Bitcoin ETF: Creations in cash VS creations in kind?  BlackRock launches the debate

BlackRock has just warned the SEC of the potential risks associated with in-kind orders for Bitcoin ETF shares. In a context of debate on liquidity creation models, investor security is at the heart of concerns.

Bitcoin ETF: BlackRock warns against cash creations

The liquidity creation model of Bitcoin ETFs is not unanimous

Pursuant to SEC approval, new Bitcoin ETFs will adopt a model for creating cash liquidity. This approach sparks significant debate within the financial industry.

In his documents filed, BlackRock strongly advocated for in-kind orders, emphasizing their effectiveness and lower cost compared to cash creations. However, the SEC guided applicants toward the liquidity creation model due to the specific nature of the regulatory processes.

The complexity lies in the direct processing of Bitcoin by these brokers, raising questions about compliance with financial rules. Currently, the lack of clarity on these aspects has led to a transition of Bitcoin ETF applications to a cash-in model in December, just before approval.

BlackRock criticizes SEC model

As the world’s largest asset manager, BlackRock expresses substantial concerns about the effectiveness of the liquidity creation model adopted by Bitcoin ETFs. THE BlackRock iShares Bitcoin ETF (IBIT) prospectus warns of potential risks associated with the current practice of buying and selling stocks with cash rather than using Bitcoin directly.

According to BlackRock, this method could cause problems in keeping stock prices aligned with the real value of Bitcoin. In the “Risk Factors” section, she also highlights the consequences on the arbitration operations of Authorized Participants.

The price implications of Bitcoin ETFs

Since the launch of Bitcoin ETFs, the net asset value premium compared to the discount spread maintains relative stability. It varies from +40 basis points to –30 basis points over 10 trading days.

BlackRock’s Bitcoin ETF has not deviated beyond +5 basis points and –11 basis points over the past 12 months. This constancy suggests that Bitcoin ETFs maintain some stabilitydespite BlackRock’s concerns.

Regardless, investors will need to remain vigilant as this debate evolves. It could have significant repercussions on the value of Bitcoin ETFs.

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