As the year-end holidays approach, major asset management firms are racing to submit amendments for their bitcoin spot ETF applications, hoping to secure approval in the first wave. According to Bloomberg ETF analyst James Seyffart, Valkyrie, Bitwise, and Invesco have all filed amendments specifying that creation and redemption of their ETF shares will be conducted in cash only—at least for now. While some experts argue this model is less efficient than in-kind redemption, the strategic move raises an important question: should the industry prioritize getting a bitcoin spot ETF approved—even if imperfect—before pushing for optimal structure?
👉 Discover how bitcoin ETF structures could reshape crypto investing in 2025.
This evolving regulatory landscape reflects a delicate balance between innovation and compliance. As the SEC weighs its options, understanding the implications of cash vs. in-kind redemption models is critical for investors, institutions, and market observers alike.
Why the SEC Favors Cash-Only Redemption
The U.S. Securities and Exchange Commission (SEC) appears to prefer the cash-based creation and redemption model for proposed bitcoin spot ETFs. According to Bloomberg analyst Eric Balchunas, this preference stems from regulatory control and oversight concerns. Under a cash model, only the ETF issuer handles the underlying bitcoin—intermediaries like authorized participants (APs) or unregistered broker-dealer subsidiaries are excluded from direct BTC transactions.
This structure limits exposure to unregulated entities and simplifies compliance. The SEC may be wary of allowing non-registered financial firms to interact directly with cryptocurrency, given ongoing concerns about custody, market manipulation, and investor protection.
Here’s how it works:
When demand for ETF shares rises, an authorized participant (AP) delivers cash to the ETF issuer in exchange for new shares. The issuer then uses that cash to purchase bitcoin on the open market. Conversely, when shares are redeemed, the AP receives cash—not bitcoin—from the fund.
“When there is excess demand for a bitcoin ETF, an intermediary ('the AP') will need to create new ETF shares. With cash creates, they give ETF issuer cash for new shares (issuer then buys BTC) vs in-kind they give issuer BTC for shares. Either way, new ETF shares = new BTC purchase.”
— Eric Balchunas, Bloomberg ETF Analyst
While both models ultimately result in fresh BTC purchases, the cash model introduces inefficiencies, particularly around taxes and market impact.
The Tax Efficiency Advantage of In-Kind Redemption
One of the core strengths of traditional ETFs lies in their tax efficiency, achieved primarily through in-kind creation and redemption. This mechanism allows APs to exchange baskets of underlying assets directly for ETF shares—without triggering taxable events.
In a bitcoin context, this would mean APs deliver actual BTC to the issuer when creating shares and receive BTC back when redeeming them. Because no sale occurs, there’s no capital gains tax liability for the fund. This helps minimize tax drag and keeps more value within the ETF.
However, under a cash-only model, every redemption forces the fund to sell bitcoin to raise cash—potentially triggering capital gains taxes if the BTC was acquired at a lower price. Over time, these tax liabilities can erode returns and make the ETF less attractive to long-term investors.
👉 See how next-gen ETF models could unlock tax-efficient crypto access.
Why GBTC Faces Unique Risks Under Cash Redemption
Grayscale’s Bitcoin Trust (GBTC) stands in a particularly vulnerable position if forced into a cash-only framework. Unlike newly structured ETFs, GBTC holds approximately 620,000 bitcoins with an average acquisition cost of just $11,625 per BTC—a fraction of today’s market value.
If GBTC transitions to an ETF structure but operates under cash redemption rules, any significant redemptions could force the fund to sell large amounts of bitcoin to meet cash obligations. These sales would likely incur substantial capital gains taxes—costs that would be passed on to remaining shareholders.
Moreover, forced selling could create downward pressure on bitcoin’s price, especially during periods of high redemption volume. This scenario highlights why many investors view in-kind redemption as essential for large-scale crypto ETFs.
Valkyrie, Bitwise, and Invesco Adopt Cash-Only Filings
In a strategic bid to expedite approval, several firms have proactively aligned their filings with perceived SEC preferences. James Seyffart confirmed that Valkyrie recently submitted a revised S-1 registration statement stating that creations and redemptions will occur in cash only—mirroring similar filings by Bitwise and Invesco.
Notably, Invesco’s amendment includes a forward-looking clause: while launching under a cash model, the firm explicitly reserves the right to pursue in-kind redemption in the future, should regulatory conditions allow.
Valkyrie followed suit with nearly identical language, signaling a coordinated industry effort to clear the initial regulatory hurdle—even if it means accepting suboptimal mechanics at launch.
This “get it approved first, improve later” strategy reflects growing consensus among issuers: securing SEC approval is the highest priority. Once a spot ETF framework is established, future amendments may pave the way for more efficient structures.
Will In-Kind Redemption Follow After Initial Approval?
Historical precedent suggests yes. Many financial products launch under conservative regulatory frameworks before evolving into more sophisticated forms. Once the SEC observes stable operations and market integrity under the cash model, it may feel more comfortable permitting in-kind transactions.
Bloomberg analysts remain optimistic that in-kind redemption will eventually become standard, especially as institutional demand grows and custodial infrastructure matures. The key will be demonstrating that APs can handle bitcoin securely and transparently without compromising investor protection.
Until then, early adopters may pay a premium in terms of tax inefficiency and tracking error—but gain access to regulated, exchange-traded exposure to bitcoin.
Core Keywords
- Bitcoin spot ETF
- Cash vs in-kind redemption
- SEC approval process
- ETF tax efficiency
- Grayscale GBTC
- Authorized participant (AP)
- Cryptocurrency regulation
- Bitcoin investment vehicles
Frequently Asked Questions (FAQ)
Q: What is the difference between cash and in-kind redemption in ETFs?
A: In cash redemption, investors receive cash when redeeming shares, forcing the fund to sell assets. In in-kind redemption, investors receive actual underlying assets (like bitcoin), avoiding taxable sales and improving tax efficiency.
Q: Why does the SEC prefer cash-only bitcoin ETFs?
A: The SEC likely prefers cash models because they limit direct cryptocurrency handling to regulated issuers, reducing risks related to custody, fraud, and unregistered intermediaries.
Q: Can a bitcoin ETF switch from cash to in-kind redemption later?
A: Yes. Firms like Invesco and Valkyrie have indicated they intend to pursue in-kind redemption in the future if regulatory approval is granted.
Q: How does cash redemption affect GBTC investors?
A: If GBTC must sell bitcoin to meet redemptions, it could trigger capital gains taxes and reduce net asset value—potentially hurting long-term shareholders.
Q: Is a cash-based bitcoin ETF still worth investing in?
A: While less tax-efficient than in-kind models, a cash-based ETF still offers regulated, accessible exposure to bitcoin prices—making it valuable for retail and institutional investors seeking simplicity.
Q: When might we see in-kind bitcoin ETFs become available?
A: It depends on SEC comfort levels. If initial cash-based ETFs perform well and markets remain stable, in-kind models could emerge within 12–24 months post-launch.