Is the Ethereum ETF good for Bitcoin?

The debate on the impact of the Ethereum ETF on Bitcoin.

The Securities and Exchange Commission (SEC) shocked the world with its approval of the Ethereum ETF. This surprised me along with many others (and most in the Bitcoin community) who fully expected the SEC to reject the application for the Ethereum ETFs.

The discussion at the MicroStrategy Bitcoin conference centered around regulatory risk. Because of Ethereum’s classification as a security rather than a commodity, the sentiment in the room was that the SEC would be opening up Pandora's Box if it approved the Ethereum ETF. I'm not privy to the inside negotiations, but I suspect there was some back door, last-minute pressure from the ETF managers and political horse-trading. Looks like crony capitalism is alive and well!

Michael Saylor was convinced, like the rest of us, that the SEC would deny the application, which he announced during his Bitcoin conference in Vegas. But post-approval, he pivoted and argued that the Ethereum ETF would actually be good for Bitcoin: It will attract more investment into the crypto ecosystem generally, and if a fraction of that flows into Bitcoin, then that is a net positive.

I disagree with Saylor here. Ultimately, it comes down to a core economic question: is Bitcoin a substitute or a complement to Ethereum? Saylor is arguing that they are complementary: dollars invested into Ethereum will attract new dollars into Bitcoin, away from other assets like stocks and bonds.

But I believe that they are more like substitutes. There is a fixed amount of mind-share dedicated to cryptocurrencies, and if some of that goes to Ethereum, it will come at the expense of investment into Bitcoin.

The approval adds a layer of legitimacy to Ethereum that I do not believe is warranted, given Ethereum’s centralization: the decision rights of the Ethereum Foundation, the history of poor governance of the protocol (illustrated by prior hard forks), and the outsize influence of its founder, Vitalik Buterin. It’s fine to experiment with new technologies on Ethereum, given its culture of experimentation, and eventually move those technologies onto Bitcoin. But that experimentation alone does not make Ethereum an investible asset.

What this whole episode shows is the failure of gatekeeping. All gatekeepers —- e.g. securities regulators, central banks, or investment bankers —- suffer from the same problems of bounded rationality, political influence, and private rent-extraction that affect any central actor. The antitdote is free and open competition, and to let the market decide.

So, while many Bitcoiners cheered the Bitcoin ETF approval in January, in principle it was wrong to do so, as it only celebrates the role of government gatekeepers that happened to vote in your favor. That’s a tenuous thread to rely on, as the Ethereum ETF approval just showed.