Nasdaq’s Bitcoin ETF Proposal: Key Takeaways for Investors

What does Nasdaq’s proposal mean for Bitcoin ETFs?

Nasdaq has put forward a proposal to the SEC that permits in-kind creation and redemption for the BlackRock iShares Bitcoin Trust (IBIT). In layman’s terms, this means that authorized participants (APs) can either use Bitcoin or cash when creating or redeeming shares of the fund. The primary goal here is to streamline processes, allowing APs to handle Bitcoin transactions directly, which in turn speeds up responses to ETF demand without relying solely on cash.

How do in-kind transactions affect retail investors?

Who gets to participate?

In-kind transactions are largely exclusive. They are tailored for institutional players or high-net-worth individuals, which means regular retail investors are left out. This exclusion limits access to a potentially tax-efficient investment vehicle that might otherwise be beneficial for a broader audience.

What are the additional costs involved?

Without in-kind transactions, retail investors face higher costs. They may have to pay trading fees, deal with unfavorable bid-ask spreads, and could end up with unexpected tax bills when buying or selling ETF units. For retail investors, this makes the prospect of investing in Bitcoin ETFs less appealing, especially when compared to institutional investors who can tap into in-kind options.

Is it fair?

The fact that retail investors aren’t allowed to engage in in-kind transactions seems inherently unfair. It gives an advantage to institutional and high-net-worth players who can leverage more efficient means of investing, creating an uneven playing field.

What trends are emerging in Bitcoin ETF inflows?

What’s the latest on net flows?

On January 24, 2025, the Bitcoin ETF market witnessed a significant net flow of $517.7 million. FBTC saw an inflow of $186.1 million, ARKB $168.7 million, and IBIT $155.7 million. Meanwhile, BITB experienced an outflow of $8.6 million. Other ETFs like BTCO, EZBC, BRRR, HODL, and GBTC were largely inactive, with BTCW seeing a mere $2.8 million inflow.

Who’s driving these numbers?

The surge in Bitcoin prices post-U.S. elections has largely been attributed to large investors. Their holdings surged from 16.2 million to 16.4 million BTC. In stark contrast, small investors reduced their holdings from 1.75 million to 1.69 million BTC during the same timeframe.

How does institutional interest shape the Bitcoin market?

Stability and legitimacy?

Institutional participation through Bitcoin ETFs can bring a semblance of stability to the market. Large investors infuse considerable amounts of capital, which may help to diminish price swings and enhance Bitcoin’s appeal to a wider audience, thereby legitimizing it in the eyes of traditional finance.

Enhanced infrastructure?

Bitcoin ETFs can ease the operational load on financial institutions, offering a regulated product that doesn’t require them to set up their own crypto infrastructure. With ETFs being traded on established exchanges and custodians managing the underlying Bitcoin, the infrastructure for Bitcoin becomes more robust.

Liquidity and trading volume?

The approval of spot Bitcoin ETFs has significantly increased trading volume and liquidity. The added liquidity allows for larger buy or sell orders to be executed without substantial price fluctuations, making Bitcoin more attractive to institutions. This could potentially lead to a considerable uptick in the cryptocurrency market cap.

What regulatory hurdles remain for in-kind transactions?

Market integrity?

The SEC has had reservations about spot Bitcoin ETFs due to market manipulation concerns and the need for investor protection. For in-kind transactions to be viable, these issues would have to be adequately addressed to maintain market integrity.

Operations and security?

For in-kind transactions to function effectively, the ETF must possess the operational and regulatory capacity to manage Bitcoin transfers securely. This entails holding Bitcoin directly, a complex endeavor requiring significant compliance to fend off security risks.

Legal compliance?

Currently, broker-dealers aren’t authorized to manage Bitcoin directly, and cash-based systems are the norm. Transitioning to an in-kind system necessitates revisions to existing rules to ensure compliance with federal securities laws.

Price alignment?

Switching from a cash-based to an in-kind system raises questions about price alignment. Keeping the ETF’s share price in sync with the actual Bitcoin price is critical for maintaining efficiency and fairness.

Retail investor fairness?

The proposed in-kind process may cater exclusively to institutional participants, raising concerns about fairness for retail investors. This could create unequal access to the benefits of in-kind transactions.

Clarity and regulation?

Over 20 exchange rule filings for spot Bitcoin ETFs were previously rejected due to various concerns. Gaining approval for in-kind transactions would require precise regulatory guidance on conducting these transactions within the existing framework.

Global implications?

In-kind transactions align with the global move towards uniform crypto regulations. However, they could also influence global standards regarding asset transfer, taxation, and market stability.

Future regulatory risks?

The regulatory landscape for cryptocurrencies is still in flux, and upcoming changes could impact the viability of Bitcoin ETFs. While spot Bitcoin ETFs have been approved, future regulations may introduce new risks or challenges.

Final thoughts

Nasdaq’s proposal for in-kind Bitcoin ETF transactions is a significant development in crypto investment. While it offers efficiency to institutional investors, it raises questions about market access, fairness, and regulatory challenges. As institutional interest grows, the future of cryptocurrency investment is likely to evolve in response to these forces.