This article is available in Spanish.
In a new YouTube video Titled “There Is No ETF Paper Bitcoin,” Fred Krueger, an investor at crypto hedge fund 2718.fund, delved into the growing concerns surrounding US spot Bitcoin Exchange-Traded Funds (ETFs) and their impact on the price of the cryptocurrency. Krueger wanted to dispel the fear, uncertainty, and doubt (FUD) circulating about “paper Bitcoin” – the idea that ETFs could sell Bitcoin they don’t actually own – and to explain why Bitcoin’s price hasn’t risen as dramatically as some would expect this, despite significant ETF purchases.
Krueger began his analysis by acknowledging the prevailing skepticism in the market. “There are all these paper Bitcoins, and ETFs don’t actually have the Bitcoin, and if they bought all this Bitcoin, how come the Bitcoin price isn’t higher?” he said, summing up the main concerns of many investors.
Historically, the concept of ‘paper Bitcoin’ has been associated with exchanges that sold Bitcoin to customers without actually owning the underlying assets. Krueger highlighted several high-profile cases where this practice led to significant losses for investors. He cited the case of Mount Gox.
Another example he gave was QuadrigaCX, a Canadian exchange that went bankrupt under mysterious circumstances. Founder Gerald Cotten is said to have died in India, taking with him the private keys to the exchange’s cold wallets, effectively blocking customers’ funds. “Many Canadians lost all their Bitcoin on this Quad exchange,” Krueger noted.
Are “ETF Paper Bitcoin” 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, suppressing the price of BTC through artificial supply. However, Krueger argued that ETFs, especially those managed by established financial institutions, operate under a fundamentally different framework than unregulated exchanges.
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By focusing on two leading ETFs – IBIT, the BlackRock ETF and FBTC, the Fidelity ETF – Krueger highlighted the strict supervision of these entities. “Both ETFs are subject to very strict regulatory oversight, including the SEC but also other agencies in the US,” he stated. This extensive oversight includes requirements for full transparency, regular audits and the use of third-party custodians for asset verification. “They literally have to get a receipt of an asset from a third-party custodian,” Krueger added.
In the case of IBIT, Coinbase acts as a third-party custodian. “Coinbase itself is a publicly traded company that is monitored,” Krueger noted, noting that Coinbase’s public nature adds an extra layer of oversight and accountability. IBIT conducts audits of Coinbase and both entities are subject to audits by the SEC and other regulatory authorities. For FBTC, custody is handled by Fidelity Digital Assets, a separate entity within Fidelity that specializes in the custody of digital assets, ensuring specialized oversight and management.
“The issuers of IBIT and FBTC are BlackRock and Fidelity, two of the largest and oldest financial institutions, and they have a vested interest in maintaining their reputations,” Krueger said. “Their reputation is at stake, and this is a big deal,” he emphasized, suggesting that these institutions would not risk their credibility by engaging in the sale of non-existent Bitcoin.
Krueger contrasted BlackRock with entities like QuadrigaCX to highlight the disparity in regulatory compliance and operational scale. “BlackRock is highly regulated […] BlackRock has a robust corporate governance structure with audit, risk and compliance committees and very comprehensive internal controls,” said Krueger.
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To address the core concern about ETFs holding “paper Bitcoin,” Krueger provided specific data to refute this idea. “The reality is that the ETFs do not have pure paper Bitcoin,” he stated unequivocally. He highlighted that IBIT owns approximately 403,000 actual Bitcoins, while FBTC owns approximately 185,000 actual Bitcoins. “Together, these two ETFs own almost 3% of the world’s total Bitcoin, or 588,000 Bitcoins – I think it’s 2.9%,” he calculated.
Krueger acknowledged that some skeptics have tried to analyze the Bitcoin movement between specific dates to challenge these holdings. However, he emphasized that the facts are clear and verifiable. “We know how much Bitcoin these ETFs have; we know it is taken into account, and that is a reality,” he insisted.
As for why Bitcoin’s price hasn’t risen more dramatically despite significant ETF inflows, Krueger offered a nuanced explanation. He noted that Bitcoin has actually risen 60% since the introduction of the ETFs, translating into a $600 billion increase in market cap. This growth was fueled by net inflows of approximately $20 billion into the ETFs, resulting in a price multiplier effect of approximately 30x. “That is historically normal, maybe a bit on the low side, but not bad,” he assessed.
Krueger attributed the moderation in Bitcoin price growth to significant selling pressure from several sources. “A lot of sales were made,” he explained. He explained that Germany has $3 billion worth of Bitcoin and Mt. Gox assets sold. Additionally, earlier this year, FTX sold its GBTC (Grayscale Bitcoin Trust) stake and sold its Digital Valuta Group (DCG) assets to resolve lawsuits. “We had a lot of sales,” Krueger summarized.
Speculating on the potential impact without this selling pressure, Krueger suggested that Bitcoin’s price could have been significantly higher. “We probably would have made $90,000 if there were no sales,” he stated.
At the time of writing, BTC was trading at $68,752.
Featured image created with DALL.E, chart from TradingView.com