The Bitcoin spot ETF, which is expected to be launched in mid-January, will adopt the “cash purchase/redemption model” insisted by the SEC. BitMEX Research warned today that the cash redemption model may cause the loss of most advantages and reduce efficiency in the structure of the ETF.
The U.S. Securities and Exchange Commission (SEC) is currently reviewing Bitcoin spot ETF applications submitted by more than ten issuers, including BlackRock. Recently, several U.S. media outlets have reported that the SEC met with several issuers last week and clearly stated that it will only adopt the “cash purchase/redemption model” instead of the favored physical purchase/redemption model by issuers.
The SEC also stated that any content mentioning the physical purchase/redemption model must be deleted from the application documents, and any issuers who fail to complete the final changes to the documents before the 29th “will not enter the first batch of approved Bitcoin spot ETF issuers in early January.”
This not only increases the market’s expectation that the SEC will approve the spot ETF before January 10, but also means that the first listed Bitcoin spot ETF will adopt the “cash purchase/redemption model.” BlackRock, Ark/21 Shares, and even the most stubborn Grayscale have compromised and successively submitted amended documents and adopted the cash model in order to become the first batch of approved spot ETF issuers.
In addition to the tax issues, BitMEX Research, the research department of the veteran cryptocurrency derivatives exchange BitMex, also warned that adopting the cash redemption model for the Bitcoin spot ETF may cause the loss of most advantages in the ETF structure.
The institution explained the operation of the ETF on the X platform earlier today and pointed out the disadvantages of the cash model:
If the ETF is trading at a premium (usually due to more buyers than sellers), authorized participants (APs, i.e. underwriters) will be incentivized to purchase the underlying assets/commodities and deliver them to the issuer to receive new ETF units. Then, because of the premium in the ETF trading, APs can sell the new ETF units on the market to earn profits.
If the ETF is trading at a discount, the situation is reversed. APs will buy ETF units on the market, provide them to the issuer, then receive the underlying assets, and sell the underlying assets to generate profits because the product is traded at a discount.
Nic Carter, co-founder of blockchain analytics company Coin Metrics and former first cryptocurrency analyst at Fidelity, believes that the consequence of adopting the cash model is that the efficiency of the ETF will be reduced because the cost of purchase/redemption will be higher. Although it is uncertain whether this will lead to tracking errors or higher fees, it will make the cost of participating in the Bitcoin spot ETF more expensive.