Debunking Key Bitcoin ETF Myths
Many people believe that adopting the cash create redemption model for Bitcoin ETFs means the fund will not hold Bitcoin. However, it is important to clarify that spot Bitcoin ETFs will indeed hold Bitcoin. This misconception has led to confusion among the public.
Another misconception is that Bitcoin ETFs will act as fractional reserve products. This is not true. Spot Bitcoin ETFs are designed to hold actual Bitcoin.
Some individuals have questioned whether ETF issuers will publish on-chain addresses for transparency. While some issuers like Osprey Funds have done this, it is not a common practice among ETF issuers.
Cash Creates and In-Kind Model: the Difference
The cash create redemption model and the in-kind model are two different approaches. BlackRock has explained the difference in a document presented during a meeting with the SEC.
In the in-kind model, a Market Maker requests redemption through an Authorized Participant, and after approval, buys ETF shares via a Listing Exchange. The ETF shares are then delivered to a Transfer Agent after the Bitcoin custodian releases the coins to the Market Maker.
In the cash model, the ETF issuer instructs the BTC custodian to move cash out of cold storage before initiating redemption. The Market Maker can then enter a trade with the issuer to buy BTC for USD.
BlackRock and WisdomTree have adopted the cash-create model for their Bitcoin ETFs, and Grayscale has also added it to its recent amendment filing.
Hot Take: Understanding Redemption Models in Bitcoin ETFs
The choice of redemption models in Bitcoin ETFs has led to misconceptions among investors. It is important to clarify that spot Bitcoin ETFs do hold actual Bitcoin and are not fractional reserve products. While some issuers publish on-chain addresses for transparency, it is not a widespread practice.
Furthermore, the cash create and in-kind models differ in their processes. The cash create model involves moving cash out of cold storage before initiating redemption, while the in-kind model allows for direct transfer of ETF shares after the Bitcoin custodian releases the coins to the Market Maker.
Overall, understanding these redemption models is crucial for investors looking to participate in Bitcoin ETFs and make informed decisions about their investments.
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