The US Securities and Exchange Commission’s (SEC) decision to allow “in-kind” creation and redemption for cryptocurrency spot ETFs has had widespread repercussions in the industry.
Bitwise President Teddy Fusaro highlighted the technical aspects of this decision and explained in detail why it is important for investors.
“I hear a lot of people ask, ‘Why is this so important?’ I want to share a few technical reasons,” Fusaro said, outlining how the current “cash generation” model works.
Under the current system, when a Bitcoin ETF receives inflows, the fund must purchase Bitcoin directly from the market. While some issuers are more active than others, each transaction incurs a cost. For example, Fusaro explained that assuming the ETF purchases Bitcoin at a price 0.02% (2 basis points) above the reference price, this difference represents an additional cost of $20,000 for a $100 million purchase.
This transaction cost is not charged directly to the ETF, but to the “authorized participant” (AP) acting as the intermediary in the transaction. However, this cost is passed on by the AP to the market maker, and from there to the end investor. As a result, the investor is forced to purchase ETF shares at a higher price due to the transaction cost.
Fusaro stated that with the implementation of the “in-kind” system, additional fees like the $20,000 cost cited as an example will be eliminated. In the new system, instead of handing over cash to purchase Bitcoin, the AP will deliver a predetermined amount of Bitcoin directly to the ETF. This will eliminate the purchase difference above the reference price, or “slippage.”
Fusaro concluded his remarks as follows:
“The first and most important gain is increased efficiency and reduced costs for the end user. With this system, Bitcoin entering the ETF will no longer incur additional costs.”
*This is not investment advice.