How does the BlackRock Bitcoin ETF work? A guide to help you understand

On June 8, 2023, a milestone event occurred as the world's largest asset management firm, BlackRock, officially filed with the SEC to establish a Bitcoin spot ETF and simultaneously applied to establish the iShares Bitcoin Trust, a trust specifically designed for Bitcoin.

The core purpose of this trust is to allow Authorized Participants to transfer their held bitcoins to the trust in exchange for the trust's issued secured shares. These shares not only represent beneficial interests in the trust's net assets but will also be officially issued to the secondary securities market through BlackRock for enhanced liquidity. This news briefly energized the cryptocurrency market, with the general consensus being that this move represents a significant step for Bitcoin's entry into the traditional financial trading market.

Bitcoin Trust Operational Mechanism

The iShares Bitcoin Trust, established by BlackRock, consists of Bitcoin held by professional Bitcoin managers. All shares are transferable. The trust sets standard ETF establishment fees during trading. Additionally, the trust periodically sells some Bitcoin to cover operational costs, allowing the trust to hold a certain amount of cash in the short term. Furthermore, the trust may hold cash in response to claims from Bitcoin managers or other third parties.

It is worth noting that any distribution of cash or other assets will be strictly governed by the trust agreement. After the record date for distributing this cash or other assets, no new Bitcoin deposits or issuance of new shares will be accepted according to the trust agreement.

Creation and Redemption of Bitcoin Shares

Minimum Subscription Unit of 40,000 Shares

The iShares Bitcoin Trust issues shares in increments of 40,000 shares or multiples thereof. It is important to note that this trust is not a traditional investment company and is not regulated by the U.S. Securities and Exchange Commission (SEC) under investment advisor regulations.

Creation and Redemption Process

Authorized Participants must submit written purchase orders or enter orders into the system electronically before making a deposit, specifying the number of shares they intend to acquire. Upon order confirmation, the date the order is received will determine the amount of Bitcoin the Authorized Participant must deposit. However, orders received after 3:59 pm Eastern Time will not be accepted and should be resubmitted on the next business day.

If the Trustee accepts a purchase order, on the day the order is received or deemed received, by 5:00 pm Eastern Time, the Trustee will electronically transmit a copy of the purchase order with an "accepted" stamp to the Authorized Participant via email or other electronic means, indicating the amount of Bitcoin the Authorized Participant must deliver to the Bitcoin manager. Orders entered into the system electronically will receive an automatic email indicating the purchase order has been accepted and marked as "accepted" in the system. Before acceptance by the Trustee, a purchase order only represents a unilateral offer by the Authorized Participant to exchange Bitcoin for shares, with no binding effect on the trust, the Trustee, the trust administrator, the Bitcoin manager, or any other party.

Prior to redeeming shares, Authorized Participants must submit a written request or enter a redemption order into the system electronically, specifying the number of shares they intend to redeem. The date the order is received will determine the amount of Bitcoin received in exchange. However, orders received after 3:59 pm Eastern Time will not be accepted and should be resubmitted on the next business day.

Fees Deducted in Bitcoin

As the amount of Bitcoin required for new shares changes daily, the trust administrator will adjust the amount of Bitcoin in the portfolio accordingly. Because Authorized Participants bear most of the expected expenses of the trust, and fees accumulate daily at the same rate, the amount of Bitcoin in the portfolio that decreases daily is predictable in the absence of any extraordinary fees or liabilities.

Responsibilities and Risks

All tax obligations related to exchanging Bitcoin for shares, including any applicable value-added tax, will be fully borne by the Authorized Participant conducting the transaction. Additionally, in the face of market volatility and trading restrictions, such as NASDAQ trading halts or restrictions, the trust may suspend share redemptions to protect investors' interests. Moreover, any purchase or redemption order that does not meet the specified format will be rejected to ensure fair and legal transactions.