There's a widely predicted impending reality where crypto ETFs become the default wrapper for future capital and native crypto rails get sidelined.
The risk of supply being captured by centralized custodians to a significant rate, is worth evaluating and setting out to mitigate.
Recently Grayscale filed for HYPE ETF, reportedly joining Bitwise and 21Shares looking to bring regulated exposure to the Hyperliquid token.
This adds to the earlier reported over 126 pending crypto ETFs, signalling a clear growing institutional interest in wrapping blockchain-native assets in regulated investment vehicles.
Currently, data from Coinglass shows that there are 29 active crypto ETFs with approximately $119.57 billion in assets under management (AUM).
In under 2 years, crypto ETFs have captured as much as 7% of Bitcoin's supply while absorbing 12-15% of newly mined BTC. If this trend is sustained, as much as 35% of Bitcoin's supply could be controlled by ETF issuers like BlackRock.
The convenience solution
Crypto ETFs are a convenience solution. The only reason anyone would buy into them instead directly owning the underlying assets is because of the convenience.
The convenience in management where investors transfer the underlying capital for safe-keeping to the asset managers.
The convenience of avoiding problems with the tax man, especially in the United States.
The convenience of gaining meaningful economy exposure to an emerging market with high upside potential without having to deal with learning deeply about the domain, ecosystem or industry.
If the convenience angle falls apart, ETFs supply capture collapses. That said, it's important to understand that since we are talking about more than just Bitcoin ETFs, there are different risks associated with centralized asset managers controlling these markets.
Evaluating monopolization
When an asset manager like BlackRock launches a Bitcoin ETF, the risks associated with controlling a significant supply is different from an Ethereum ETF and also, a staked ETH ETF.
The risks associated with the first two is generally market manipulation, but at the same time, it's important to note that sustained and extended market manipulation can prove expensive even for a giant like BlackRock, so all attempts, if any, would likely be within short periods and those with exposure generally will be perpetual traders and of similar products.
Now when we are dealing with staked ETFs such as iShares Staked Ethereum Trust ETF, which trades on the Nasdaq under the ticker ETHB, we are dealing with a financial product with a much higher risk factor to the crypto ecosystem since these assets hold direct governance influence on the Ethereum network.
The risks associated with centralized ETF issuers controlling significant ETH supply through staked ETF products extends beyond market manipulation, directly into governance manipulation, which could potentially threaten the stability and sovereignty of the blockchain.
What to watch out for in 10 years
Crypto ETFs issuers are not just launching simple regulated exposure to digital assets, there are engineering financial infrastructure for the future of finance.
It's expected that some may view them as marginal buyers that are unlikely to monopolize supply, but it's important to note that most risks associated with allowing capital to be controlled by centralized institutions doesn't show up until times when the system is strained and/or politically tested.
Will staked assets be ever used to do the government's bidding and whoever (or entities) that opposes be labeled a threat to national security?
An example of strains that reveals the risks of centralized finance was reported on early March:
BlackRock (BLK) has restricted withdrawals from one of its flagship private credit funds after a surge in redemption requests, adding to growing signs of stress in the rapidly expanding $2 trillion private credit market.
The world’s largest asset manager said it would limit withdrawals from the $26 billion HPS Corporate Lending Fund after investor redemption requests exceeded the fund’s quarterly liquidity cap. Investors sought to withdraw $1.2 billion, but the fund approved $620 million, reaching the 5% quarterly limit that allows managers to gate withdrawals. — Source
The motivation here is growing fear, but what happens when motivations involving anti-government movements show up—which is very likely?
I think that it's important to watch the percentage growth of Crypto ETFs against independent decentralized capital to avoid extreme sovereignty threats that will be inevitable if these centralized businesses are allowed to capture significant supplies of sovereign networks or projects assets.
It's not a question of what will happen in the short term of controlling these assets, but the long-term implications for security and sovereignty of the industry.