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“What happens if the government makes bitcoin illegal?” is a question you will frequently hear. The underlying assumption — the same one that Prohibitionists made in the early part of the last century — is that usage will decrease, or even stop altogether, if you make something illegal.

But this is not necessarily so.

On September 24, Chinese regulators issued two documents: One outlawed cryptocurrency mining, the other reiterated a ban on all cryptocurrency transactions and noted that all companies providing cryptocurrency trading services to Chinese citizens are engaged in illicit financial activity.

And here we are, just over a month later, and the price of bitcoin is up over 50%...

Meet The New Boss, Same As The Old Boss

Bitcoin has broken out to new highs against almost every currency there is, even the U.S. dollar. Bitcoin’s market cap has never been bigger. The network is stronger than ever. Mining simply relocated following China’s regulatory notice.

This is now the 18th — something like that, anyway — time China has attempted to ban bitcoin. Its bans don’t seem to have the desired effect.

The reason for bitcoin’s recent rally, certainly the latter part of it anyway, was the announcement last week that there will, finally, be a listed bitcoin exchange-traded fund (ETF).

Said ET, the ProShares Bitcoin Strategy ETF (NYSE:BITO), began trading on October 19. It turned over almost $1 billion (we don’t know the precise number as of this writing), with more than 24 million shares changing hands.

This makes it the second-most-heavily-traded fund on record, beaten only by a BlackRock carbon fund, which ranked higher due to pre-seed investments.

We have been waiting a long time. The Winkelvoss twins tried to get a bitcoin ETF off the ground in 2013, when bitcoin was $65. Many others have tried, and here we are finally, eight years on, with the price a thousand times higher. I guess bitcoin ETFs are like buses. You wait all that time and then two come along at once. Valkyrie’s bitcoin futures ETF launched soon after.

I used to be CEO of Canadian-listed privacy tech company Cypherpunk Holdings (CSE:HODL) and I was extremely proud of myself and the team for securing what I thought was the best ticker in the world in “HODL.” But, credit where credit’s due, Valkyrie have gone one better. They have secured the ticker “BTFD.” “LOL,” as they say.

It’s being hailed as a watershed moment for the crypto industry, enabling it to enter the financial mainstream, easily accessible to investors of all shapes and sizes through traditional brokers.

I am less convinced, myself. Call me a grouch.

The publicity is good, sure. But bitcoin has done perfectly well without an ETF. Does it even need one?

Crypto is supposed to be an entirely new financial system, where individuals take control of their own keys, their own custody, their own money, freeing themselves of the need for intermediaries and trusted third parties. In that sense, an ETF is like a step back.

It feels a bit like French revolutionaries celebrating that Marie Antoinette and the aristocracy have joined them in overthrowing the regime.

If You Want To Get Better Exposure To Bitcoin, There’s An Easy Answer

What’s more, these futures ETFs are based on futures contracts, not the “spot” price of bitcoin. I confess I am out of my depth discussing the intricacies of short- and long-dated futures contracts, but if my understanding is correct, the fund, which charges a 1% fee, will have to constantly sell expiring contracts and buy longer-dated ones, which tend to be more expensive. This constant rolling of contracts is going to cost money — in the 5% to 10% range — and that means the ETF might not end up accurately replicating the price of bitcoin itself, which is the very purpose of the thing.

United States Oil Fund (NYSE:USO) used to be a popular ETF for investors hoping to track the oil price. But with all of the complications of rolling futures contracts, contango and backwardation, it always seemed to underperform the price. It might reflect short-term swings, but in the longer term, it was useless, even more so than Shell or BP as oil price trackers. It is immensely frustrating for an investor to correctly call a market, only for the chosen vehicle not to deliver.

USO is by no means alone in its failure as an ETF to actually track the underlying asset. One hopes that BITO, BTFD and their investors will not fall into the same trap. I am sure this is something they have prepared for, but it is a concern.

The Grayscale Bitcoin Trust (NYSE: GBTC), with a market cap of $32 billion, had been the previous way by which traditional investors could buy exposure to bitcoin through their brokers. It is a closed-end fund that owns bitcoin directly — not futures — charging 2%. As a closed-end fund, new shares are not created as new money buys in. The trust price is therefore determined by supply and demand for the trust, rather than the price of the asset it is designed to replicate. It has traded at a consistent 20% discount to the price of its bitcoin.

Trusts often trade at a discount to their net asset values (NAVs), many perpetually so, which means there is a value proposition there. But that is not why people buy GBTC — they buy it to replicate bitcoin’s price, and it hasn’t.

What I’m saying is this: if you want to get exposure to bitcoin’s price, then buy bitcoin!

It involves some self-education that many can’t or are not prepared to take on, but that is the sacrifice to be made. I can’t see how synthetic vehicles for mainstream investors will ever be anything but second best.

Grayscale is now, I hear, applying for ETF status. The danger here is that, if it achieves it, it will then sell the bitcoin it currently holds, which could actually mean greater selling than would otherwise have happened.

We are at new highs. New highs, way more often than not, lead to more new highs. This ETF should mean a lot more money flowing into bitcoin. That has to be bullish.

Beware The Curse Of The ETF Launch

And one final word of warning: I remember the launch of the gold and silver ETFs back in the noughties. Until then, it was difficult for mainstream investors to get easy exposure to the gold and silver prices. Buying physical metal was cumbersome — it was hard to make quick entries and exits with all of the delivery and quality complications. Futures contracts presented their own problems.

The gold and silver ETFs were brilliant innovations to make gold and silver quickly and easily tradable. There was a lot of hype about both in the lead up to their launch.

The SPDR Gold Shares ETF (NYSE:GLD) launched in late November 2004 and the iShares Silver Trust (NYSE:SLV) did so in April 2006. We take them for granted now, but they were considerable breakthroughs at the time and there was a lot of excitement.

Gold was trading around $440 an ounce at the time of the launch of GLD. It rallied over the next ten days or so to $450 — and then went into a two-and-a-half-month bear market that saw it go below $415.

When SLV was launched in April 2006, it rallied for a fortnight to $15 an ounce, then crashed 40% to $9.

Bitcoin is a different beast of course. And the mistake with bitcoin has always been to underestimate it.

I am a bitcoin bull — don’t get me wrong on that. But let’s just say it wouldn’t surprise me to see this market rally for a fortnight on all the excitement, then turn around and sell off, just as the gold and silver ETFs did.

This article originally appeared at Moneyweek.

This is a guest post by Dominic Frisby. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.