The first Bitcoin ETF starts trading today and that’s a big deal. Everyone from multi-billion dollar investment firms to Wall Street hedge funds to individual investors can now easily and relatively cheaply buy Bitcoin. From the position of a news organization (and individual) who is optimistic about crypto’s future it feels almost wrong to write anything but a celebratory post.
There’s something about celebrating that a single Bitcoin futures ETF was approved eight years after the first application was submitted that doesn’t sit right. The contrarian take is that this much-anticipated offering tracks futures contracts and is not the real thing, and sure, that is less than ideal.
But I have a separate contrarian take for you: The long wait for this one imperfect trading product shows exactly why DeFi will disrupt and upend traditional finance. The financial system — payments, investing, lending, trading — is being redesigned. Traditional financial institutions are only now starting to wrap their heads around how, but they’re nowhere near ready to embrace this change. They’re too slow, running on outdated infrastructure, weighed down by rules and processes.
So yeah, a Bitcoin futures ETF is a milestone. It’s nice. But it’s also just so meh when you look at DeFi’s progress. In the last year, a picture of a new financial system is emerging, and a Bitcoin futures ETF just isn’t the game-changer everyone in the mainstream believes it may be.
U.S. regulators have taken almost a decade since the Winklevoss twins filed their application to list their $COIN ETF to finally approve the ProShares product. But in just the last 24 months, hundreds of different tokenized index funds have been created using open source tools like Uniswap, Balancer and Set Protocol.
These products were created by users who didn’t have to ask for anyone’s permission to provide index-based exposure to traders and investors. Anyone can invest in these funds.
These DeFi index funds do the same thing ETFs do. The exchange-traded fund was born out of the drive to provide investors with a way to earn returns without having to pay pricey fees to Wall Street money managers. So they’re super cheap, and ETFs trade like stocks so they tend to be highly liquid. Most importantly, most are based on indexes like the S&P 500 or the Nasdaq 100 and bellwethers for international stocks and commodities like gold and oil. By spreading bets in indexes, investors have a surefire way to manage risk.
The same applies in DeFi. No surprise in a permissionless ecosystem, there’s a lot of diversity in the offerings. You have more methodically created products by teams dedicated to providing indexed funds, like Index Coop, Cryptex Finance, Indexed Finance and Pie DAO. These projects have launched about 30 funds, with almost $1B in market cap, including the DeFi Pulse Index, TCAP Total Crypto Market Cap Token and the Metaverse Index, according to research by Arch, which is also building a suite of tokenized indexed funds.
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Then there are open-source protocols that allow anyone to invest in the funds created on those platforms, and also create their own investable baskets of tokens. Platforms like Balancer, Enzyme, and Set Protocol have enabled the creation of more than 500 funds, with indexes like Layer 2 Index, FAANG Index and the ApeSzn Portfolio.
Some of those indexes have decent liquidity. Some have very low liquidity. Some will carry shitcoins. And some, like Indexed Finance the other day, will get hacked.
And that’s the type of skullduggery SEC Chair Gary Gensler says regulators want to protect us from. But as I believe is always the case, the goal of “protecting investors” from crypto will likely have the opposite effect.
Feeding Wall Street
This BTC futures ETF “will definitely cost investors’ performance,” Real Vision’s Raoul Pal said in an interview. In other words, it will be worse than holding the real thing. Inflows from the ETF will cause the Bitcoin futures price to trade at a premium to the spot price. Sophisticated investors will be able to take advantage of that difference by buying the spot and selling the futures at a profit, but the large majority of investors holding the ETF will be losing out.
In addition to that underperformance, the ETF is feeding Wall Street the same fees that crypto was built to get rid of: The ETF provider takes its fee, law firms dealing with regulators took their fees, and so did the auditors and administrators. Meanwhile, hedge funds arbitraging between the futures and the spot get to pocket those gains, Pal said.
“To do this and say, this is a good way of keeping the individual retail investor safe, is simply just not true,” he said.
Speaking of protecting investors, DeFi index funds are instrumental in reducing risk. They allow investors to hold a group of diverse tokens and get exposure to a broad array of assets, representing a sector or a theme. That’s far less risky than actively trading between positions and picking winners and losers.
It turns out, DeFi is figuring out this missing piece of the investment landscape all on its own. It’s been able to fill this market need thanks to enterprising founders and developers, without the need for regulators who may take another decade before giving a crypto index fund the green light to trade on a regulated exchange.
Future of Finance
So the new Bitcoin ETF is great. But we’re lucky to be in the vanguard of finance, where we don’t really need it. We can invest in Bitcoin directly. On top of that, we have access to hundreds of indexed funds that let investors express much more sophisticated views on the market than going long or short bitcoin based on a speculative price in the future.
And sure the whole point of the ETF is it gives access to investors who can’t (because of regulations, mandates, etc.) or won’t (because it’s hard, different, scary) access all these tokens.
But let’s not lose sight of what truly happened this week — regulators have finally stood aside for a product that is rudimentary compared to the breakthroughs emerging steadily in DeFi. The focus should be on getting more people using the future of finance. The rest is just window dressing in a falling house.