"The Potential Destruction of Bitcoin by Successful Physical ETFs," Warns BitMEX Co-Founder Arthur Hayes

Uncover the potential dangers of successful physical Bitcoin ETFs as warned by BitMEX co-founder Arthur Hayes.

Delve into a comprehensive analysis of how these ETFs could impact Bitcoin's liquidity, mining dynamics, and overall survival, raising crucial questions for investors and enthusiasts alike.

Arthur Hayes Issues a Warning

Arthur Hayes, the co-founder of the cryptocurrency exchange BitMEX, warned in a blog post published on December 23, 2023, that "Bitcoin (BTC) could be completely destroyed if asset management companies' ETFs are too successful."

There's a rising expectation in the cryptocurrency industry for the approval of physical Bitcoin ETFs and the substantial capital inflow they could bring.

Hayes cautions that if a physical Bitcoin ETF is too successful, it could ultimately lead to the extinction of Bitcoin itself.

This concern stems from the subtle yet critical difference between Bitcoin and traditional financial assets. Hayes explains, "While financial assets like gold and fiat currencies physically exist due to natural laws, Bitcoin is entirely different."

Bitcoin's Existence: Dependent on Liquidity

Hayes states, "Bitcoin is the first financial asset in human history that exists because of the movement of funds."

He emphasizes the importance of miners who support the BTC network. He explains, "After Bitcoin's block rewards drop to zero around 2140, miners will only receive transaction fees.

Without transactions on the BTC network, it will be impossible to secure the necessary energy to maintain network security."

If profitability declines, miners will stop their mining operations. Without miners, there will be no one to approve transactions on the BTC network, leading to the network's functional collapse and the eventual disappearance of Bitcoin.

Hayes' analysis reveals that "For the Bitcoin network to operate stably, continuous transactions must occur on the BTC network, ensuring miners are compensated through fees."

However, he warns that the advent of Bitcoin ETFs could lead to a loss of this liquidity.

The Problems Posed by Physical Bitcoin ETFs

Hayes explains that "Physical Bitcoin ETFs work by absorbing investors' assets into a metaphorical vault, issuing tradable securities, and charging management fees for this tremendous task."

He points out that even if trading in physical ETFs increases, the actual BTC remains unused in storage, posing a problem for Bitcoin.

Should major asset management companies' physical Bitcoin ETFs capture significant demand, with most investors choosing "Bitcoin ETFs" over "physical Bitcoin," the transaction volume on the BTC network could drastically decrease.

This could lead to miners not earning rewards, eventually rendering the BTC network nonfunctional.

Hayes notes, "If Bitcoin becomes just another state-controlled financial asset and is not used, it will die." He posits that "If Bitcoin dies, it creates room for another cryptocurrency network to grow."

He suggests this could be a reboot of Bitcoin or an improved version of the original, hoping "the second time around, people learn not to hand over their private keys to a bald man."

In contemplating survival methods amidst the decline of fiat currencies, Hayes states one must choose either "to trade financial assets for more fiat currency" or "to maintain wealth in terms of energy by using a state-independent financial system."

He advises that "if it's the former, trade ETFs to your heart's content, but if it's the latter, buy BTC and withdraw it to a self-managed wallet."

Edward Snowden, a former CIA employee, has made similar remarks about Bitcoin ETFs, stating, "ETFs are a form of domestication, a part of the taming process, and their price fluctuation is not desirable." He emphasizes the need to focus on more fundamental issues.

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