In the fast-evolving landscape of cryptocurrency investment, the impending arrival of a Bitcoin Exchange-Traded Fund (ETF) has stirred intrigue and speculation. However, amidst the buzz surrounding this financial innovation, there have been misconceptions that need clarification, particularly regarding the redemption models mandated by the US Securities and Exchange Commission (SEC).

Bloomberg’s Senior ETF Analyst, James Seyffart, recently stepped in to address the swirling misunderstandings around the ‘Cash Create’ redemption model set for the spot Bitcoin (BTC) ETF. With several applicants adhering to the SEC’s demands, public perceptions arose that adopting this redemption model implied the fund would not actually hold Bitcoin. Seyffart, in no uncertain terms, clarified that “Spot Bitcoin ETFs WILL hold Bitcoin.”

Responding to queries, some enthusiasts raised concerns about transparency and verifying the cash-create model’s functionality through on-chain addresses. Seyffart highlighted Osprey Funds’ publication of addresses for its OBTC offering as an example, though he noted this practice wasn’t universally adopted by ETF issuers.

One curious user even sought a concise book explaining the Bitcoin ETF concept, prompting a lighthearted chuckle from Seyffart. Amidst these clarifications, the distinction between the ‘Cash Create’ and ‘In-Kind’ redemption models emerged as a focal point for understanding.

The in-kind model, elucidated by BlackRock in a meeting with the SEC, entails a streamlined 5-step process. It commences with a Market Maker (MM) requesting redemption via an Authorized Participant (AP). The ETF issuer approves the order, prompting the MM to purchase ETF shares through a Listing Exchange. Subsequently, the ETF shares are delivered to a Transfer Agent by the MM after the ETF issuer instructs the Bitcoin custodian to release the coins.

Contrastingly, the cash-create model involves a divergent process. Here, the ETF issuer must direct the Bitcoin custodian to move cash from cold storage for sale post-redemption initiation by the MM. Only after this action can the MM engage in a trade with the ETF issuer to buy BTC for USD.

Seyffart’s insights serve to demystify the complexities behind these redemption mechanisms. The underlying goal of both models remains ensuring liquidity and operational functionality while complying with SEC requirements.

Delving deeper, the distinction between cash create and in-kind models emerges as a pivotal point. BlackRock outlined this contrast in a document presented during an SEC meeting, shedding light on the fundamental differences between the two.

The in-kind model follows a streamlined 5-step process involving Market Makers (MMs), Authorized Participants (APs), ETF issuers, and Bitcoin custodians. This model ensures the seamless transfer of ETF shares and Bitcoin holdings.

On the other hand, the cash create model necessitates a more intricate process. ETF issuers must instruct Bitcoin custodians to move cash from cold storage, subsequently selling it post-redemption initiation. Only then can Market Makers engage in trades to procure BTC for USD.

As the ETF landscape expands, the significance of understanding these redemption models cannot be overstated. Each model presents its own set of nuances and implications, influencing how the ETF interacts within the market.

In the realm of crypto ETFs, transparency stands as a pivotal concern. While some issuers opt to disclose on-chain addresses, providing visibility into their operations, it remains a choice rather than a mandate. This diversity in transparency practices underscores the evolving nature of cryptocurrency markets and investor preferences.

Ultimately, Seyffart’s clarifications shed light on the intricate workings of Bitcoin ETFs. As the industry eagerly anticipates their debut, a clearer understanding of these models will guide investors and enthusiasts alike through the evolving landscape of cryptocurrency-backed financial products.