This article is also available in Spanish.
In new YouTube video Titled “No Paper Bitcoin Exchange Traded,” Fred Krueger, an investor in cryptocurrency hedge fund 2718.fund, addressed the growing concerns surrounding Bitcoin exchange-traded funds (ETFs) in the US and their impact on the price of the cryptocurrency. Krueger aims to dispel the Fear, Uncertainty, and Doubt (FUD) that has circulated around “paper Bitcoin” — the idea that ETFs might be selling Bitcoin that they don’t actually own — and explain why the price of Bitcoin has not risen as dramatically as it once did. Some might expect, despite the heavy buying of ETFs.
Krueger began his analysis by acknowledging the uncertainties in the market. “There are all these bitcoin notes, and the ETFs don’t really own bitcoin, and if they’re buying all this bitcoin, why shouldn’t the price of bitcoin be higher?” He stated this, voicing the fundamental concerns of many investors.
Historically, the concept of “fiat Bitcoin” was associated with exchanges that sold Bitcoin to customers without actually owning the underlying asset. Krueger highlighted several high-profile cases where this practice led to significant losses for investors. He cited the case of Jebel Gox.
Another example he gave was QuadrigaCX, a Canadian exchange that collapsed under mysterious circumstances. Founder Gerald Cotton allegedly died in India, taking the private keys to the exchange’s cold wallets with him, effectively locking up customer funds. “A lot of Canadians lost all their Bitcoin on this quad exchange,” Krueger noted.
Is “ETF Paper Bitcoin” real?
These historical events have contributed to current concerns about ETFs potentially engaging in similar practices, selling Bitcoin that they do not actually own, thus suppressing the price of Bitcoin through artificial supply. However, ETFs, especially those managed by established financial institutions, operate within a fundamentally different framework compared to unregulated exchanges, Krueger said.
Related reading
By focusing on two leading ETFs — IBIT, the BlackRock ETF, and FBTC, the Fidelity ETF — Kroger emphasized the stringent regulatory oversight that governs these entities. “Both of these ETFs are subject to very strict regulatory oversight, including the Securities and Exchange Commission but also other agencies in the United States,” he said. This comprehensive monitoring includes requirements for full transparency, regular audits and the use of external custodians to verify assets. “They literally have to get a receipt for the asset from a third-party custodian,” Krueger added.
In the case of IBIT, Coinbase acts as a third party. “Coinbase is itself a public company that is audited,” Krueger noted, noting that the public nature of Coinbase adds an additional layer of scrutiny and accountability. IBIT conducts audits of Coinbase, and both entities are subject to audits by the Securities and Exchange Commission (SEC) and other regulatory bodies. For FBTC, custody is handled by Fidelity Digital Assets, a separate entity within Fidelity that specializes in the custody of digital assets, thus ensuring expert 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 emphasized. “Their reputation is at stake, and that’s a big deal,” he stressed, noting that these institutions would not risk their credibility by engaging in the sale of non-existent Bitcoin.
Krueger compared BlackRock with entities like QuadrigaCX to underscore the contrast in regulatory compliance and operational scale. “BlackRock is strictly regulated… BlackRock has a strong corporate governance structure with audit, risk and compliance committees and very extensive internal controls,” Krueger added.
Related reading
To address fundamental concerns about ETFs holding “paper Bitcoin,” Krueger provided specific data to refute this idea. “The truth is that ETFs do not contain pure fiat Bitcoin,” he said unequivocally. He stressed that IBIT owns approximately 403,000 physical bitcoins, while FBTC owns approximately 185,000 physical bitcoins. “Together, these two ETFs hold roughly 3% of the world’s total bitcoin, or 588,000 bitcoins — I think it’s 2.9%,” he calculates.
Krueger acknowledged that some skeptics have tried to analyze Bitcoin’s movement between specific dates to challenge this property. But he stressed that the facts are clear and verifiable. “We know how much Bitcoin these ETFs have; we know it’s calculated, and that’s a fact.”
Turning to the question of why Bitcoin’s price has not risen significantly despite significant ETF inflows, Krueger offered a nuanced explanation. He noted that Bitcoin has actually risen by 60% since the ETFs were introduced, meaning a $600 billion increase in market capitalization. This growth has been fueled by nearly $20 billion in net inflows into ETFs, resulting in a price multiplier effect of approximately 30 times. “This is historically normal, maybe a little on the low side but not terribly so,” he said.
Krueger attributed the moderation in Bitcoin price growth to significant selling pressure from various sources. “There was a bunch of selling,” he explained. He explained that Germany sold $3 billion worth of Bitcoin in addition to MT Gox’s holdings. Additionally, FTX sold its stake in GBTC (Grayscale Bitcoin Trust) earlier in the year, and Digital Currency Group (DCG) sold assets to resolve lawsuits. “We had a lot of selling,” Krueger summarized.
Krueger speculated on the potential impact of the absence of this selling pressure, and noted that the price of Bitcoin could have been much higher. “We’ll probably get to $90,000 if there’s no sale,” he posited.
At press time, Bitcoin was trading at $68,752.
Featured image created with DALL.E, a chart from TradingView.com