As the Christmas holiday approaches, various asset management companies have submitted amendments for Bitcoin spot ETFs, hoping to be included in the first batch of approved lists. James Seyffart, an ETF analyst at Bloomberg, stated that Valkyrie, Bitwise, and Invesco have all proposed amendments that only allow creation and redemption in cash. Although another analyst, Eric Balchunas, pointed out that the cash mode would lower the efficiency of ETFs, everyone may still prefer to “get something first and then make it better.”
Why does the SEC prefer the cash mode?
The cash mode is disadvantageous for GBTC and will force the sale of Bitcoin.
Valkyrie, Bitwise, and Invesco first submit cash mode.
Get something first and then make it better?
Bloomberg ETF analyst Eric Balchunas explicitly pointed out that the cash mode preferred by the SEC means that only ETF issuers handle BTC, not intermediaries (registered brokers cannot). They may also be unwilling to allow subsidiaries of unregistered broker-dealers to handle it (because they are not registered).
Balchunas pointed out that the superpower of ETFs comes from the tax efficiency of physical creation and redemption. If ETFs are forced to use only the cash mode, the fund can only buy and sell assets (in this case, Bitcoin), and then generate capital gains/losses.
If GBTC can only use the cash mode, they will be forced to sell Bitcoin. According to Balchunas’ estimation, GBTC holds 620,000 bitcoins with an average cost of $11,625.
According to a post by James Seyffart, an ETF analyst at Bloomberg, Valkyrie has also submitted a new S-1 form, similar to Bitwise and Invesco. They stated that creation and redemption can only be done in cash. However, like Invesco, they specifically stated that if/when allowed, they hope to use the physical mode in the future.
Since the cash mode brings tax disadvantages, a Bitcoin ETF created in cash is not ideal and undermines a major advantage of the ETF structure. But it is better than nothing, and Bloomberg analysts also hope to ultimately resolve this issue in a physical manner.
Eric Balchunas
James Seyffart
Bitcoin spot ETF
Cash mode
Further reading
ETF dynamics | SEC delays digital ETF as planned, Bloomberg analyst: SEC is currently negotiating with industry participants
BITO achieved a new high trading volume last week, confirming market demand for Bitcoin spot ETFs!