The ETF Is The Bridge Across The Moat
The path forward is one where you help your opponents profit
With all the excitement surrounding the likely launch of the multiple Bitcoin ETFs next week, I wanted to pin down the way I view the developing process, and it’s likely slightly off the beaten path of the mainstream discussion.
I’m in the middle of an excellent book, “Technological Revolutions and Financial Capital: The Dynamics of Bubbles and Golden Ages” by Carlota Perez:
One pertinent point to the upcoming ETF is that as new technologies came about, the incumbent businesses (or technological paradigms per Perez) historically had fought tooth and nail to prevent disruption.
This isn’t much of a secret but is clearly apparent to everyone from the Web3 side of things. It brought to mind a quote from Balaji Srinivasan (@balajis) discussing the usual tactics:
“If you’re building something new, you should be prepared to defend it against accusations of harming children and funding terrorists. That’s just the reality of the world we live in. And so, you know, if you’re not prepared to do that, you’re not really prepared to build something new.” 1
It seems we still have those battles ongoing, yet we are now at the door of a slew of ETF approvals, which in my view is by far the best vehicle by which to onboard many market participants into the Web3 space.
To be clear, I view this differently as price. I’m more focused on the aspect of accessibility and vested interests.
It starts the virtuous cycle of softening the stances of many against crypto (those that buy into the ETF and benefit) while also monetarily rewarding the issuers. By widening the number of participants who own a piece of the new asset class, you also widen the scope of constituents who would like to see that investment not be harmed. Moreover, if the established sectors also profit from the introduction of the technology, they too are incentivized to protect that investment.
It’s this softening from both the traditional finance sector and everyday citizens, that help crypto cross the moat.
Crossing the Moat
The banking sector (at least the surviving ones) have counterintuitively benefitted from massive-scale regulations following 2008 (and echos of 2002). In brief, Dodd-Frank in essence made the creation of new banks illegal, thus in the panic to control a financial meltdown, inadvertently sowed the seeds to creating the largest banks in human history.
No new competition is a wide regulatory moat for the incumbents2:
So, in a twist to historical technological revolutions, the innovative breakthrough here is within the financial sector, one that by any measure is overdue for some creative destruction. It is within this framework that crypto threatened to cross the seemingly impenetrable regulatory moat. The reaction has been fierce, predictable, and well within historical norms. This is especially true following any blow-ups and/or criminal activity.
But how do you cross this chasm?
The ETF.
In short, I think that if you provide access to the profit potential of crypto to a wider audience, while more crucially allowing the biggest players to also participate, it sets in motion a demand cycle on the regulatory side.
As Wall Street succeeds, it opens the door for regulators and lawmakers to actually develop a legal framework. Further, a wider swath of constituents on the political side will now be personally invested in seeing the protection and success of the burgeoning asset class.
Demand creates demand.
If the established financial firms (bankers, traders, investment firms) are doing well with a crypto ETF, then it makes sense that they produce a demand pull to provide sound legal framework and regulations in which to expand on the technology.
For instance, if the first round of ETFs performs well, then they have a strong incentive to go down the stack and offer various ETFs of other Web3 assets, or even creative combinations of various sectors within Web3 (ex. a Defi basket ETF). Furthermore, it incentivizes integration of the technology into the established businesses, especially in need of granular maintenance of the new investments.
I sense that the ETF structure is the first phase of a larger incorporation of the crypto technology. As more market participants own, profit and benefit within ETFs, the demand for regulatory clarity (or at least calling off the dogs of the regulators) will increase. Moreover, fighting the banks and revolving door of lobbyists, regulators and politicians is a battle we can’t win. It’s one of attrition and the other side has access to the printing press.
In no small sense, helping your opponents profit is the way forward.
So, the way to victory is actually to develop a win-win strategy, which is one reason why my largest position is in Chainlink, who is working directly with the largest banks and financial institutions to make it frictionless to participate within the developing Web3 system.
That said, this part of any new technology, the regulatory battles, the pearl-clutching, the moral outrage, are all perfectly within historical norms. It’s very annoying at times, but it’s a part of the assimilation of a new technology that encroaches, inevitability, upon encumbered markets.
This is all to say, this is normal. So, let’s all focus on the positive sum game and create a win-win strategy.
Will
https://tim.blog/2021/03/25/balaji-srinivasan-transcript/
https://www.atr.org/dodd-frank-hammers-small-banks/