BitMEX Research: Bitcoin ETF risks losing advantages due to cash redemption.

Samiksha

The U.S. Securities and Exchange Commission (SEC) is currently reviewing Bitcoin spot ETF applications submitted by over a dozen issuers, including BlackRock. Recently, several U.S. media outlets reported that the SEC met with several issuers last week and explicitly stated that it would only adopt the "cash purchase/redemption model" rather than the physically settled model favored by issuers.

The SEC also indicated that any mention of the physically settled model must be removed from the application documents. Any issuer unable to finalize changes to the documents by the 29th "will not enter the ranks of the first batch of approved Bitcoin spot ETFs in early January."

This not only increases the market's expectation of the SEC approving a spot ETF before January 10th but also means that the first listed Bitcoin spot ETF will use the "cash purchase/redemption model." Companies such as BlackRock, Ark/21Shares, and even the staunch Grayscale have compromised, submitting amended documents and adopting the cash model to seek approval as the first spot ETF issuer.

Cash redemption may cause Bitcoin spot ETF to lose most of its advantages. The difference between the physical and cash redemption models lies in the fact that both models hold Bitcoin as the underlying asset. The key difference is that the SEC prefers the cash redemption model, where only the issuer handles Bitcoin, avoiding situations where unregistered brokers handle Bitcoin. However, this may trigger tax obligations arising from cash transactions.

In addition to tax issues, BitMEX Research, the research department of the veteran crypto derivatives exchange BitMEX, has warned that adopting the cash redemption model for Bitcoin spot ETFs may lead to the loss of most of the structure's advantages.

BitMEX Research explained the operation of ETFs on the X platform earlier today and pointed out the disadvantages of the cash model. If the ETF trades at a premium (usually due to more buyers than sellers), authorized participants (APs, i.e., underwriters) are incentivized to buy the underlying assets/commodities and deliver them to the issuer in exchange for new ETF units. Then, because of the ETF's trading premium, APs can sell the new ETF units to the market to make a profit.

If the ETF trades at a discount, the situation is reversed. APs will buy ETF units in the market, provide them to the issuer, receive the underlying assets, and then sell the underlying assets to generate a profit because the product is trading at a discounted price.

"However, it is crucial that ETFs should have multiple competing APs to ensure that the product can handle high volumes and have lower price tracking errors. If only cash purchase and redemption are allowed, most of the benefits of the ETF structure will be lost. Now, only issuers can buy and sell Bitcoin in the market, and many competitive advantages that make ETFs efficient will no longer apply."

Analysts warn that the cash model will reduce ETF efficiency and increase costs, although it is uncertain whether this will lead to tracking errors or higher fees, it will undoubtedly make the cost of participating in Bitcoin spot ETFs more expensive.

Ritu77

Is this kind of thinking, perhaps, worrying about things that might never happen?

Iravan774

If there are no advantages, there's not much that can be done.