Bitcoin ETFs: Are They Actually Good for Decentralization, Long Term?

[Cheffe]

Okay, Bitcoin ETFs were huge, no doubt. They brought in a ton of institutional money, and the price definitely reacted. But here’s something I’ve been thinking about: are they actually good for Bitcoin’s decentralization in the long run?

When big players like BlackRock hold massive amounts of BTC for their ETFs, doesn't that concentrate power? It feels like we're just trading one form of centralization (fiat banks) for another (institutional custody of BTC). Or am I overthinking this, and the wider adoption benefits totally outweigh this concern? What's your take? Does mainstream access come at a cost to the core Bitcoin ethos?
https://example.com/etf-custody-debate

[DubemIfedigbo001]

What's your take? Does mainstream access come at a cost to the core Bitcoin ethos?

Yes, Bitcoin is experiencing price surge from adoption from big players and indirectly trading it's decentralized ethics. If the trend continues, it means that centralization is finally winning over decentralization which Bitcoin was designed for.

Bitcoin ETFs are far from decentralized, it's more like buying shares from their Bitcoin portfolio, so you don't have direct control over your Bitcoin.

As long as investors are not in charge of their coins directly by being in possession of their seed phrases or private keys. They're not in control and it's not decentralized.

ETF are centralized and don't contribute to Bitcoin decentralized network. They only contribute to the prize surge and isn't a good idea for decentralized when acquiring bitcoin for yourself

[348Judah]

Okay, Bitcoin ETFs were huge, no doubt. They brought in a ton of institutional money, and the price definitely reacted. But here’s something I’ve been thinking about: are they actually good for Bitcoin’s decentralization in the long run?

The incidence of bitcoin ETF has helped many institutions to have better priorities for their stock market indices to use bitcoin market price for it profitability or losses, some this alone make as many as possible accept to adopt bitcoin ETF and apply to SEC for the approval, now after all these, we can say bitcoin is helpful in many ways to these organizations and institutions.

Secondly, these same centralized bodies have also been investors of the same bitcoin itself, whereas this is something different form their shares they pegged to bitcoin market price, which is another advantage to them as they make more money investing in bitcoin.

Lastly, on the note of the general public, we have seen bitcoin being a decentralized digital currency and that was the aim of the creation right from the start, for the people to have alternative to fiat system, ETF investment is not bitcoin investment, instead, they are shares and assets that are being pegged on bitcoin market price volatility, which people are still much more interested in bitcoin than ETF, while none is affecting another if we truly understand how the pattern works.

[Ambatman]

When I saw your post title I was coming to support your claim until I realized we saying different things.

When big players like BlackRock hold massive amounts of BTC for their ETFs, doesn't that concentrate power?

No it doesn't. Though they own the keys and all but legally they are managers
The coins are own by Investors. They are third party helping with safekeeping.

This is the decentralization issue I was expecting. That many are preferring third party rather than self custody.

the wider adoption benefits totally outweigh this concern?

What I have to say on this is that only time will tell.

[Bitcoin_Arena]

I agree with your sentiment OP, Bitcoin ETFs are of no good in the long run. One of the purposes of Bitcoin decentralization is so that we move away from the old bank-fiat system and do not have to rely on a third party for even things like investment. But look what those institutions are doing today in the name of Bitcoin “adoption”.

The coins are own by Investors. They are third party helping with safekeeping.

How different is this from the way banks operate? Or have you forgotten the phrase “Not your keys, not your coins”
If BlackRock for example disappeared tomorrow, will the investors still own the coins?

[BitGoba]

Okay, Bitcoin ETFs were huge, no doubt. They brought in a ton of institutional money, and the price definitely reacted. But here’s something I’ve been thinking about: are they actually good for Bitcoin’s decentralization in the long run?

When big players like BlackRock hold massive amounts of BTC for their ETFs, doesn't that concentrate power? It feels like we're just trading one form of centralization (fiat banks) for another (institutional custody of BTC). Or am I overthinking this, and the wider adoption benefits totally outweigh this concern? What's your take? Does mainstream access come at a cost to the core Bitcoin ethos?
https://example.com/etf-custody-debate

That doesn’t mean centralization. It doesn’t matter who owns how much Bitcoin.Bitcoin isn’t proof-of-stake where those with the most coins make the decisions. Bitcoin is a peer-to-peer monetary network. As long as you can run your own node, and running a node remains cheap and accessible to everyone, and as long as you can choose which software to use, you don’t need to worry about centralization.

[collecttmaster]

There is nothing wrong with this. People confuse distribution of wealth with the protocol. The wealth can be very centralized and the protocol will remain decentralized. It can never have an impact on the protocol, but people don't understand this because they are still stuck in the old ways of thinking. In traditional systems if you have a lot of wealth centralized, then you can manipulate things for yourself with your power. This is not the case with Bitcoin! Besides, ETFs are holding coins for countless thousands of institutions and people so really it is not even centralized ownership but instead just a big custodian. S

[DubemIfedigbo001]

That doesn’t mean centralization. It doesn’t matter who owns how much Bitcoin. 

