Bitcoin has gone mainstream. For crypto, that’s controversial.

It’s been almost two weeks since several investment products tied to bitcoin started trading on old-school financial markets. 

These exchange-traded funds have made it easier for everyday investors to place bets on the cryptocurrency market, like they would buy and sell stocks on Wall Street.

In the days since federal regulators finally gave the green light, investors have poured nearly $2 billion into the new bitcoin funds. But probably not the crypto purists, says Joel Khalili, who reports on the industry for Wired.

Marketplace’s Meghan McCarty Carino spoke with Khalili about crypto early adopters, who, he says, are quite happy to stay on the fringes of the financial system.

The following is an edited transcript of their conversation.

Joel Khalili: It harkens back to the underlying ideology of bitcoin, that it would be a technology that underpinned a payment network whereby people would store their own wealth and transact directly with one another, essentially cutting these large Wall Street intermediaries out of the picture. And the reality is that the ETFs are just not that, they’re kind of the opposite. They’re a vehicle exclusively for financial speculation. They’re managed by a host of kind of the “who’s who” of Wall Street, these large financial institutions. Users don’t hold the underlying bitcoin themselves, they’re kind of investing in a representation. You can’t use ETF shares as a means of peer-to-peer payment, that’s for sure.

Meghan McCarty Carino: So, investing in ETFs is not direct ownership of a cryptocurrency, but that kind of ownership is kind of a core principle for this group.

Khalili: That’s right. That’s one of the reasons why crypto ideologues like the idea of bitcoin ETFs, partly because they see it as a kind of source of new legitimacy for bitcoin and they hope that it will legitimize the asset in the eyes of large, institutional investors. They also see it as something that will kind of unlock this pent-up demand for bitcoin among people who have typically been unwilling to deal with the hassles, the frictions, the perils of storing crypto themselves. So, on one hand, bitcoiners are excited about the arrival of bitcoin ETFs, but they won’t touch them themselves, because as you say, what ETF investors aren’t doing is buying bitcoin directly, they’re buying a representation. There’s a saying among bitcoiners: “Not your keys, not your coins.” And that means effectively that unless you keep bitcoin in a self-managed wallet, it’s not really under your control. That is the case with the ETFs. A third-party custodian has control of the underlying bitcoin.

McCarty Carino: Can you explain some of the hassles and frictions of buying and storing bitcoin directly?

Khalili: One issue is that some people have tended to prefer not to do business with crypto exchanges like Coinbase or Gemini or offshore exchanges like FTX, which is a name familiar to everyone that ended fairly poorly. So, purchasing crypto directly still involves transacting with a crypto exchange, where you take dollars and they will, in return, give you a cryptocurrency, and then you can choose if you’d like to take the cryptocurrency off the exchange and keep them in a wallet of your own. But it’s that piece where most of the friction lies. The reality with cryptocurrency is that there is no room for error. So, I can take the cryptocurrency and put it in my own wallet. But if I lose access to that wallet, if I forget my password, if I haven’t correctly recorded what’s known as a seed phrase, which is a 12-word sequence of words that will allow you to recover access to a wallet. If you forget any of those pieces and you lose access, then your crypto is gone. It’s into the ether. It’s unrecoverable. So, it’s that piece, that’s where the peril really lies in terms of people participating in what’s known as self-custody. That’s the term that bitcoiners would use.

McCarty Carino: So, who is excited about this?

Khalili: It’s a funny one. Bitcoiners believe that the greater awareness surrounding the asset among regular people can only be a good thing in the long term. One person put it to me, they think that it’ll have a kind of mosquito bite effect. It’s a bit of a crude turn of phrase, but effectively infecting people with bitcoin fever, right? So they’re kind of excited about this prospect that bitcoin is going to be effectively passing into the hands of a much broader range of people, and a much broader range of investors are coming to the space, and potentially, a lot more cash in terms of dollar value will be entering the bitcoin system and potentially driving up the price. But then on the other hand, none of that means that they’ll be buying ETFs themselves, for the kinds of reasons we’ve discussed.

McCarty Carino: If we do see this kind of sustained flood of mainstream investment into crypto, could that sort of stabilize this ecosystem?

Khalili: Yeah, I mean, it’s one theory. I’m not a market analyst, but the analysts that I spoke to generally do believe that the arrival of ETFs and the arrival of capital from these kind of large institutional investment houses into the asset class will kind of result in an upward trend in demand. Perhaps that will have a stabilizing effect. But on the other hand, something analysts predicted was that there was a lot of hype in the lead-up to ETF approval around what it might do to the bitcoin price. There were a lot of posts flying around on Twitter peppered with rocket ship emojis, and there were predictions that ETFs would suddenly drive bitcoin to new all-time highs. And the reality – and this is something that analysts had predicted – is that the preapproval hype kind of drove up the price, but then the approval itself led to a dip. People bought the rumor, so to speak, and then sold the news.

McCarty Carino: This moment comes after a tough couple years in crypto. Things seem to have been kind of on the upswing lately, but how would you define this moment in, in crypto after the last few years?

Khalili: People within the industry have a sense of optimism in the wake of the trial of Sam Bankman-Fried, the founder of FTX, which is the collapsed crypto exchange I referred to earlier. There is a sense that there’s an opportunity for crypto to start fresh now. Whether that’s borne out in reality is another question, but there’s a sense of optimism and part of it is surrounding the approval of these ETFs. And I can’t understate how much this was something that members of crypto circles latched on to as something to celebrate. It was the talk of the virtual town for months in the lead-up. So, you know, there is a sense of optimism in crypto circles that the industry can move on from the trauma that was caused by the collapse of FTX and the series of other companies that fell in, in around the same time frame in 2022.

More on this

In my conversation with Joel Khalili, we talked about some of the big philosophical tensions with crypto going mainstream, but there are also practical considerations.

One of the perceived benefits of bitcoin is real-time, around-the-clock availability. The blockchain stays online 24 hours a day, 365 days a year. But stock exchanges and investment firms are more of a 9-to-5 kind of crowd.

So, that first weekend after ETFs hit the scene, bitcoin’s value fell more than $1,000 after markets closed. As The Wall Street Journal noted, “those who owned it directly or via a crypto broker were able to keep trading, as bitcoin runs 24/7. Those who held a bitcoin ETF could only watch and wait for Wall Street to open.”