As the Christmas holiday approaches, major asset management firms are rushing to submit amendments for Bitcoin spot ETF applications, aiming to secure a spot in the first wave of approvals. Bloomberg ETF analyst James Seyffart notes that Valkyrie, Bitwise, and Invesco have all filed amendments restricting creations and redemptions to cash-only transactions. While analyst Eric Balchunas points out that cash mode may reduce ETF efficiency, it raises the question: Are issuers adopting a "function first, optimize later" approach?
👉 Why cash mode matters for Bitcoin ETFs
Why Does the SEC Prefer Cash Creation Mode?
Bloomberg ETF analyst Eric Balchunas clarifies: The SEC's preference for cash mode ensures only ETF issuers handle Bitcoin—not intermediary broker-dealers (since unregistered entities cannot). The SEC may also avoid involving unregistered broker-dealer subsidiaries.
"When there is excess demand for a bitcoin ETF, an intermediary ('the AP') will need to create new ETF shares. With cash creations, they give the ETF issuer cash for new shares (the issuer then buys BTC), whereas in-kind transactions involve direct BTC transfers. Either way, new ETF shares equate to new BTC purchases."
— Eric Balchunas (@EricBalchunas)
Cash Mode Disadvantages GBTC, Forcing Bitcoin Sales
Balchunas highlights that ETF efficiency stems from tax-advantaged in-kind creations/redemptions. If restricted to cash, funds must buy/sell Bitcoin directly, triggering capital gains/losses.
For Grayscale’s GBTC, cash-only mode would force Bitcoin sales. GBTC holds ~620K BTC with an average cost basis of $11,625.
Valkyrie, Bitwise, and Invesco Adopt Cash Mode First
Per James Seyffart, Valkyrie’s updated S-1 filing aligns with Bitwise and Invesco, specifying cash-only creations/redemptions but expressing intent to switch to in-kind if permitted later.
"Update: Valkyrie submitted a new S-1 stating creations/redemptions will be cash-only but aims for in-kind in the future if allowed."
— James Seyffart (@JSeyff)
Functionality Before Optimization?
Cash mode introduces tax inefficiencies, undermining a key ETF structural advantage. However, analysts view it as a temporary compromise, hoping for in-kind solutions long-term.
FAQ Section
Q: Why is cash creation less efficient than in-kind for Bitcoin ETFs?
A: Cash mode requires buying/selling BTC, generating taxable events. In-kind transfers avoid this by directly exchanging BTC for shares.
Q: How does cash mode affect GBTC’s Bitcoin holdings?
A: GBTC would need to liquidate BTC to fulfill redemptions, potentially increasing market sell pressure.
Q: Will all Bitcoin ETFs start with cash mode?
A: Likely yes, as SEC prioritizes controlled exposure. Issuers may later transition to in-kind as regulations evolve.
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Risk Disclosure
Cryptocurrency investments carry high risk, with volatile prices that may result in total capital loss. Assess risks carefully.