A recent filing by Nasdaq on behalf of asset management giant BlackRock has proposed a rule change that would allow its spot Bitcoin exchange-traded fund (ETF) to process share creations and redemptions using Bitcoin itself, in addition to cash.
This move, aimed at increasing operational efficiency and tax benefits, has drawn attention from analysts and investors alike. Here’s what you need to know.
What Are In-Kind Redemptions?
In-kind redemptions refer to the process where authorized participants—typically large institutional market makers—can create or redeem shares in an ETF using the underlying asset, in this case Bitcoin, rather than solely using cash.
This method is considered more efficient because it avoids certain costs associated with cash-based transactions, such as bid-ask spreads and broker commissions. More importantly, it can improve tax efficiency by minimizing capital gains distributions that affect shareholders.
Analysts like James Seyffart from Bloomberg Intelligence have pointed out that this model “should have been allowed from the beginning” for spot Bitcoin ETFs.
Benefits for Market Participants
Adopting in-kind creation and redemption offers several advantages:
- Improved liquidity and tighter spreads: By simplifying the creation/redemption mechanism, market makers can provide better pricing and deeper liquidity.
- Lower operational costs: Reduced intermediary steps mean fewer fees and lower transaction costs.
- Tax efficiency: In-kind transfers help defer taxable events, which is beneficial for long-term investors.
It’s important to note that these processes are only available to authorized participants, not individual investors. Retail traders will continue to use the cash-based system for buying and selling shares.
Current Performance of BlackRock’s Bitcoin ETF
BlackRock’s iShares Bitcoin Trust (IBIT) has been one of the most successful entrants in the new wave of U.S. spot Bitcoin ETFs. Since its launch in January 2024, it has seen massive inflows, totaling over $39.57 billion according to data from Farside Investors.
The proposed rule change could further strengthen IBIT’s competitive position, especially if it leads to improved efficiency and lower costs.
Broader ETF Developments
The same day Nasdaq submitted the proposal for BlackRock, multiple other crypto-related ETF applications were filed:
- CoinShares submitted applications for a Litecoin (LTC) ETF and an XRP ETF.
- Grayscale filed to convert its Solana (SOL) and Litecoin (LTC) trusts into ETFs.
- Grayscale also applied for a Bitcoin Adopter ETF and an Ethereum High Yield ETF.
This flurry of activity signals growing institutional interest in cryptocurrency-based investment products and could pave the way for more innovative offerings.
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Frequently Asked Questions
What are in-kind redemptions?
In-kind redemptions allow authorized participants to exchange ETF shares for the actual underlying assets—Bitcoin, in this case—instead of cash. This can make the fund more efficient and tax-friendly.
Can individual investors use in-kind redemptions?
No. This mechanism is only available to authorized participants, such as market makers and large institutions. Retail investors continue to trade shares using cash.
Why is this change important?
In-kind redemptions can reduce costs, improve liquidity, and offer tax advantages. This makes the ETF more attractive to both institutional and retail investors over the long term.
How will this affect IBIT’s performance?
While it’s hard to predict short-term movements, improved efficiency and lower costs could help sustain strong inflows and tighter bid-ask spreads.
Are other Bitcoin ETFs adopting this model?
It’s likely that other issuers will pursue similar changes if the SEC approves BlackRock’s proposal, leading to industry-wide improvements.
What does this mean for Bitcoin’s adoption?
As ETFs become more efficient and accessible, they serve as a bridge between traditional finance and crypto, potentially driving further mainstream adoption.
Conclusion
The proposal to allow in-kind creations and redemptions for BlackRock’s Bitcoin ETF marks a significant step toward maturation within the crypto ETF space. If approved, it could lead to lower costs, better tax treatment, and improved market structure—benefits that ultimately trickle down to investors.
While the change is technical and primarily impacts authorized participants, its effects could enhance the overall attractiveness and functionality of spot Bitcoin ETFs.