Farley on Nostr: If Coinbase starts managing "paper Bitcoin" through ETFs while continuing its normal ...
If Coinbase starts managing "paper Bitcoin" through ETFs while continuing its normal exchange operations, it could mark a significant shift in its business and the broader crypto market. Here’s a possible futuristic scenario:
### The Rise of Paper Bitcoin at Coinbase:
Coinbase may begin heavily investing in Bitcoin ETFs, which allow investors to gain exposure to Bitcoin without directly holding the underlying asset. This “paper Bitcoin” is essentially a financial product that mimics the price of Bitcoin but does not require the investor to hold real Bitcoin. If Coinbase focuses more on this model, its custody service would become crucial, as ETF managers hold Bitcoin in reserve while selling shares to the public.
Over time, this may attract a new wave of institutional investors. ETFs could lead to a significant surge in demand for Bitcoin derivatives, and while this drives up the fiat price of Bitcoin, it risks creating an imbalance between real, hard Bitcoin and the paper equivalents floating through the market. Eventually, these derivative products could outstrip actual Bitcoin holdings.
### Decoupling Real Bitcoin from Paper Bitcoin:
Coinbase’s focus on ETFs and other paper Bitcoin products might drive a wedge between the underlying asset and its derivative price. As more institutions and retail investors buy into paper Bitcoin, Coinbase may face challenges in maintaining a one-to-one ratio of actual Bitcoin in reserves versus what's being traded. This could lead to fractional reserve practices, similar to how the fiat banking system operates.
If Coinbase fails to back its ETFs with actual Bitcoin reserves, the result could lead to a “Bitcoin squeeze,” where demand for real Bitcoin vastly exceeds supply. At some point, as more individuals and companies seek to withdraw their real Bitcoin, cracks in this model could surface.
### The Inevitable Crisis and the Fall of Coinbase:
If there’s a moment where the demand for physical Bitcoin spikes—possibly during geopolitical unrest or rapid inflation—Coinbase could find itself unable to meet withdrawal requests. This would cause panic among users, resulting in mass withdrawals. Investors might start realizing that the paper Bitcoin they hold is, in reality, not backed by the actual underlying asset in sufficient quantity.
### Regulatory Crackdown and Market Evolution:
As Coinbase navigates this volatile future, government regulators may step in, either due to systemic risk concerns or pressures from users. The company may face lawsuits or be forced to reveal that it had not been transparent about its fractional reserve approach to Bitcoin custody. In the worst-case scenario, this could lead to a liquidity crisis or bankruptcy similar to other centralized exchanges that mismanaged reserves.
Simultaneously, this event might encourage more investors to shift toward decentralized exchanges (DEXs) or self-custody solutions, where they can hold and manage their Bitcoin without relying on a centralized party. This evolution could decentralize control even further, pushing institutions and individuals alike toward the original ethos of Bitcoin—peer-to-peer transactions with no trusted intermediaries.
### The Role of Real Bitcoin in the Future:
In this scenario, real Bitcoin, held by individuals and businesses off centralized exchanges, would become a prized asset. As paper Bitcoin crashes, the fiat price of real Bitcoin may surge astronomically, marking a pivotal moment where individuals who hold self-custody Bitcoin become the true beneficiaries.
Ultimately, Coinbase’s fate could become a cautionary tale, where managing paper Bitcoin leads to systemic issues, reinforcing the need for decentralization and self-sovereign control of digital assets.
### The Rise of Paper Bitcoin at Coinbase:
Coinbase may begin heavily investing in Bitcoin ETFs, which allow investors to gain exposure to Bitcoin without directly holding the underlying asset. This “paper Bitcoin” is essentially a financial product that mimics the price of Bitcoin but does not require the investor to hold real Bitcoin. If Coinbase focuses more on this model, its custody service would become crucial, as ETF managers hold Bitcoin in reserve while selling shares to the public.
Over time, this may attract a new wave of institutional investors. ETFs could lead to a significant surge in demand for Bitcoin derivatives, and while this drives up the fiat price of Bitcoin, it risks creating an imbalance between real, hard Bitcoin and the paper equivalents floating through the market. Eventually, these derivative products could outstrip actual Bitcoin holdings.
### Decoupling Real Bitcoin from Paper Bitcoin:
Coinbase’s focus on ETFs and other paper Bitcoin products might drive a wedge between the underlying asset and its derivative price. As more institutions and retail investors buy into paper Bitcoin, Coinbase may face challenges in maintaining a one-to-one ratio of actual Bitcoin in reserves versus what's being traded. This could lead to fractional reserve practices, similar to how the fiat banking system operates.
If Coinbase fails to back its ETFs with actual Bitcoin reserves, the result could lead to a “Bitcoin squeeze,” where demand for real Bitcoin vastly exceeds supply. At some point, as more individuals and companies seek to withdraw their real Bitcoin, cracks in this model could surface.
### The Inevitable Crisis and the Fall of Coinbase:
If there’s a moment where the demand for physical Bitcoin spikes—possibly during geopolitical unrest or rapid inflation—Coinbase could find itself unable to meet withdrawal requests. This would cause panic among users, resulting in mass withdrawals. Investors might start realizing that the paper Bitcoin they hold is, in reality, not backed by the actual underlying asset in sufficient quantity.
### Regulatory Crackdown and Market Evolution:
As Coinbase navigates this volatile future, government regulators may step in, either due to systemic risk concerns or pressures from users. The company may face lawsuits or be forced to reveal that it had not been transparent about its fractional reserve approach to Bitcoin custody. In the worst-case scenario, this could lead to a liquidity crisis or bankruptcy similar to other centralized exchanges that mismanaged reserves.
Simultaneously, this event might encourage more investors to shift toward decentralized exchanges (DEXs) or self-custody solutions, where they can hold and manage their Bitcoin without relying on a centralized party. This evolution could decentralize control even further, pushing institutions and individuals alike toward the original ethos of Bitcoin—peer-to-peer transactions with no trusted intermediaries.
### The Role of Real Bitcoin in the Future:
In this scenario, real Bitcoin, held by individuals and businesses off centralized exchanges, would become a prized asset. As paper Bitcoin crashes, the fiat price of real Bitcoin may surge astronomically, marking a pivotal moment where individuals who hold self-custody Bitcoin become the true beneficiaries.
Ultimately, Coinbase’s fate could become a cautionary tale, where managing paper Bitcoin leads to systemic issues, reinforcing the need for decentralization and self-sovereign control of digital assets.