The recent announcement of a spot Bitcoin ETF application from BlackRock, the world's largest asset manager with a $10 trillion AUM, generated significant excitement among crypto folks and a huge spike in bitcoin price. A surge in Inflows in digital-asset investment products also did not take long. So why are there so many concerns among Bitcoin proponents? Are there some significant caveats under the hood of that BlackRock ETF application? Well, let’s try to dig into it some deeper.
Unlike Grayscale's GBTC, BlackRock's iShares Bitcoin Trust offers an in-kind redemption as a distinct feature. This means investors are not tied to selling their shares, triggering a taxable event. Instead, they have the option to withdraw bitcoins from the trust. Sounds good!
But it comes with a big caveat: only BlackRock's authorized participants, essentially investment firms with a favorable relationship with BlackRock, can withdraw bitcoin from the product.
The trust is stated to follow the grantor trust model, which aligns its structure with gold investment trusts. This means that holding shares of BlackRock's trust would be considered equivalent to owning the underlying asset (here, bitcoin) for tax purposes. (Looks fair enough.)
Concerns are being raised, however, about potential risks associated with BlackRock's proposed trust structure, particularly regarding the possibility of rehypothecation, which is a common practice among traditional asset ETFs, where assets are lent out to market participants. If extended to the Bitcoin Trust, it could result in a scenario where investors only have paper claims to bitcoin rather than the asset itself.
Furthermore, in their proposal, BlackRock openly admits an ambition in the event of a Bitcoin fork to choose which version of Bitcoin to support. This introduces the potential for manipulations (considering the scale of the player and the potential for the rehypothecation) and poses risks to investors who may not agree with BlackRock's decisions.
The intricate design of BlackRock's Bitcoin Trust gives rise to serious concerns regarding its implications and potential risks, even suggesting a deliberate attack on Bitcoin by TradFi.
Here, I’ll point out readers to an excellent post by Allen Farrington, which sheds light on the fine print and seemingly opaque risk models in the otherwise “bullish” BlackRock's ETF application. Take a look, really, “Trust Me, Bro.”
But in short and from a broader perspective, BlackRock's trust has the potential to accumulate “a metric fuck ton” of Bitcoin. This alone is not necessarily a problem. However, investors should better stay vigilant of the potential secondary consequences.
- BlackRock has the ability to "sell bitcoin" to numerous largest financial institutions through its ETF, which operates under rehypothecated paper claims.
- It could offer lower trading costs compared to spot exchange purchases, potentially leading to liquidity consolidation and price-setting control.
- TradFi could potentially create a narrative about “clean,” by definition, bitcoins in Trust and suspicious coins outside of, impacting the fungibility of the asset.
- By promoting the trust's version of "clean" bitcoin, BlackRock can encourage banks to opt into the trust, further consolidating bitcoin ownership and offering clients paper claims to the underlying asset.
- The trust filing grants BlackRock the option to choose the "appropriate network" in case of a hard fork in Bitcoin, potentially diverging from the most valuable fork and contradicting Bitcoin's fundamental aspects.
- Redemption concerns arise, as mentioned above, as only authorized participants can withdraw bitcoin from the trust, excluding everyday investors, and BlackRock could potentially refuse redemptions, even from institutional investors.
This together paints a picture of such a giant "vacuum cleaner," a black hole, threatening to take the spirit out of the Honey Badger in a pessimistic scenario, changing it with “Uncle Sam’s vision.” That's why some of the most knowledgeable in the U.S. financial market bitcoiners are looking at this BlackRock's Bitcoin ETF application with such suspicion.