financial institutions that have a vested interest in maintaining their reputations,” Krueger said. “Their reputation is at risk, and that’s a big deal,” he stressed, suggesting that these institutions would not risk their credibility by engaging in the sale of non-existent Bitcoin.

Krueger compared BlackRock to entities such as QuadrigaCX to highlight disparities in regulatory compliance and operational scale. “BlackRock is highly regulated […] BlackRock has a solid corporate governance structure, including audit, risk and compliance committees, and very strong internal controls,” Krueger added.

Addressing the main concerns about ETFs holding “paper Bitcoin,” Krueger provided specific data to refute this claim. “The reality is that ETFs do not have pure paper Bitcoin,” he stated unequivocally. He highlighted that IBIT holds approximately 403,000 actual Bitcoins, while FBTC holds approximately 185,000 actual 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 admitted that some skeptics have tried to analyze Bitcoin’s movement between specific dates to question the stock. However, he emphasized that the facts were clear and verifiable. “We know how much Bitcoin these ETFs have; we know it has been clarified and it is a reality,” he insisted.

Returning to the question of why Bitcoin’s price hasn’t risen more dramatically despite significant ETF inflows, Krueger provided a detailed explanation. He noted that Bitcoin has actually increased by 60% since the introduction of ETFs, which translates to a $600 billion boost in market capitalization. This growth was fueled by a net inflow of approximately $20 billion into ETFs, resulting in a price multiplier effect of approximately 30 times. “Historically speaking, it’s rather normal, maybe a little underestimated, but not that much,” he said.

Krueger attributed the moderate boost in Bitcoin prices to significant selling pressure from various sources. “There were a lot of sell-offs,” he explained. He detailed that Germany sold $3 billion worth of Bitcoin and shares in Mt.Gox. Additionally, at the beginning of the year, FTX sold its shares in GBTC (Grayscale Bitcoin Trust) and Digital Currency Group (DCG) sold assets to settle lawsuits. “We had a lot of sales,” Krueger concluded.

Speculating on the potential impact if not for this selling pressure, Krueger suggested that Bitcoin’s price could have been much higher. “If there were no sales, we would probably have reached PLN 90,000. dollars,” he said.

At the time of publication, the price of BTC was $68,752.

Bitcoin price, 1-day chart | Source: BTCUSDT on TradingView.com

Featured image created with DALL.E, chart from TradingView.com

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