The landscape of spot Bitcoin exchange-traded funds (ETFs) in the United States may be on the verge of a significant operational shift. Nasdaq has filed a proposal with the U.S. Securities and Exchange Commission (SEC) to amend the rules governing BlackRock’s iShares Bitcoin Trust (IBIT), aiming to introduce in-kind redemptions—a move that could enhance efficiency, transparency, and tax advantages for institutional participants.
This development marks a pivotal moment in the evolution of crypto-based ETFs, signaling growing maturity in how digital assets are integrated into traditional financial frameworks.
Why In-Kind Redemptions Matter for ETF Efficiency
In traditional ETF structures, shares are created and redeemed through cash transactions. However, in-kind creations and redemptions allow authorized participants (APs)—typically large financial institutions—to exchange baskets of underlying assets (in this case, Bitcoin) directly for ETF shares, or vice versa.
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ETF analyst James Seyffart emphasized that this model should have been permitted from the start. In a January 24 post on X, he noted:
“This is more efficient. It reduces bid-ask spreads and avoids brokerage commissions that would otherwise be incurred when selling a basket to raise cash.”
By eliminating the need to liquidate Bitcoin holdings to settle redemptions, the in-kind mechanism streamlines operations, lowers transaction costs, and improves price alignment between the ETF and its underlying asset.
Who Benefits? Authorized Participants, Not Retail Investors
It's crucial to clarify a common misconception: individual investors cannot participate in in-kind creations or redemptions. The process remains exclusive to authorized participants who meet stringent regulatory and capital requirements.
Chris J. Terry, Chief Architect at Bitseeker, addressed widespread confusion on social media, stating:
“No, this doesn’t mean you can now deposit or withdraw Bitcoin from your brokerage account. This primarily benefits APs and helps maintain ETF liquidity.”
While retail investors continue to buy and sell IBIT shares using cash on exchanges, the improved structural efficiency benefits all shareholders indirectly by minimizing tracking error and enhancing market stability.
Enhanced Transparency and On-Chain Visibility
One of the most compelling arguments for in-kind settlements is the boost in transparency. When APs transact Bitcoin directly with the fund, these movements can be observed on the blockchain, offering real-time insights into fund activity.
MartyParty, a pseudonymous crypto analyst with over 143,000 followers on X, highlighted this advantage:
“This means higher transparency and a flowing on-chain record.”
Such visibility strengthens market confidence, as stakeholders can independently verify fund flows and assess potential impacts on Bitcoin’s supply dynamics.
Tax Efficiency: A Hidden Advantage
Beyond operational improvements, in-kind redemptions offer a critical tax advantage for ETFs holding appreciating assets like Bitcoin.
When an ETF redeems shares using cash, it may need to sell Bitcoin to raise funds—triggering capital gains that could be distributed to remaining shareholders. In contrast, transferring Bitcoin directly out of the fund avoids taxable events within the trust.
Chris J. Terry explained:
“By allowing stock-to-asset exchanges, ETFs can minimize capital gains distributions—an advantage for investors holding fund shares.”
This structure aligns with long-term investment strategies, particularly appealing to tax-sensitive investors.
IBIT Remains the Leader in Asset Inflows
Since its launch in January 2024, BlackRock’s iShares Bitcoin Trust (IBIT) has emerged as the dominant player in the U.S. spot Bitcoin ETF market. According to data from Farside Investors, IBIT has attracted approximately $39.57 billion in net inflows, outpacing competitors like Fidelity’s FBTC and ARK Invest’s ARKB.
This sustained demand underscores investor confidence in BlackRock’s brand and execution capabilities—and the proposed rule change could further solidify its competitive edge.
Broader Market Momentum: New ETF Filings Signal Expansion
On the same day Nasdaq submitted its filing, the crypto asset management space saw a wave of new ETF applications across North America and Europe:
- CoinShares filed for both Litecoin (LTC) and XRP ETFs in Europe.
- Grayscale Investments submitted proposals to convert its Solana (SOL) and Litecoin (LTC) trusts into ETFs.
- Additionally, Grayscale applied for a Bitcoin Miners ETF and an Ethereum Staking Yield ETF.
These filings reflect a growing institutional appetite for diversified exposure to digital assets beyond just Bitcoin and Ethereum.
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FAQ: Understanding In-Kind Redemptions in Bitcoin ETFs
What are in-kind creations and redemptions?
In-kind transactions allow authorized participants to create or redeem ETF shares by exchanging the underlying asset—Bitcoin—instead of cash. This reduces trading friction and enhances efficiency.
Can individual investors use in-kind redemptions?
No. Only authorized participants (APs), such as large broker-dealers or institutional firms, can engage in in-kind transactions. Retail investors must continue using cash-based trading through brokers.
Why didn’t spot Bitcoin ETFs launch with in-kind redemptions?
Regulatory caution was a key factor. The SEC initially required cash-only models to mitigate perceived risks related to custody and valuation. However, as market infrastructure matured, pressure grew for more efficient mechanisms.
Do in-kind redemptions affect Bitcoin’s price?
Indirectly, yes. By reducing the need to sell Bitcoin for cash during redemptions, downward price pressure is minimized. Transparent on-chain flows also help markets anticipate supply changes.
Will other Bitcoin ETF providers adopt in-kind redemptions?
If approved for IBIT, it’s likely other issuers—including Fidelity, Ark Invest, and VanEck—will pursue similar amendments to remain competitive.
Does this make Bitcoin ETFs safer or more transparent?
Yes. In-kind settlements improve structural integrity by aligning the ETF more closely with its underlying asset. Combined with on-chain traceability, this enhances overall transparency.
The Path Forward: Regulatory Hurdles and Industry Impact
While Nasdaq’s proposal represents a technical refinement rather than a radical overhaul, its approval could set a precedent for future digital asset ETFs. The SEC will evaluate whether the proposed mechanism ensures fair valuation, prevents market manipulation, and protects investor interests.
If greenlit, we may see a broader shift toward in-kind models across the crypto ETF ecosystem—potentially accelerating adoption among institutional investors seeking efficient, tax-advantaged exposure to digital assets.
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