The U.S. Securities and Exchange Commission pushed for bitcoin exchange-traded funds to have a key difference from major stock funds, and that decision’s effect on how the funds trade will only become clear over time.
The bitcoin funds that launched Thursday are using a share redemption process that turns the underlying crypto into cash. Most ETFs primarily use an in-kind redemption process, where the underlying asset does not have to be actually sold.
While the rules around share redemption do not directly affect the smaller trades that retail investors do in brokerage accounts, they come into play for the execution of larger trades made by institutions.
There is some concern that using the cash-only redemption model could make the plumbing of the ETFs less efficient.
“It could be that certain funds are capable of getting better execution prices than others. The other thing is that those trading costs, whether it be transaction costs or the market impact type costs that aren’t necessarily quantifiable, those costs are now borne by investors,” said Bryan Armour, director of passive strategies research for North America at Morningstar.
In-kind redemptions are typically used by major equity funds and, as crypto asset manager Grayscale pointed out in a presentation to the SEC, commodities funds. Using cash-only redemption could result in ETFs that have weaker liquidity and wider bid-ask spreads, Grayscale argued.
But Steven McClurg, chief investment officer at Valkyrie, said the situation may be more analogous to fixed income ETFs, where cash redemption is more common because the authorized market participants working with the funds may be more comfortable with that process.
“In this situation, there’s a lot of APs that don’t have the ability to transact in bitcoin. If it was an in-kind model, then it would throw a lot of advantage toward the APs that do have that ability. … We want as many market makers and authorized participants in these products as possible, because…
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