Bitcoin ETF: Cash creations vs. in-kind creations? BlackRock launches the debate

BlackRock has just warned the SEC about potential risks associated with in-kind orders for Bitcoin ETF shares. Amidst debates regarding liquidity creation models, investor security is now at the center of concerns.

BlackRock warned SEC lack of in-kind orders for #Bitcoin ETF shares could hurt investors

via @akibablade https://t.co/B6se2s1S1U

— CryptoSlate (@CryptoSlate) January 26, 2024

The liquidity creation model of Bitcoin ETFs is not universally accepted

In accordance with SEC’s approval, the new Bitcoin ETFs will adopt a cash-based liquidity creation model. This approach has sparked significant debate within the financial industry.

In its filed documents, BlackRock strongly argued for in-kind orders, highlighting their efficiency and lower cost compared to cash creations. However, the SEC has guided applicants towards the liquidity creation model due to the specific nature of regulatory processes.

The complexity lies in the direct handling of Bitcoin by these brokers, raising questions about compliance with financial regulations. Currently, the lack of clarity on these aspects has led to a transition of Bitcoin ETF requests to a cash contribution model in December, just before approval.

BlackRock criticizes the SEC’s model

As the world’s largest asset manager, BlackRock expresses significant concerns about the effectiveness of the liquidity creation model adopted by Bitcoin ETFs. The BlackRock’s iShares Bitcoin ETF (IBIT) prospectus cautions against potential risks related to the current practice of buying and selling shares for cash rather than using Bitcoin directly.

According to BlackRock, this method could cause problems in keeping the share prices aligned with the actual value of Bitcoin. In the “Risk Factors” section, it also highlights the consequences on the arbitrage operations of Authorized Participants.

The implications on Bitcoin ETF prices

Since the launch of Bitcoin ETFs, the net asset value premium over the discount spread has maintained relative stability. It has ranged from +40 basis points to -30 basis points over 10 trading days.

BlackRock’s Bitcoin ETF has not deviated beyond +5 basis points and -11 basis points during the last 12 months. This consistency suggests that Bitcoin ETFs maintain a certain level of stability, despite BlackRock’s concerns.

Regardless, investors will need to remain vigilant as this debate evolves. It could have significant repercussions on the value of Bitcoin ETFs.