Institutional custody of bitcoin could kill it, cautions Hayes

Potential spot bitcoin ETF approval excitement is building in the crypto ecosystem, but Arthur Hayes isn’t convinced such an event is good for bitcoin, or for the people who use it.

The crypto OG and Maelstrom Fund founder says institutional interest in bitcoin could “herald a situation that we might not actually like in the end.”

Speaking to Blockworks on the On the Margin podcast (Spotify/Apple), Hayes posits a hypothetical scenario: “Let’s say Larry Fink and his [traditional finance] ilk come in and hoover up a large percentage of the freely traded bitcoin [BTC] in circulation.”

The same institutional entities could launch bitcoin mining ETFs, he says, adding that “BlackRock is the largest shareholder of some of the largest mining operations.”

Asset managers like BlackRock are effectively “agents of the state,” Hayes cautions. “They act on what the state tells them to do.”

Hayes argues that if the state needs its citizens to “sit in the fiat banking system” in order to tax them via inflation to pay back ever-growing debts, it makes sense for institutional entities — who are, by nature, compliant with the state — to hold money in an ETF vehicle.

In such a system, Hayes argues, “You can’t actually use the bitcoin. It’s a financial asset. It’s not the actual bitcoin itself.”

“You had some fiat, you bought this derivative,” he explains. “The asset manager went and bought some bitcoin and they put it in a custodian and it sits there.”

“If the BlackRock ETF gets too big,” he warns, “it could actually kill bitcoin because it’s just a bunch of immovable bitcoin that’s just sitting there.”

Trading a sugar high today for calamity tomorrow?

Additionally, Hayes warns that the same entities could increase their grip on the network’s consensus mechanics by holding a large percentage of miners.

Certain upgrades that might be required to ensure bitcoin remains a “rock solid cryptographically hard monetary asset” — particularly regarding encryption and privacy — are not necessarily aligned with traditional finance institutions, he says.

“So would they support that?” he asks. “Open question. I don’t know, but that’s what happens when you have these large passive investors.”

Hayes says bitcoin is the antithesis of statist money “that is here for us, the people, that have the ability to send money around the world.” But he wonders aloud what might happen if most of it winds up in the custody of one or few institutions.

Of course, broader adoption of bitcoin will undoubtedly be great for the price in fiat terms, Hayes says. “But is it actually gonna be great for the usefulness of bitcoin?”

“Are we, you know, gaining a sugar high today to only engender a massive calamity in the future? I don’t know.”

Hayes says people need to think longer term about the issue. “Yes, okay, ETF comes, price pumps to whatever it pumps to — but what’s the net result of one institution holding all this crypto?”

Start your day with top crypto insights from David Canellis and Katherine Ross. Subscribe to the Empire newsletter.