what it means for spreads, taxes and flows

The largest Bitcoin ETF in the world has just revamped its process for moving coins in and out of the fund. BlackRock’s IBIT, which has accrued more than $20 billion since launch, can now process creations and redemptions “in kind.”The SEC’s approval order quietly flipped the switch: IBIT’s authorized participants can now swap Bitcoin directly against shares instead of only taking or delivering cash. While it might sound like a small operating change, the effects could be anything but minor.When spot ETFs went live in January 2024, the SEC required them to be created in cash. If you wanted to buy IBIT, an authorized participant (AP) like Citadel or UBS would sell you ETF shares and wire cash to Coinbase to source the actual Bitcoin.Redemptions worked the same way in reverse: sell ETF shares, get dollars back, and Coinbase liquidated coins to cover the difference. However, this model created a drag. Every creation and redemption process runs through a fiat leg, accumulating transaction costs, custody fees, and, most importantly, tax frictions.APs couldn’t simply shift Bitcoin in inventory: they had to finalize cash sales. That widened bid-ask spreads for large players and opened the door to tracking errors between IBIT’s share price and Bitcoin.In-kind solves this. Now, if an AP needs to deliver 1,000 BTC worth of IBIT shares, it can simply transfer 1,000 BTC from its own balance. Redeeming works the same way: return IBIT shares, receive coins directly, and no forced liquidation.Not everyone can do this. The SEC’s approval order and updated IBIT prospectus name four firms with the privilege: Jane Street, Virtu Americas, JP Morgan Securities, and Marex. These are the desks that already dominate ETF market-making. They now get to skip a step, moving Bitcoin in and out of IBIT’s custodian wallet without having to go through dollars first.That means tighter inventory management, faster arbitrage, and less basis risk. This also means that the spreads on IBIT should compress further. ETFs already trade at pennies around NAV, but with direct coin settlement, the incentive to quote even tighter grows.Then there’s the tax angle. Cash redemptions can trigger taxable events when APs dump Bitcoin to fund withdrawals. In-kind transfers are generally tax-neutral. For institutions managing balance sheets, that’s a meaningful edge. Some ETF lawyers argue it could also sidestep wash-sale complications, since redemptions now involve moving the asset itself rather than cycling cash.The SEC’s order doesn’t settle every nuance, but it makes IBIT look more like a gold ETF: shares backed by a stash of the commodity, with the ability to pull metal (or in this case, coins) on demand.IBIT already dominates the field, regularly pulling in more net flows than all rivals combined.CryptoSlate’s coverage of Farside data shows that IBIT consistently banks hundreds of millions, if not billions, in net inflows, even when its competitors experience losses. By lowering friction for APs, BlackRock may have just sharpened that lead.Cheaper creations mean market makers can quote tighter spreads, attracting more secondary-market volume. Cleaner redemptions mean lower exit costs, which matters to institutions worried about getting stuck in size. Both point toward IBIT becoming the default liquidity pool, with rivals forced to follow if and when they get in-kind approval.Despite the magnitude of the change, everything will likely remain the same to retail investors. IBIT trades the same, with the same ticker and fees. However, under the hood, the switch matters. Tighter spreads should shave basis points off every trade.Better tax treatment reduces hidden costs for large players, and if APs move inventory more quickly, IBIT’s tracking error to Bitcoin could shrink further, improving its pitch as a one-for-one proxy.The broader market effect? Expect more flows into IBIT relative to competitors, at least until they win the same privilege. And regarding Bitcoin’s liquidity, moving coins in and out of the custodian without fiat detours could boost turnover at scale, with knock-on effects for derivatives markets that hedge against ETF inventory.One way or another, BlackRock got the ETF it wanted from day one: a true in-kind Bitcoin fund.Mentioned in this article



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