The Securities and Exchange Commission (SEC) decision to allow the creation and redemption of “in-kind” Cryptocurrency Spot ETFs had far-reaching impacts in the industry.
Bitwise President Teddy Fusalo highlighted the technical aspects of the decision and detailed why it is important to investors.
“I hear a lot of people asking, ‘Why is this so important?’ I want to share some technical reasons,” Fusalo said.
Under the current system, if Bitcoin ETFs receive an inflow, the fund must purchase Bitcoin directly from the market. Some issues are more active than others, but each transaction costs. For example, Fusaro explained that assuming an ETF buys Bitcoin at a reference price of 0.02% (2 basis points), 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 “certified participants” (AP) acting as intermediaries in the transaction. However, this cost is passed to the market maker by the AP and from there to the final investor. As a result, investors are forced to buy ETF shares at a higher price due to the transaction costs.
Fusaro said the implementation of the “in-kind” system will eliminate additional charges, such as the $20,000 cost cited as an example. In the new system, instead of handing over cash to buy Bitcoin, the AP will directly provide a pre-determined amount of Bitcoin to the ETF. This will eliminate purchase differences that exceed the reference price or “slip.”
Fusalo concluded his statement:
“The first and most important benefits are improving end-user efficiency and reducing costs. This system eliminates additional costs when Bitcoin enters the ETF.”
*This is not investment advice.