Bloomberg Analysts: Bitcoin Spot ETFs Created with Cash, Not Physical BTC, Will Not Attract More Institutional Investors to Cryptocurrencies
(BitMEX Warning: Bitcoin Spot ETFs with Cash Redemption Will “Lose Most of Their Advantages”)
(Bitcoin Spot ETF Speculation: BTC Surges Briefly and Plummets, Failing to Meet Three Conditions for a Bull Market)
The U.S. Securities and Exchange Commission (SEC) is currently reviewing 13 applications for Bitcoin spot ETFs, including proposals from Grayscale, which aims to convert its Bitcoin Trust Fund (GBTC) into a Bitcoin spot ETF, as well as BlackRock, Fidelity, and other asset management giants.
Recently, the SEC has had close meetings with several issuers and explicitly requested the adoption of a “cash creation/redemption model” instead of the favored physical creation/redemption model by issuers. Analysts believe that ETFs created with cash will not attract more institutional investors.
Although the signs, combined with the SEC’s positive signals, have increased expectations for the approval of Bitcoin spot ETFs in early January, the requirement for cash creation/redemption has raised doubts among analysts about the future of BTC.
Max Keiser, a senior advisor to the President of El Salvador, known as the “Bitcoin country,” refuted Cathie Wood, the “Queen of Stocks,” who previously stated in a CNBC interview that a successful Bitcoin spot ETF would attract more institutional investors. Keiser believes that Wood’s viewpoint is misleading. Bloomberg ETF analyst Eric Balchunas also agrees with this:
Cash Creation/Redemption vs. Physical Creation/Redemption: What’s the Difference?
In the cash creation model, authorized participants (APs) create or redeem shares of Bitcoin spot ETFs with cash. This means that APs provide cash to the ETF fund manager, who uses it to purchase Bitcoin. The impact of this model is that it may increase costs and tax complexity related to cash flow. Capital gains tax issues may arise due to cash transactions. Additionally, cash redemption may affect the tracking accuracy between the ETF and the actual Bitcoin market price.
On the other hand, in the physical creation model, APs create or redeem shares of Bitcoin spot ETFs with actual Bitcoin. This means that APs directly transfer Bitcoin to the ETF in exchange for newly created ETF shares or, during redemption, exchange ETF shares for an equivalent amount of Bitcoin. The impact of this model is that it avoids tax issues arising from cash transactions and better maintains consistency between ETF assets and the Bitcoin market price.
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Cash Creation Model Illustration. Image Source: Blackrock
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