After the ETF: ​​Bitcoin’s Coming Power Struggle

A
sizable
crypto
community’s
presence
at
the
World
Economic
Forum
in
Switzerland
this
week
highlights
an
inherent
tension:
on
the
one
hand,
the
industry’s
desire
for
acceptance
by
the
business
establishment
and,
on
the
other,
a
concern
that
engaging
with
it
could
undermine
crypto’s
disruptive,
rebellious
ethos.

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With
2024
shaping
up
to
be
the
year
that
traditional
finance
(TradFi)
arrives,
that
tension
seems
especially
acute.
After
all,
the
U.S.
Securities
and
Exchange
Commission’s
long-awaited
approval
of
bitcoin
exchange-traded
funds
(ETFs)
sets
the
stage
for
giant
asset
managers
such
as
BlackRock
and
Fidelity,
and
for
massive
banks
like
Goldman
Sachs
and
JPMorgan,
to
participate
in
the
bitcoin
market.

The
question
is:
will
these
institutions’
participation
affect
the
power
dynamics
within
Bitcoin
itself.
Will
“Bitcoin
maxis”
and
“degens,”
who
place
a
high
value
on
censorship
resistance
and
decentralization,
see
their
influence
over
Bitcoin
diminish
as
these
large
regulated
entities
start
to
engage?

Might
BlackRock,
Goldman
or
JPMorgan,
for
example,
insist
only
on
buying
coins
mined
with
renewable
energy,
or
that
are
“clean”
of
any
past
connection
to
non-identified
actors?
Would
their
demand
for
bitcoin
be
so
substantial
that
such
policies
would
materially
change
the
behavior
of
others,
such
as
miners,
so
as
to
change
the
very
makeup
of
Bitcoin
itself?

It’s
too
early
to
say.
While
that
might
be
a
frustrating
answer,
the
lack
of
predictability
around
that
question
stems
from
the
complex
power
dynamics
within
Bitcoin’s
very
decentralized,
diverse
ecosystem.
That
complexity
is
part
of
Bitcoin’s
appeal
and,
in
the
long
run,
leads
me
to
believe
these
Wall
Street
titans
will
be
unable
to
alter
it
significantly.

A
reference
point
for
this
was
the
outcome
of
the
so-called

“Block
Size
Wars”
in
2017.

At
that
time,
58
crypto
businesses
lobbied
to
support
a
proposed
“hard
fork”
upgrade
in
Bitcoin’s
Core
code
that
would
increase
the
amount
of
memory
for
each
block.
The
so-called
New
York
Agreement
was
intended
to
reduce
logjams
on
the
network,
allowing
those
businesses
to
process
more
transactions
and
so
earn
more
fees.
After
a
number
of
mining
pools
said
they
supported
an
increase,
many
thought
the
increase
was
a

fait
accompli,
as
the
miners,
in
choosing
which
blocks
to
mine
were
kingmakers
in
determining
whether
a
new
version
of
the
software
would
be
adopted.

But
a
core
group
of
developers
and
users
argued
against
increasing
the
block
size
beyond
the
existing
2MB
capacity
on
the
grounds
that
data
storage
costs
would
rise
for
anyone
running
a
node
to
validate
the
blockchain.
That,
ultimately,
would
squeeze
out
smaller
participants,
leading
to
a
more
centralized
network,
they
said.

Instead,
they
advocated
for
a
modification
known
as
Segregated
Witness,
or
SegWit,
to
lower
the
data
needs
for
each
transaction,
while
also
enabling
layer
2
solutions
such
as
the
Lightning
Network
to
process
transactions
off-chain
and
minimize
on-chain
fees.
They
launched
a
so-called
User
Activated
Soft
Fork
(UASF),
in
which
anyone
who
opposed
the
block
size
increase
would
boycott
accepting
any
coins
mined
by
miners
that
were
supporting
it.

In
the
end,
the
UASF
rebels
won.
It
was
celebrated
as
a
victory
for
the
little
guy,
for
the
idea
that
users,
the
ultimate
beneficiaries
of
the
Bitcoin
network,
had
real,
effective
power,
since
it
was
their
end-demand
for
tokens
that
would
drive
market-led
decisions.

One
reason
to
question
whether
the
“little
guys”
can
continue
to
dictate
Bitcoin’s
direction
is
that
the
post-ETF
newcomers
will
likely
own
a
very
large
chunk
of
it.

A
number
of
analysts
estimate
that
the
demand
for
bitcoin
ETFs
could
run

as
high
as
$100
billion.
If
so,
that
would
represent
about
an
eighth
of
the
total
market
cap,
which
was
just
above
$800
billion
at
the
time
of
writing.

So,
very
big,
but
not
totally
dominant.

But
let’s
now
adjust
for
so-called
dormant
coins.
It’s
reasonable
to
assume
that
a
decent
number
of
bitcoins
that
have
not
moved
out
of
their
current
address
for
more
than
five
years
won’t
ever
be
moved
–
either
because
they
are
controlled
by
diehard
HODLers
or
because
their
owners
have
lost
the
private
keys.
Those
coins
–
currently
representing
around
30%
of
the
total
market
cap,
according
to
Glassnode
–
cannot
be
treated
as
an
exact
proxy
for
“dead
coins,”
but
should
be
taken
into
account
when
estimating
the
size
of
the
active
Bitcoin
ecosystem.

So
now,
we
have
$100
billion
worth
of
ETF
demand
at
17%
of
the
“active”
bitcoin
market
of
around
$581
billion.
That’s
starting
to
look
like
these
institutions
could
have
real
clout.
A
2017-like
UASF
might
be
harder
to
pull
off
if
such
heavy-hitters
can
put
their
foot
on
the
scale.

And
yet,
Wall
Street
won’t
be
the
only
giant
holder
of
bitcoin.
There
are
currently
around
1,500
so-called
“whale”
addresses
holding
more
than
1,000
bitcoin
each,
together
controlling
around
40%
of
the
total
bitcoin
supply.
Many
of
those
are
true
believers
who’ve
“HODLed”
for
years.
They
can
move
coins
among
themselves,
or
among
their
own
self-owned
addresses,
and
in
doing
so
make
demands
of
miners
and
other
participants
in
similar
ways
to
the
UASF
rebels.
The
Bitcoin
OGs
still
have
clout.

One
thing’s
for
certain,
if
a
battle
for
Bitcoin’s
soul
emerges,
it
will
be
extremely
hard
fought,
as
the
Blocksize
Wars
were
hard
fought.