Convince me that the coins purchased by BlackRock for their bitcoin ETFs are not centralized to them and the people who invest with them are not subject to any actions and decisions they take? Moreover, their profitability potential is lower since BlackRock would share their profits with them and if anything happens to BlackRock and they stop functioning tomorrow, would the investors have any claim to their coins?

 

Bitcoin isn’t proof-of-stake where those with the most coins make the decisions. Bitcoin is a peer-to-peer monetary network. As long as you can run your own node, and running a node remains cheap and accessible to everyone, and as long as you can choose which software to use, you don’t need to worry about centralization.

Are you still on topic? how can they run their own nodes when they are not directly in possession of the coins, but are offered shares that reflect the spot price of bitcoin at the time of purchase? You can only run a node for more privacy when you've the UTXO to spend. The coins are held by the ETF's companies and are managed and traded on behalf of the investor. Investors choose this channel when they want exposure to bitcoin, but do not want to manage it by themselves.

[Zaguru12]

Yes, Bitcoin is experiencing price surge from adoption from big players and indirectly trading it's decentralized ethics. If the trend continues, it means that centralization is finally winning over decentralization which Bitcoin was designed for.

ETF are centralized and don't contribute to Bitcoin decentralized network. They only contribute to the prize surge and isn't a good idea for decentralized when acquiring bitcoin for yourself

I wouldn’t argue that bitcoin had more adoption with the arrival of top institutions coming but did it actually make the price to excessively surge up, I would say this is up for debate because bitcoin had move more up than in price during the periods of where there was no top institutions investing into it than now, the comparison in volatility from how the market pumped from the first 12 years are there. For now it’s all about the adoption it’s bring in, although many will say it is because of the market cap been huge now that’s why it doesn’t surge up like before.

As for decentralization I seriously see this ETF of a thing just like the centralized exchanges they are there for people who do not value decentralization but does that affects bitcoin as a whole I will say No because bitcoin is pseudonymous and can be used by any in anyway they deem fit. The only time I will worry about decentralization is when there is censorship in node running or miners censoring transactions.

[collecttmaster]

That doesn’t mean centralization. It doesn’t matter who owns how much Bitcoin. 

Convince me that the coins purchased by BlackRock for their bitcoin ETFs are not centralized to them and the people who invest with them are not subject to any actions and decisions they take? Moreover, their profitability potential is lower since BlackRock would share their profits with them and if anything happens to BlackRock and they stop functioning tomorrow, would the investors have any claim to their coins?

The law does not allow them to do anything wrong. Nobody needs to convince you, you need to get some education. BlackRock is not some obscene exchange run by third world jeets and located in a very bad country. 

[adaseb]

There are many pros and cons. One of the pros is that many people who are computer illiterate can finally own some crypto. Even many people who held bitcoin on exchanges and cold storage moved and now hold it on the etf because it’s safer and you can get tax benefits if you have a retirement account.

The cons are that eventually most of the coins will be held by wealthy individuals and this is not the purpose of Bitcoin or crypto. Back in the day you could mine it with a laptop and later with a mid type of graphic card and later you had to buy an ASIC, these days those options are long gone.

[d5000]

ETFs are sort of a "middle ground" between the ideal case -- self-custody of all Bitcoins -- and the storage of Bitcoins at exchanges, where the legal owners are the exchanges and the coins are IOUs. ETFs are like custodians, as others wrote.

So if ETF hodling replaces hodling on exchanges, this would be definitely an improvement regarding decentralization. However, if ETF hodling becomes an alternative to self-custody, it's a deterioration. Even if there may be also advantages, above all regarding blockchain congestion, I'm not 100% comfortable with the vision that ETF companies should become the main way of storing Bitcoins.

First, there's the technical risk: what happens if major ETF holdings become hacked? Of course the ETF company would have to recover and/or acquire them. The problem is only: ETFs already hold more Bitcoins than the daily BTC/USD exchange volume even at peak trading times. If this becomes even more widespread, e.g. ETFs holding 5 million BTC or so, then it could become difficult to acquire the hacked coins if really a major custodian is hacked and a large part of its coins is stolen.

Second, there is some influence to the power structure in the case there is a hard fork, or even a controversial soft fork, because a "hard fork threat" is one of the options there to defend Bitcoin's core values. But in the case of a hard fork the ETF companies could employ their influence (their business relation to customers, for example) to frame the discussion "which fork is the real Bitcoin".

The example I always mention in such discussions is a privacy improvement. What if the US government pressures all local companies holding Bitcoin, including ETF custodians, to declare the chain with worse privacy "the real Bitcoin"? In such a situation, the part of the Bitcoin community defending privacy values has much more work to do to defend the name "Bitcoin" for the pro-privacy chain.

I believe in the current situation the pro-privacy camp is still powerful enough to repel such an attack, but if ETF holding becomes much more widespread this may change. Even in this forum, I think I see more anti-privacy threads and posts than some years ago.

Situation would be better if the ETF companies weren't that concentrated in the US ...


