Cash Redemptions Will Dilute Bitcoin Spot ETF Advantage – BitMEX Research

The U.S. Securities and Exchange Commission (SEC) is currently reviewing applications for Bitcoin spot ETFs submitted by more than a dozen issuers, including BlackRock. According to reports, a number of media recently broke the news that the SEC had met with several issuers last week and made it clear that it would only accept the "cash subscription/redemption model" and would not adopt the physical subscription/redemption preferred by the issuers. model.

The SEC also emphasized that all references to the physical subscription/redemption model must be deleted from the application documents. In addition, issuers must complete the final changes to the documents before the 29th, otherwise they will not be eligible to be among the first batch of approved Bitcoin spot ETFs in early January.

This not only increases market expectations, but also means that the first batch of listed Bitcoin spot ETFs will adopt a cash subscription/redemption model. BlackRock, Ark/21Shares, and even Grayscale have all compromised, submitting change documents and adopting a cash model in order to become the first approved issuers of spot ETFs. This move will further stabilize the market and attract more investor participation.

Cash redemption may cause Bitcoin spot ETF to lose most of its advantages

What is the difference between the physical and cash redemption models? In fact, both models will hold Bitcoin as the underlying asset, but the main difference is that the cash redemption model preferred by the SEC only has issuers that will handle Bitcoin, which can avoid the situation of unregistered brokers handling Bitcoin, but will trigger Cash transactions may incur tax liabilities; physical redemption involves directly exchanging Bitcoin for ETF shares, so it can avoid tax liabilities and is more favored by issuers.

BitMEX Research warns that in addition to tax issues, the adoption of a cash redemption model for Bitcoin spot ETFs could eliminate most of the advantages of the ETF structure.

The institution explained the operation of ETF on the ) will be incentivized as they can receive new ETF units by purchasing the underlying asset/commodity and delivering it to the issuer. Because the ETF trades at a premium, AP can sell these new ETF units into the market and make a profit.

When an ETF trades at a discount, AP purchases ETF units in the market, then provides them to the issuer, receives the underlying assets, and makes a profit by selling the underlying assets. Because the product is traded at a discount, AP can use this price difference to generate profits.

“However, it is crucial that the ETF should have multiple competing APs, which ensures that the product can handle large flows and have low price tracking error. If only cash subscriptions and redemptions are allowed, the ETF Most of the benefits of the structure would be lost. Now that only issuers can buy and sell Bitcoin on the market, much of the competition that makes ETFs efficient will no longer apply."

Analyst: Cash model will allow ETFs Reduced efficiency and higher costs

Nic Carter, co-founder of blockchain analysis company CoinMetrics and previously Fidelity’s first crypto-asset analyst, believes that the consequence of adopting the cash model is that the efficiency of ETFs will It will be lower because the cost of subscription/redemption will be higher. Although it is not sure whether this will lead to price tracking errors or higher fees, it will make participating in the Bitcoin spot ETF more expensive regardless.

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