There is a fair amount of hype and expectations surrounding the upcoming Bitcoin ETF applications. Some estimates are that it will bring as much as $300m in new money (only around $60m in new Bitcoins are mined every month at the current price!) into the ecosystem, forcing the price up. Many “pundits” are already claiming this is not priced into the currency price — they are actually wrong! The probability of it happening is actually priced in, which I will attempt to explain simplistically for brevity.

My view (which reflects a 10–15% chance of success of the ETF being approved) is that the current price factors in about $100-150 worth of net present expectation that the ETF will succeed. If March 11th comes and the ETF is declined, I doubt we will see any more than a $150 decline in the price. If that happens, this will be a strong buying opportunity, for sure.

However, if it is approved, it could trigger a massive bull run similar to previous runs, especially since it would probably mean that the second ETF decision due on March 31 would also likely be approved.

The reason the Bitcoin price is not at $2,000+ right now, is that the likelihood of it actually being approved is quite low (15% chance of a $1,000 price increase would equate to a $150 net present price premium).

If it’s approved, you can expect the price to hit $2,000 within days/weeks, with a reasonably low likelihood of a major crash below $1,300. This will also trigger a whole new bout of volatility.

This implies the current price of Bitcoin does reflect the market risk. If the ETF is approved. It’s a +1000/-150 outcome assuming the risk is around 15%.

I’m not overly concerned with a Bitcoin price of $2,150 as a result of external factors like an ETF approval, which positively impact the supply/demand curve — but if it goes well past this, into the $3,000+ territory due to mania/short squeezes/media hype/FOMO and other triggers, then alarm bells will go off for me and we start approaching bubble territory where the Smart Money starts to leave.

There are many personality archetypes in Bitcoin world, but here a few examples:

Mooners (Bitcoin is going to the moon! Shout it from the rooftops!) Pump and Dumpers (BUY BUY BUY/SELL SELL SELL) Hodlers (aka Hoarders/BuyHoldForget) Speculators/Day Traders (buys and sells frequently — trader types) Smart money (takes a long term holder view, however, will buy and sell if facts change)

All the archetypes above would love to see the price just keep going up and up with total disregard for how it impacts the Bitcoin economy, network or even the public perception and adoption of Bitcoin. Speculators & Pump and Dumpers love volatility in particular. Mooners & Hodlers don’t really care — they just want to see new ground being broken on the long term uptrend every day.

So, the real problem is Smart Money. Smart money has slowly but surely been seeping into the system. There is a lot of smart money that has come into Bitcoin in the past year at sub-$1,000 prices. Expectations are very high that Bitcoin will break $2,000 this year and my expectations are that we will hit $3,000 — but preferably much later in the year. If this barrier is broken too soon — the smart money is going to leave — quickly, and they will take their chips off the table and look for a better time to buy back in. This will trigger the bust part of the cycle.

Supply and demand will eventually find equilibrium, but the ETF itself presents other challenges for Bitcoin after Smart Money leaves the system. Smart Money maintains stability in the Bitcoin price. These are typical High Net Worth Individuals conducting OTC trades but keeping the coins off the market, which chokes supply and ensures that new money and new coins find an equilibrium price point with minimal volatility.

Here are the key reasons (my explanations are brief due to the length of this post) as to why I believe that approvals for the upcoming ETFs is not in the best interest of Bitcoin right now (as it would potentially catalyze in another boom/bust cycle) and if they were approved, I believe the SEC would be remiss in their responsibilities to protect the public.