PS: I think this should be in the Economics section, not here. It's not a protocol issue, even if the protocol determines the power structure of course.

[Rustam Meraj]

Bitcoin ETFs brought much of money into crypto market and boosted its price but they also raise serious question about Bitcoin core idea of decentralisation. When huge companies like BlackRock hold massive amounts of Bitcoin for their ETFs it creates central point of control which some worry is just trading one type of centralized financial system. Some from us think that this mainstream access is necessary bringing in more money and making Bitcoin more widely accepted. But main thing is that ETFs can not get all Bitcoins they can have big amount but not all. So they only can manipulate the prices not damage the core Idea.

[Darker45]

Financial institutions offering spot Bitcoin ETFs are doing the exact opposite of Bitcoin's ethos, so they're not good for decentralization, which is what Bitcoin is all about.

However, to each his own. Not everybody loves decentralization. Not everybody loves independence, freedom, control, custody, and the like. Others prefer third-parties to do the buying, safekeeping, and control for them. It's their choice. There are people who don't want to take responsibilities, who'd rather risk letting somebody else manage their funds than do it themselves.

All this doesn't affect Bitcoin's integrity, anyway.

[JuxtaposeLife]

an ETF is an IOU... in that regard, it's more like fiat than true ownership. Sure, it comes with a 'promise' it won't be rehypothecated (printed), but the point remains, you're not in posession. Just like the value in fiat isn't really yours if it can be debased/inflated without your concent.

In this regard, ironically... ETFs are sort of the institutions trojan horse into BTC... as BTC is a trojan horse into the traditional finance industry. The less people that use ETFs the better... but people are going to do "the easy" path, and find out the hard way. What's actually ownership and what isn't. At least it's adoption, but I don't think it's "healthy" long term. It could actually do a lot of damage, if a huge pile of BTC was lost or stolen... and govt stepped in to reconcile the way they often do (taxing everyone to make sure those with a lot don't lose it).

[BALIK]

Before bitcoin ETFs were approved, OGs or bitcoin maximalists warned that ETFs would be bad for bitcoin's decentralization in the short or long term. But the thing is, like it or not, we can't stop it. This is inevitable if governments and organizations want it to happen.

Also, not as many people care about decentralization as we think, including ourselves. If we are honest and admit, what we care about most is the profits that bitcoin brings, not privacy. That's why most people were so excited when the bitcoin ETF launched.

[kotajikikox]

Or am I overthinking this, and the wider adoption benefits totally outweigh this concern? What's your take? Does mainstream access come at a cost to the core Bitcoin ethos?
https://example.com/etf-custody-debate

ETF definitely helped in making bitcoin more accessible and understandable to the general public. It might be better for those who are not so tech savvy and would need other's assistance but this was not how bitcoin was supposed to be. There is some hope in me that over time, people will just switch to non ETF bitcoins.

[davis196]

Okay, Bitcoin ETFs were huge, no doubt. They brought in a ton of institutional money, and the price definitely reacted. But here’s something I’ve been thinking about: are they actually good for Bitcoin’s decentralization in the long run?

When big players like BlackRock hold massive amounts of BTC for their ETFs, doesn't that concentrate power? It feels like we're just trading one form of centralization (fiat banks) for another (institutional custody of BTC). Or am I overthinking this, and the wider adoption benefits totally outweigh this concern? What's your take? Does mainstream access come at a cost to the core Bitcoin ethos?
https://example.com/etf-custody-debate

If you don't want to keep your fiat money in a bank, just keep your fiat money under your bed(or in your closet).
If you don't want to buy Bitcoin ETFs or deposit BTC in centralized crypto exchanges, just don't do it. Keep your BTC in your cold wallet.
It's all personal preference. Does institutional adoption helped in pumping the Bitcoin price to 100+ thousand dollars? Yes. Is that what we all wanted? Yes. You can't eat the cake and have it at the same time. BlackRock has power on the financial markets. So what? Can we stop BlackRock from buying more Bitcoins? No, we can't.

[Emjay24]

As for decentralization I seriously see this ETF of a thing just like the centralized exchanges they are there for people who do not value decentralization but does that affects bitcoin as a whole I will say No because bitcoin is pseudonymous and can be used by any in anyway they deem fit. The only time I will worry about decentralization is when there is censorship in node running or miners censoring transactions.

After doing some research on ETFs now, I can comfortably say that they are just as centralized as CEXs  since the coins aren't held by the individuals themselves, and they only buy shares from the ETF companies themselves and rely on the companies for safe keeping on their bitcoin. These people do not take decentralization seriously and left their coins in the hands of a third party.

I see now the reason government approved 11 ETFs last year since they are still propagating the gospel of centralization which is the government's love so much.

[JeffBrad12]

ETF exposes to centralization since the bitcoin is in custody, however regulation requires institutional to invest in bitcoin through custody or use qualified custodian and it's a requirement.It's the cost of attracting the big money to flow in to the bitcoin's market. It's just affect the decentralization of holders but speaking about the bitcoin's blockchain itself it affects virtually nothing