Wall Street Moves into Bitcoin: Opportunities and Risks Go Hand in Hand
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Wall Street Moves into Bitcoin: Opportunities and Risks Go Hand in Hand
Bitcoin ETFs are just a transitional phase; eventually, most people will hold bitcoin directly.
Navigating Web3 tides with focused insightsBy Anna Baydakova
Translated by Mars Finance, MK
Spot Bitcoin exchange-traded funds (ETFs) have opened the door for Bitcoin to access the vast reservoir of traditional capital, but they also bring potential risks to the ecosystem. Experts warn that large financial institutions may attempt familiar tactics, distorting Bitcoin’s original intent and exerting influence over Bitcoin's political landscape. In the U.S., with the approval of 11 spot Bitcoin ETFs, Bitcoin has officially entered the mainstream market. For instance, products launched on Thursday by firms such as BlackRock, Fidelity, and Bitwise saw trading volumes exceed $7 billion in their first two days.
For years, the cryptocurrency industry has awaited this approval to attract more capital into the market. Now, the market is open not only to major traditional financial institutions but also to retail investors interested in crypto who aren't yet ready to handle technical complexities.
However, the intersection of Bitcoin and Wall Street carries risks. Some long-time Bitcoin supporters caution it could lead to ownership becoming increasingly concentrated among a few institutions, raise rehypothecation concerns, and potentially alter the self-governance nature of the Bitcoin community.
Single Point of Failure
A key concern among prominent figures in the crypto space is that all the Bitcoin backing ETF shares might be held by just a few custodians. Most issuers have chosen Coinbase as their custodian, while VanEck selected Gemini, and Fidelity uses its own custody service.
Jameson Lopp, co-founder and CTO of Bitcoin custody firm Casa, pointed out that under such circumstances, custodians become a single point of failure. Government agencies would face fewer obstacles if they wanted to seize Bitcoin held within ETFs, he said in an interview with The Block.
Jeffrey Ross, founder and managing partner at asset management firm Vailshire Capital, believes these concerns are somewhat overstated. While custodians could theoretically make mistakes leading to massive client losses, large financial institutions like these ETF issuers have taken measures to prevent such events, he said in an interview with The Block.
As for the risk of government confiscation, it's often compared to Roosevelt-era gold ownership bans. However, at that time, the U.S. dollar was backed by gold, making gold integral to monetary policy—unlike Bitcoin’s current status, Ross added. “There seems to be no reason for the government to confiscate Americans’ Bitcoin,” he said.
A New Type of Double-Spend Attack
Another potential issue causing concern is the so-called financialization of Bitcoin—introducing traditional finance practices into the Bitcoin economy, which until now has largely operated according to its own principles.
“ETFs are both a powerful tool and a double-edged sword for the Bitcoin ecosystem,” said Caitlin Long, founder and CEO of Custodia, in an interview with The Block. “Their greatest vulnerability lies in potentially enabling a new form of leveraged financialization of Bitcoin. Although the SEC prohibits custodians from lending out the Bitcoin backing ETF units—which is correct—there could still emerge fund commingling, collateral substitution, and leverage on top of this foundation.”
Lopp from Casa noted that securities based on Bitcoin effectively create Bitcoin IOUs. This means people would hold instruments representing Bitcoin’s value rather than actual Bitcoin stored in hardware and software wallets—assets with essential characteristics like decentralization, permissionless access, and public ledger visibility.
“Because you can’t verify corporate balance sheets, you can’t ensure your IOU will be redeemable for the underlying asset,” Lopp wrote in a blog post last year. As Long noted in an article, there are numerous historical examples of Wall Street firms artificially inflating stock supply by trading non-existent shares. Now, they might try the same playbook with Bitcoin.
Ross from Vailshire Capital stated that the currently approved ETF structures do not allow issuers to lend out the Bitcoin backing the ETFs. However, over time, more complex derivatives could be built on top of these ETFs, potentially opening the door to more reckless behavior. Currently, Bitcoin ETF issuer Grayscale has already submitted an application to the SEC for a covered call ETF designed to generate yield from positions in its GBTC ETF.
“We must trust that the SEC is regulating this, but the SEC also has a history of poor oversight,” Ross said. He sees both pessimistic and optimistic sides to this issue. The transparency of public blockchains means companies could choose to disclose their holdings—but they’re unlikely to do so unless demanded by the public. And the public usually only demands such information after something goes wrong, Ross argued.
“By 2025–2026, we might see some kind of Wall Street blow-up related to Bitcoin,” Ross predicted.
Governance Wars
Another focal point of discussion is whether institutions issuing and trading ETFs could accumulate significant amounts of Bitcoin and gain authority within the Bitcoin community, possibly attempting to influence how the Bitcoin protocol is maintained in the future.
For example, if the Bitcoin blockchain forks into two significant factions, this could pose a problem for ETF issuers who currently ignore any fork (or airdrop) proceeds—potentially reducing the value of their holdings. They might then have an incentive to slow down or oppose such forks.
Lopp from Casa considers this concern somewhat far-fetched. During the Bitcoin “block size wars” between 2016 and 2018, mining and crypto service companies became advocates for forking and increasing the maximum block size. Yet, they did not prevail—the Bitcoin community chose to keep the block size unchanged.
Unlike past companies involved in Bitcoin scaling debates, ETF issuers don’t conduct many on-chain transactions and won’t interact with the Bitcoin protocol in the same way. “Therefore, we expect them to become more conservative in the realm of protocol development,” Lopp said.
Still, Ross anticipates that sometime after 2025, a new governance war could erupt. “[ETF issuers] will certainly try to make changes, but it won’t matter,” Ross said. “They might try pushing for proof-of-stake or altering Bitcoin’s fixed supply, but true Bitcoin supporters will almost certainly prevent that from happening,” he added.
On the positive side, Ross believes Bitcoin ETFs are merely temporary solutions during a transitional phase, and eventually most people will move from traditional financial instruments to holding Bitcoin directly. The wealthiest generation today is the baby boomers, but their children won’t need intermediaries between themselves and Bitcoin.
“The longer people hold Bitcoin, the more motivated they are to understand its essence. The younger generation will inherit their parents’ wealth and may choose to sell these ETFs and buy actual Bitcoin instead,” Ross said.
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