Bloomberg analysts state that if a Bitcoin spot ETF can only be created with cash instead of physical BTC, it may not attract more institutional investors to enter the cryptocurrency market and purchase Bitcoin.
The US Securities and Exchange Commission (SEC) is currently reviewing 13 Bitcoin spot ETF applications, including those from Grayscale, which intends 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 been in close communication with several issuers and explicitly requested the adoption of a “cash purchase/redemption model” instead of the preferred physical purchase/redemption model by issuers. Analysts believe that ETFs created through cash purchases will not attract more institutional investors.
Although the signs, along with the SEC’s positive signals, have once again raised expectations for the approval of a Bitcoin spot ETF in early January, the requirement that only cash purchase/redemption be accepted has raised doubts among analysts about the future prospects of BTC.
Max Keiser, senior advisor to the President of El Salvador, criticized Cathie Wood’s statement in a recent CNBC interview that “if a Bitcoin spot ETF is approved, it will attract more institutional investors.” He believes that Wood’s viewpoint is misleading. In response, Bloomberg ETF analyst Eric Balchunas also expressed his agreement.
What’s the difference between cash creation/redemption and physical creation/redemption?
In the cash purchase/redemption model, authorized participants (APs) create or redeem shares of the Bitcoin spot ETF using cash. This means that APs provide cash to the ETF fund, and the fund manager uses this cash to purchase Bitcoin. The impact of this model may include increased costs and tax complexity related to cash flow and potential capital gains tax issues. Additionally, cash redemption may affect the tracking accuracy between the ETF and the actual market price of Bitcoin.
On the other hand, in the physical purchase/redemption model, APs create or redeem shares of the Bitcoin spot ETF using actual Bitcoin. This means that APs directly provide 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 avoids tax issues arising from cash transactions and better maintains consistency between ETF assets and the Bitcoin market price.
Cash creation/redemption model illustration. Image source: Blackrock.