Since January 2024, American Bitcoin ETFs have turned the investment world upside down. Over 4.2 percent of all BTC is already owned by the ten approved index funds. But now a large German asset manager, the DWS Group, is competing with them: with new Exchange Traded Commodities (ETCs) on Bitcoin and Ethereum for the European market.
At the Crypto Asset Conference in Frankfurt, BTC-ECHO spoke to Dr. Alexander Bechtel, Head of Digital Strategy at DWS.
The Bitcoin Halving has dominated the headlines in the crypto space for weeks. Why is this event so important?
Dr. Alexander Bechtel: The halving is the reason why there can only be just under 21 million Bitcoin in the end. And it’s part of Bitcoin’s DNA that it is absolutely limited. This is exactly why many Bitcoiners say that Bitcoin is good money, perhaps even the best money. But I sometimes wonder why Satoshi designed it so that there is a big jump every four years. Instead of this big halving, the block subsidy could have been reduced a little bit every week. On the one hand, I’m happy about the halving, but on the other hand, it makes me a little nervous because it is definitely a shock for the Bitcoin network.
Do you think Satoshi made a conscious decision and previously weighed up the advantages and disadvantages of the linear variant versus the four-year cycles?
I recently talked to some Bitcoiners about this. And we all didn’t know why four years was chosen as the time period. Strictly speaking, it’s not four years, but 210,000 blocks. I actually would have thought it would have made more sense to choose shorter intervals and, for example, to regularly reduce the block subsidy by one percent. Instead, after four years, miners’ income is suddenly halved, which is a big shock. Especially since the miners are extremely important for Bitcoin because they ultimately ensure the security of the Bitcoin network.
What impact do you expect on the mining industry?
Due to the strong price increase of Bitcoin in the past few months, we shouldn’t see any significant effects on the hashrate for the time being. Currently, relatively few miners in the Bitcoin network are likely to have costs over $30,000 to $40,000 to mine a Bitcoin. That’s why most people can probably continue to work profitably even after the block subsidy has been halved.
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In the last episode of your “Bitcoin, fiat and rock’n’roll“Podcasts you talk about the security budget problem. That sounds dangerous. What exactly is behind it?
The successful miner currently receives 6.25 Bitcoin per block, the so-called block subsidy. There are also a small portion of transaction fees, but the miners’ main remuneration is the block subsidy. The higher it is, the more incentive the miners have to put energy into mining and the more secure the Bitcoin network is. If the block subsidy is halved as a result of the halving, then miners have a lower incentive to invest energy. This could make Bitcoin more insecure, which I think is still not discussed enough. This is not currently a problem, but it could become one in the next five to ten years.
What solutions do you see for this problem?
The ideal solution would be for the price to rise enough to compensate for the halving of the block subsidy. This is how it went with the previous three Bitcoin Halvings. That’s why you have to ask yourself what price development can be expected and where the necessary increase in demand will come from. Now we have the new ETFs, but what will they be next time? There could also be a halving cycle where the price barely moves and then we would need other solutions. For example, you could keep the block subsidy constant, around 6.25 Bitcoin. However, this would mean saying goodbye to the limit of a maximum of 21 million Bitcoin and there would be slight inflation in Bitcoin to compensate the miners. Another possibility would be a kind of tax so that every Bitcoin holder gives a small part of their Bitcoin to the miners. However, these solutions are currently in no way capable of gaining a majority in the Bitcoin community.
How can the mining industry actually survive in the long term if the block reward is halved every four years? Will miners be able to finance themselves solely from transaction fees at some point?
I don’t think we’ll see transaction fees on the Bitcoin network that can replace the block subsidy on a one-to-one basis in the foreseeable future. There is currently a lot of work being done on second layer solutions and we will soon be outsourcing many of the transactions that currently take place on layer 1 to layer 2. Therefore, transaction fees will not increase massively. For this reason, the ideal case, as just mentioned, would be a strong price increase so that transaction fees don’t have to increase infinitely to cover the miners’ costs.
You already mentioned the US Bitcoin ETFs. How important do you think SEC approval is in the context of institutional adoption?
It was an extremely important and long-awaited event because it gave the entire asset class more respectability. When an institution like the SEC approves spot Bitcoin ETFs, it is also saying that there is no significant price manipulation and that the market is liquid and mature. A very important prerequisite for even larger institutional investors to dare to approach us. In addition, with the ETF you can now use a familiar, traditional financial shell for a Bitcoin investment.
Do you also see risks associated with Bitcoin ETFs?
The major asset managers in the USA are truly absolute professionals. Their Bitcoin ETFs are structured based on the processes of the ETF market that have been established over decades. What I would also like to see would be more banks than depository institutions. We currently have Coinbase as the custodian for the vast majority of ETFs, which represents a concentration risk. And there are already major banks in the US that are also building and offering crypto custody solutions. But unfortunately, due to accounting rule SAB121, they cannot currently offer crypto custody because they have to hold an extremely large amount of equity for it.
Why do we not have Bitcoin ETFs in Germany and the EU like in the USA, but only other financial products with abbreviations such as ETP, ETN or ETC?
In Europe we have the UCITS regulation, which sets certain requirements for ETFs. This also means that, as a rule, a single asset in an ETF may not make up more than 20 percent. And this alone naturally excludes any ETFs based on individual investment goals – such as a Bitcoin or a gold ETF. That’s why we in Europe have to use other financial structures. And these are ETPs, for example an ETN or an ETC.
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DWS recently launched both a Bitcoin and an Ethereum ETC. How do these ETCs work in contrast to Bitcoin ETFs in the USA?
ETCs work similarly to ETFs. For example, both instruments are exchange traded and there are authorized participants who play a crucial role in liquid trading in the secondary market. Both products are traded in fiat money on traditional exchanges; cryptocurrencies are sent in the primary market when shares are created and redeemed. The ETCs are physically deposited and the cryptocurrencies are in cold storage solutions at professional crypto custodians. We have specifically selected two different custodians, Zodia and Coinbase. A key difference is that the ETC, in contrast to the ETF, is a debt security.
Does that mean there is a theoretical issuer risk?
We have structured the ETC platform to minimize counterparty risk for investors. The ETCs are issued by a Swiss AG whose sole business activity is the issuance of the crypto ETCs. The AG was set up specifically for this purpose. In addition, each ETC series has sole ownership of the assigned pool of Bitcoin and is deposited 1:1 at all times. The ETCs are secured bonds, which are secured by a direct investment in the underlying cryptocurrency. The ETCs are therefore not synthetic, but physically deposited with Bitcoin. At the same time can the product With a fee of 0.35 percent per year, it can also be attractive in terms of price compared to buying Bitcoin on crypto exchanges. You can also have the physical Bitcoin from the ETC delivered to you.
What role will Bitcoin play in our world in ten years?
My narrative for Bitcoin is clearly digital gold. Physical gold has been used as a store of value for thousands of years. And we have an incredibly deep faith in gold. It is impossible for Bitcoin to have the same status after about 15 years. But with every year that this asset class ages, people’s confidence increases, a process that is likely to take decades. However, I believe that Bitcoin will become more and more similar to gold over the next ten years and could take over part of its savings function. I believe in this primarily because Bitcoin has many of the properties of gold, but is sometimes even superior to it. Of course, it is fair to admit that gold is much less volatile. And it will probably continue to be a bumpy ride. Nevertheless, I look forward to the next ten years with great confidence.
Thank you for the interview.
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