In a revealing YouTube video titled “There Is No ETF Paper Bitcoin,” Fred Krueger, an investor at the crypto hedge fund 2718.fund, addresses the burgeoning concerns surrounding US spot Bitcoin Exchange-Traded Funds (ETFs) and their influence on Bitcoin’s market value. Through his analysis, Krueger seeks to dispel the fear, uncertainty, and doubt (FUD) surrounding “paper Bitcoin”—the idea that ETFs might be selling Bitcoin they do not possess—and to elucidate why Bitcoin’s price has not soared as some anticipated, despite considerable ETF acquisitions.
Addressing Market Skepticism
Krueger begins by acknowledging the widespread skepticism that pervades the market. He captures the essence of investor concerns: “There’s all this paper Bitcoin, and ETFs don’t really have the Bitcoin, and if they were buying all this Bitcoin, how come Bitcoin price is not higher?” This encapsulates the uncertainty many investors feel.
Historically, the “paper Bitcoin” concept has been linked to exchanges that sold Bitcoin to customers without holding the actual asset. Krueger highlights notable instances where this led to significant investor losses, citing the infamous Mt. Gox case. He also discusses QuadrigaCX, a Canadian exchange that mysteriously collapsed after its founder, Gerald Cotten, allegedly died in India, taking with him the keys to the exchange’s cold wallets, effectively freezing customer funds. “A lot of Canadians lost all their Bitcoin on this Quad exchange,” Krueger emphasizes.
Are “ETF Paper Bitcoin” Real?
These historical incidents have fueled contemporary fears about ETFs potentially engaging in similar fraudulent activities—selling Bitcoin they do not hold, thus artificially affecting BTC’s price. However, Krueger argues that ETFs, especially those managed by well-established financial entities, operate under a fundamentally different set of regulations compared to unregulated exchanges.
The Regulatory Framework of Leading ETFs
Focusing on two prominent ETFs—IBIT, the BlackRock ETF, and FBTC, the Fidelity ETF—Krueger highlights the stringent regulatory oversight these entities undergo. “Both of these ETFs are subject to very strict regulatory oversight, including the SEC and other US agencies,” he notes. This oversight mandates 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 explains.
For IBIT, Coinbase acts as the third-party custodian. “Coinbase is itself a public company that is audited,” says Krueger, pointing out that its public status adds an extra layer of scrutiny and accountability. IBIT conducts audits of Coinbase, and both are audited by the SEC and other regulatory bodies. On the other hand, FBTC’s custody is managed by Fidelity Digital Assets, a specialized entity within Fidelity that oversees digital assets, ensuring expert oversight and management.
“The issuers of IBIT and FBTC, BlackRock and Fidelity, are two of the largest and oldest financial institutions, and they have a vested interest in maintaining their reputation,” Krueger asserts. “Their reputation is at stake, and this is a big deal,” he emphasizes, suggesting these institutions would not risk their credibility by selling non-existent Bitcoin.
Contrasting Financial Entities
Krueger contrasts BlackRock with entities like QuadrigaCX to highlight the vast differences in regulatory compliance and operational scale. “BlackRock is highly regulated […] BlackRock has a robust corporate governance structure with committees for audit, risk, and compliance, and very extensive internal controls,” he elaborates.
Understanding ETF Bitcoin Holdings
Addressing the core concern about ETFs holding “paper Bitcoin,” Krueger presents specific data to debunk this notion. “The reality is the ETFs have zero pure paper Bitcoin,” he declares. He reveals that IBIT holds approximately 403,000 actual Bitcoins, while FBTC holds about 185,000 actual Bitcoins. “Together, these two ETFs hold almost 3% of the world’s total Bitcoin, or 588,000 Bitcoins—I think it’s 2.9%,” he calculates.
Krueger acknowledges that skeptics have tried to scrutinize Bitcoin movement over certain periods to challenge these holdings. However, he emphasizes that the facts are clear and verifiable. “We know how much Bitcoin these ETFs have; we know that it’s accounted for, and that’s a reality,” he insists.
Bitcoin Price Dynamics
Addressing why Bitcoin’s price has not increased more dramatically despite substantial ETF inflows, Krueger offers a nuanced explanation. He notes that Bitcoin is up by 60% since the ETFs’ introduction, amounting to a $600 billion rise in market capitalization. This growth has been driven by around $20 billion in net ETF inflows, resulting in a price multiplier effect of about 30x. “That’s historically about normal, maybe a little on the low side but not terribly so,” he assesses.
Krueger attributes the moderated price growth to significant selling pressures from various sources. “There’s been a bunch of selling,” he notes, detailing that Germany sold $3 billion worth of Bitcoin, as did Mt. Gox holdings. Furthermore, FTX disposed of its GBTC (Grayscale Bitcoin Trust) stake earlier in the year, and the Digital Currency Group (DCG) sold assets to settle lawsuits. “We had a lot of selling,” Krueger summarizes.
Speculating on the potential impact if these selling pressures were absent, Krueger suggests that Bitcoin’s price could have been significantly higher. “We probably would be at $90k if there wasn’t any selling,” he posits.
At the time of writing, BTC is trading at $68,752.
