The world’s largest Bitcoin ETF has revamped the process of moving coins in and out of the fund. BlackRock’s IBIT has won over $20 billion since its launch, allowing it to handle “various” productions and redemptions.
The SEC approval order quietly reversed the Switch. IBIT approved participants can now exchange Bitcoin directly for shares, rather than just obtaining or delivering cash. It may sound like a small manipulation change, but the effect may not be minor.
When the Spot ETFs were published in January 2024, the SEC requested that they be made in cash. If you want to buy IBIT, certified participants (APs) like Citadel and UBS will sell ETF stocks and wire cash to Coinbase to raise actual Bitcoin.
Redemption worked the same way on the contrary. Coinbase liquidation coins to sell ETF stocks, regain the dollar and cover the differences. However, this model created a drag. All creation and redemption processes are carried out through the legs of Fiat, with transaction costs, custody fees and, most importantly, taxation.
The AP could not simply shift Bitcoin into inventory. I had to complete the cash sale. An expanded bid ask for large players has spread, opening the door to tracking errors between IBIT stock prices and Bitcoin.
in-cind solves this. Now, if the AP needs to provide 1,000 BTC worth of IBIT shares, you can simply transfer 1,000 BTC from your own balance. Redemption works the same way. Return the IBit stock, receive the coin directly, and there is no forced liquidation.
Not everyone can do this. The SEC approval order and updated IBIT prospectus will name four companies with privileges to four companies: Jane Street, Virtu Americas, JP Morgan Securities and Marex. These are desks that already dominate the production of ETF markets. They now skip steps and go in and out of IBit’s custodian wallet without first passing through the dollar.
This means that inventory management is tighter, arbitrages are faster, and risk is less. This also means that the spreads on ibit will be compressed further. ETFs are already trading in pennies around NAV, but the direct coin settlements have increased the incentives for even more severe growth.
Next is the tax angle. Cash redemption can cause taxable events when APS dumps Bitcoin and funds withdrawal. Typically, transfers of physical items are tax-neutral. For the institutions that manage their balance sheets, it is a meaningful edge. Some ETF lawyers argue that reimbursement involves moving the assets themselves rather than cycling cash, which also helps avoid complications of laundry sales.
The SEC instructions do not resolve all the nuances, but IBIT looks like a gold ETF. It has the ability to pull on metal (or, in this case, coins) on demand, supported by the stash of goods.
IBIT already dominates the field and regularly draws in more netflows than all of their rivals combined.
Cryptoslate’s Farside Data coverage shows that IBIT consistently transports hundreds of millions, if not billions of dollars, in net inflows, even when competitors are experiencing losses. By lowering the friction on the APS, BlackRock may have just narrowed its lead.
With cheaper creations, market makers can cite closer spreads and attract more secondary market volumes. Repayment of the cleaner means low exit costs. This is important for agencies that are concerned about their size packed. Both refer to IBIT becoming the default liquidity pool, forcing them to follow if their rivals are approved in physical form.
Despite the magnitude of the change, everything could remain the same as retail investors. ibit trades the same thing at the same ticker and fee. However, under the hood, the switch is important. Tighter spreads need to shave base points from all trades.
Better tax processing reduces hidden costs for large players, and as APS moves inventory more quickly, IBIT’s tracking errors to Bitcoin could be further reduced, improving pitch as a one-to-one proxy.
A wider market effect? Expect more flow to IBIT than your competitors, at least until you win the same privilege. Also, regarding Bitcoin liquidity, moving coins in and out of custodians without a fiat detour can increase large turnover rates as hedges against ETF inventory have a knock-on effect.
Either way, BlackRock has got the ETF they’ve been hoping for from day one. It is a true real Bitcoin fund.