Bitcoin Spot ETF Update: Seeking Cash Settlement First, Then Pursuing Physical Settlement?
As the Christmas holiday approaches, various asset management companies have also submitted amendments for Bitcoin spot ETFs, hoping to be included in the first batch of approved lists. Bloomberg ETF analyst James Seyffart stated that Valkyrie, Bitwise, and Invesco have all proposed amendments that would only allow creation and redemption in cash. While another analyst, Eric Balchunas, pointed out that the cash mode would reduce the efficiency of ETFs, but is everyone looking to "prioritize availability over perfection"?
Infographic: ETF | What are the differences between the cash mode preferred by the SEC for ETFs and the physical Bitcoin ETF by BlackRock?
Table of Contents
Why does the SEC prefer a cash mode?
Bloomberg ETF analyst Eric Balchunas pointed out that the SEC's preference for a cash mode means that only ETF issuers deal with BTC, not registered broker-dealers. They may also be unwilling to let unregistered broker-dealer subsidiaries handle it because they are not registered.
When there is excess demand for a bitcoin ETF an intermediary ("the AP") will need to create new ETF shares. With cash creates they give ETF issuer cash for new shares (issuer then buys btc) vs in-kind they give issuer btc for shares. Either way new ETF shares=new btc purchase. https://t.co/C7jKdTIzEb
— Eric Balchunas (@EricBalchunas) December 14, 2023
Cash mode is disadvantageous for GBTC, forced to sell Bitcoin
Balchunas pointed out that the superpower of ETFs comes from the tax efficiency of creating and redeeming in-kind. If ETFs are forced to use only cash mode, the fund can only buy and sell assets, in this case, Bitcoin, and then generate capital gains/losses.
If Grayscale's GBTC can only use a cash mode, they will be forced to sell Bitcoin. According to Balchunas' estimates, GBTC holds 620,000 bitcoins with an average cost of $11,625.
Valkyrie, Bitwise, and Invesco first submit cash mode
According to Bloomberg ETF analyst James Seyffart's post, Valkyrie also submitted a new S-1 form, similar to Bitwise and Invesco, stating that creation and redemption can only be done in cash. Similar to Invesco, they specifically stated that if/when allowed, they hope to use an in-kind mode in the future.
Update: @ValkyrieFunds submitted a new s-1 at 6:01 AM this morning. They are joining Bitwise and Invesco by stating that creations and redemptions will only occur in cash. Like Invesco, this filing specifically says they want to use in-kind in future if/when allowed. https://t.co/51NSmjxWAK pic.twitter.com/ARpGEHkAlL
— James Seyffart (@JSeyff) December 14, 2023
Is it better to have something than nothing?
Since a cash mode will create tax disadvantages, a cash-created Bitcoin ETF is not ideal and undermines a major advantage of the ETF structure. But it's better than nothing, and Bloomberg analysts also hope to ultimately resolve this issue in-kind.