Bloomberg analysts have stated 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 U.S. Securities and Exchange Commission (SEC) is currently reviewing 13 applications for Bitcoin spot ETFs, including proposals from Grayscale, the company behind the Bitcoin trust fund GBTC, as well as BlackRock, Fidelity, and other asset management giants.
Recently, the SEC has been in close contact with several issuers and has explicitly requested the adoption of a “cash creation/redemption model” instead of the favored physical creation/redemption model among issuers. Analysts believe that ETFs using a cash creation model will not attract more institutional investors.
Although there are positive signals from the SEC, which 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, responded on social media to Cathie Wood’s previous statement during a CNBC interview that the approval of Bitcoin spot ETFs would attract more institutional investors. Keiser argued that Wood’s view is misleading.
Eric Balchunas, a Bloomberg ETF analyst, agrees with Keiser’s view. He explained the differences between cash creation/redemption and physical creation/redemption. In the cash creation model, authorized participants (APs) use cash to create or redeem shares of Bitcoin spot ETFs, meaning that APs provide cash to the ETF fund manager who then uses the cash to purchase Bitcoin. This model may increase costs and tax complexity associated with cash flows and may lead to capital gains tax issues. Cash redemption may also affect the tracking accuracy between ETFs and the actual market price of Bitcoin.
On the other hand, in the physical creation model, APs use actual Bitcoin to create or redeem shares of Bitcoin spot ETFs. This model avoids tax issues related to cash transactions and better maintains consistency between ETF assets and the Bitcoin market price.
It remains to be seen whether the SEC will approve Bitcoin spot ETFs and whether they will adopt the cash creation/redemption model or the physical creation/redemption model.