The Bitcoin spot ETF, which is expected to be listed in mid-January, will adopt the “cash purchase/redemption model” insisted by the SEC. BitMEX Research warned today that the cash redemption model may cause most of the advantages of the ETF structure to be lost and efficiency to decrease.
The U.S. Securities and Exchange Commission (SEC) is currently reviewing Bitcoin spot ETF applications submitted by more than ten issuers including BlackRock. Recently, several U.S. media outlets revealed that the SEC had met with several issuers last week and explicitly stated that only the “cash purchase/redemption model” would be adopted, rather than the favored physical purchase/redemption model by issuers.
The SEC also indicated that any mention of the physical purchase/redemption model must be removed from the application documents, and any issuers unable to complete the final changes to the documents by the 29th will “not be included in the first batch of approved Bitcoin spot ETF issuers in early January.”
This not only increases market expectations for the SEC to approve the spot ETF before January 10th but also means that the first listed Bitcoin spot ETF adopting the “cash purchase/redemption model” is already set. BlackRock, Ark/21 Shares, and even the most stubborn grayscale have compromised and successively submitted amended documents and adopted the cash model in order to become the first batch of approved spot ETF issuers.
In addition to tax issues, BitMEX Research, the research department of the well-known cryptocurrency derivatives exchange BitMex, also warned that the adoption of the cash redemption model for Bitcoin spot ETFs may cause most of the advantages of the ETF structure to be lost.
The institution explained the operation of ETFs on the X platform earlier today and pointed out the disadvantages of the cash model:
If the ETF is trading at a premium (usually due to more buyers than sellers), authorized participants (APs, i.e. underwriters) are incentivized to purchase the underlying assets/commodities and deliver them to the issuer in exchange for new ETF units. Then, because of the premium trading of the ETF, the AP can sell the new ETF units on the market to make a profit.
If the ETF is trading at a discount, the situation is reversed. APs will buy ETF units on the market, provide them to the issuer, receive the underlying assets, and then sell the underlying assets to generate a profit because the product is traded at a discounted price.
Nic Carter, co-founder of blockchain analysis company Coin Metrics and former first cryptocurrency analyst at Fidelity, believes that the consequence of adopting the cash model is that the efficiency of the ETF will be reduced because the cost of purchase/redemption will be higher. Although it is uncertain whether this will lead to tracking errors or higher fees, it will definitely make the cost of participating in Bitcoin spot ETFs more expensive.