The block size debate has not been resolved. We cannot have a situation where unsophisticated investors are investing in a digital commodity that could literally change overnight and disrupt the market value significantly — I’ll happily debate this in a separate post but a hard fork right now would be horrible for Bitcoin, IMHO. The new amendments have not been open to public debate and I don’t believe they accurately represent the range of outcomes that would occur. Investors buying into the ETF on a particular day are subject to market fluctuations and gyrations — depending on who has access to the supply/demand data, and where the coins are being sourced from — this could lead to potential price & market manipulation. On the point of market manipulation — it’s very easy to manufacture market rumors and trick retail investors into buying up Bitcoins through the ETF, which would be easily accessible to them. Think Wolf of Wall Street or Boiler Room. Retail & unsophisticated investors have no place buying Bitcoins right now! It’s just too complicated and still too volatile. Losing 15–20% in a day is the norm for us living in the crypto world — but not for people who have their retirement savings on the line. The fact that it’s hard to buy Bitcoin right now is a good thing, for now, because it self selects sophisticated investments, by and large (scams like MMM notwithstanding). I don’t believe the market cap of Bitcoin has grown organically enough to be large enough to support $300m+ worth of immediate demand from potentially fickle retail or corporate investors with stop loss triggers. Bitcoin works when the price rises slowly, people hold and are reluctant to sell. $300m in overnight demand will create a spike, potentially encourage more buying (and some selling!) and the price will keep rising, until it doesn’t. Then one day, the ETF will need to offload half it’s holding because people get scared — imagine what that will do the price overnight. Bitcoin will be most successful when it’s held in small amounts by large numbers of people, not when they are highly centralized in one or two ETF’s that have to force sell it whenever people get the jitters or have to make margin calls. You think you’ve seen volatility — baby, you ain’t seen nothin’ yet! Many comparisons have been drawn to how gold and silver ETF’s have had great success in opening up the market. Let’s not forget that they have also had great failures too and still a number of concerns around them. Given that Bitcoin has a tiny market cap in relation to gold, it’s even more prone to market manipulation and the losses could be even worse. These are not risks that Bitcoin needs right now. Critics of this post would argue that the ETF’s open up the market to a broader set of new people engaged in the Bitcoin community. ETF investments are a vanity metric. Who cares if thousands of uninformed people are buying Bitcoin and are willing to sell if the price drops 15–20%? This is also not really driving adoption, let’s be honest. It would be better for them to open an account at Coinbase and spend some time learning about Bitcoin. I’m actually way more in favor of Bitcoin mining companies and hardware manufacturers listing their shares on exchanges. Civic is building decentralized digital identities on the blockchain — when we are in a position to list our company (years from now!), we will absolutely do that but I believe that the more publicly traded companies in the Bitcoin/Blockchain space the better. Investors can get exposure to the Bitcoin ecosystem without having to worry about the underlying asset class and gyrations in the price of the asset. The irony of the whole ETF saga is simply that Bitcoin was designed and built to be a decentralized store of value and currency, yet ETF’s are relics of the old world and here we have everyone rushing in to create centralized pools of Bitcoins. We’ve also just moved past the fake volumes from China and the loss of leverage to move the markets — but by creating a central store of tens or even hundreds of thousands of coins, this risk effectively re-enters the market. Some traders will now also be able to lever up and short sell the ETF. The role of the SEC is really to protect the public. I don’t think that allowing an ETF as Bitcoin reaches the previous All Time High is a good idea, especially given the risks that Bitcoin still faces. If the SEC wants to allow it this year, then we’re going to be in for one heck of a rollercoaster ride! There is a already a lot of research that shows that Gold ETF’s increased its volatility — something Bitcoin already has enough of…

I think I’ve made my point. Volatility is bad, stability is good. Rather have slow & sustainable growth with a view to decentralized holding of Bitcoins than to have rapid and unsustainable growth with a centralized pool of coins. If you don’t buy into this argument then you’re not thinking in the best interest for Bitcoin for the long term. If you’re just out to make a quick buck, then the ETF is a great idea!

Overall, I’m not against the idea of the ETF — I think it will be a good thing but I don’t believe that 2017 is the year for it. Once Bitcoin gets into the $3–5k range (hopefully in the next year or so) and the volatility continues to drop, then I believe we can expose it to retail investors — but for now, I’m hoping we can avert another Bitcoin Bubble!