BitMEX Raises Alarm: Cash Redemption Model for Spot Bitcoin ETF Could Diminish Its Benefits

(via Yahoo Finance)

SEC Stance on Cash Redemption Model for Spot Bitcoin ETFs

The U.S. Securities and Exchange Commission (SEC) is currently reviewing applications for Bitcoin spot Exchange-Traded Funds (ETFs) from issuers like BlackRock. Recent media reports reveal that the SEC has made it clear in meetings with several issuers that it will only approve applications adhering to a “cash purchase/redemption model,” rejecting the kind purchase/redemption approach preferred by the issuers. This decision is anticipated to heavily influence the first batch of Spot Bitcoin ETFs expected to get approval in January.

Further reading：SEC Sets Deadline for Spot Bitcoin ETF Applications: Key Developments and Expectations

BitMEX’s Warning: Potential Loss of Major ETF Advantages

BitMEX Research, the research division of the veteran cryptocurrency derivatives exchange BitMEX, has voiced concerns over this decision. They warn that adopting the cash redemption model could lead to the loss of major structural advantages inherent in Spot Bitcoin ETFs. They explained that if an ETF trades at a premium (often due to higher buyer demand than seller supply), Authorized Participants (APs) are incentivized to buy the underlying asset/commodity and deliver it to the issuer to receive new ETF units. However, if only cash purchase and redemption are allowed, many of the benefits making the ETF efficient will be lost as market competition among APs will be significantly reduced.

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Nic Carter’s Analysis: Efficiency and Cost Implications

Nic Carter, co-founder of blockchain analytics firm Coin Metrics and former crypto asset analyst at Fidelity, also shares concerns about the cash model. He believes that this approach would decrease the efficiency of the ETF as the costs associated with purchases/redemptions would be higher. While it’s uncertain if this will lead to price tracking errors or higher fees, it will undoubtedly make participating in a Spot Bitcoin ETF more expensive.

Further reading：Bitcoin ETF Breakthrough: SEC Discusses Kind and Cash Redemption with BlackRock and Grayscale

Impact on Market and Investors

The move by the SEC suggests that the first batch of Spot Bitcoin ETFs will likely operate under the cash model, which could significantly affect their operation and appeal to investors. The decision to remove any content referring to the kind purchase/redemption model from the application documents further cements this stance. As a result, even issuers who previously held out for a kind model, like Grayscale, have had to compromise and adopt the cash model to stay in contention for the approval of their ETFs.

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Keywords: Spot Bitcoin ETF, SEC, Cash Redemption Model, BitMEX Research, ETF Structure, Authorized Participants, Market Efficiency, Investment Costs, Nic Carter, Coin Metrics