A new power struggle begins with Bitcoin ETF | CoinDesk JAPAN

• The arrival of Bitcoin spot ETFs (exchange traded funds) means that major financial institutions like BlackRock and Goldman Sachs have entered the Bitcoin market.
• Wall Street may give preferential treatment to Bitcoins that are mined using green energy or that have been proven not to be involved in illegal activities.
• Such a move could spark a fight over the future of Bitcoin, similar to the block size wars that began in 2017.

The presence of the crypto asset (virtual currency) community made up of major financial institutions at the World Economic Forum (Davos), held in Switzerland, highlighted the conflicts inherent in the industry.

On the one hand, there is a desire to be accepted by the business community, and on the other, there is a fear that engaging with the business community will undermine the disruptive and rebellious spirit of crypto assets.

The Rise of TradFi (Traditional Finance)

2024 is likely to be the year when traditional finance (TradFi) rises, and the conflict seems to be particularly pronounced. The U.S. Securities and Exchange Commission’s (SEC) approval of Bitcoin exchange-traded funds (ETFs) has led to large asset management companies like BlackRock and Fidelity, as well as giants like Goldman Sachs and JP Morgan. The stage is set for banks to participate in the Bitcoin market.

The question is whether the participation of these financial institutions will affect the power dynamics of Bitcoin itself. As these regulated large-scale financial institutions begin to get involved, Bitcoin maximalists and degeners (who place all their wealth on the line) who place high value on resisting censorship and decentralization will become involved. Will fearless crypto traders (like those who end up losing money) have less influence over Bitcoin?

For example, will BlackRock, Goldman, and JP Morgan insist that they only buy coins that are mined with renewable energy or that are “clean” and have no past contact with unidentified individuals or entities?

Is their demand for Bitcoin so great that such a policy would significantly change the behavior of miners and other parties, and change the structure of Bitcoin itself?

There isn’t enough time yet to find out. While this may be a frustrating answer, the lack of predictability surrounding this question stems from the complex power dynamics within Bitcoin’s highly decentralized and diverse ecosystem.

That complexity is part of Bitcoin’s appeal, and why I don’t think the big Wall Street institutions will be able to change it much in the long run.

New York Agreement precedent

When considering this point, the results of the so-called “block size war” in 2017 are helpful.

At the time, 58 crypto companies lobbied to support a “hard fork” of Bitcoin’s core program that would increase the memory capacity of each block.

The so-called New York deal aimed to reduce network latency and allow those companies to process more transactions, thereby earning them more fees.

This comes after many mining pools expressed support for increasing memory capacity, as miners who choose which blocks to mine had the power to decide whether new versions of the software were adopted. Many considered it a fait accompli.

However, a core group of developers and users opposed increasing the block size beyond the existing 2MB on the grounds that it would increase data storage costs for operators of blockchain validation nodes. In other words, they argued that it would put pressure on smaller participants and lead to a more centralized network.

Instead, they advocate a change called Segregated Witness (SegWit), which lowers the amount of data required for each transaction while allowing Layer 2 solutions like the Lightning Network to process transactions off-chain and on-chain. We tried to make it possible to keep fees to a minimum.

They launched a so-called User Activated Soft Fork (UASF), in which those opposed to increasing block size were to boycott the acceptance of coins mined by miners who supported it.

In the end, the opponents of increasing capacity won. This victory was celebrated as a victory for the small, and a victory for the idea that the real power lies with the users, the ultimate beneficiaries of the Bitcoin network.

new whales

One reason to question whether the “little guys” can continue to dictate the direction of Bitcoin is that new entrants after the creation of the ETF are likely to own significantly larger amounts of Bitcoin. be.

Many analysts estimate that demand for Bitcoin ETFs could reach $100 billion (approximately 14.8 trillion yen, equivalent to 148 yen to the dollar). If that happens, it would account for about one-eighth of Bitcoin’s market capitalization, which is over $800 billion at the time of writing. Very large, but not completely dominant.

But let’s consider so-called dormant Bitcoin. It is reasonable to assume that many Bitcoins that have not moved in five years or more will not move in the future. Either it’s being controlled by an enthusiastic hodler (long-term holder), or the owner has lost the private key.

According to Glassnode, these coins currently represent around 30% of the market capitalization and should be taken into account when estimating the size of the active Bitcoin ecosystem.

That means $100 billion worth of ETF demand would represent 17% of the roughly $581 billion “active” Bitcoin market. When this happens, it begins to appear that major financial institutions may have influence. If large financial institutions begin to exercise their influence, it may become difficult for the “small players” to win as they did in 2017.

However, Wall Street is not the only big holder of Bitcoin. Currently, there are approximately 1,500 so-called “whale” addresses holding more than 1,000 BTC, which together control about 40% of the total Bitcoin supply. Many of them are true Bitcoin believers who have been holding for years.

They can transfer Bitcoin between whales or between addresses they own, thereby allowing miners and other participants to can be countered. Bitcoin’s original bigwigs still have influence.

One thing is for certain: if a battle for the soul of Bitcoin were to break out, it would be an extremely bitter battle, just as the block size wars were fought.

｜Translation and editing: Akiko Yamaguchi, Takayuki Masuda
｜Image: Shutterstock
｜Original text: After the ETF: ​​Bitcoin’s Coming Power Struggle