Crypto News
The Real Implications Of Cash Creation Instead of In Kind
The SEC has been busy, meeting with all of the potential issuers of spot Bitcoin ETFs with active applications in December. These meetings have resulted in the universal adoption of a cash creation methodology by those issuers instead of “in kind” transfers, as is typical for other ETFs. Much has been said about this change, ranging from the absurd to the serious. The TLDR, however, is the overall impact will be minimal to investors, relatively meaningful to the issuers and it reflects poorly on the SEC overall.
In order to provide context, it is important to describe the basic structure of Exchange Traded Funds. ETF issuers all engage with a group of Authorized Participants (APs) that have the ability to exchange either a predefined amount of the funds assets (stocks, bonds, commodities, etc) or a defined amount of cash or a combination of both, for a fixed amount of ETF shares for a predetermined fee. In this case, were “in kind” creation to be allowed, a fairly typical creation unit would have been 100 Bitcoin in exchange for 100,000 ETF shares. With cash creation, however, the Issuer will be required to publish the cash amount, in real time as the price of Bitcoin changes, to acquire, in this example, 100 Bitcoin. (They also must publish the cash amount that 100,000 ETF shares can be redeemed for in real time.) Subsequently the issuer is responsible for purchasing that 100 Bitcoin for the fund to be in compliance with its covenants or selling the 100 Bitcoin in the case of a redemption.
This mechanism holds for all Exchange Traded Funds, and, as can be seen, means that the claims that cash creation means the fund wont be backed 100% by Bitcoin holding is wrong. There could be a very short delay, after creation, where the Issuer has yet to buy the Bitcoin they need to acquire, but the longer that delay, the more risk the issuer would be taking. If they need to pay more than the quoted price, the Fund will have a negative cash balance, which would lower the Net Asset Value of the fund. This will, of course impact its performance, which, considering how many issuers are competing, would likely harm the issuers ability to grow assets. If, on the other hand, the issuer is able to buy the Bitcoin for less than the cash deposited by the APs, then the fund would have a positive cash balance, which could improve fund performance.
One could surmise, therefore, that issuers will have an incentive to quote the cash price well above the actual trading price of Bitcoin (and the redemption price lower for the same reason). The problem with that, is the wider the spread between creation and redemption cash amounts, the wider the spread that APs would likely quote in the market to buy and sell the ETF shares themselves. Most ETFs trade at very tight spreads, but this mechanism could well mean that some of the Bitcoin ETF issues have wider spreads than others and overall wider spreads than they may have had with “in kind” creation.
Thus, the issuers have to balance the goal of quoting a tight spread between creation and redemption cash amounts with their ability to trade at or better than the quoted amounts. This requires, however, access to sophisticated technology to achieve. As an example of why this is true, consider the difference between quoting for 100 Bitcoin based on the liquidity on Coinbase alone, vis a vis a strategy that uses 4 exchanges that are regulated in the U.S. (Coinbase, Kraken, Bitstamp and Paxos). This example used CoinRoutes Cost Calculator (available by API) which shows both single exchange or any custom group of exchanges cost to trade based on full order book data held in memory.
In this example, we see that a total purchase price on Coinbase alone would have been $4,380,683.51 but the price to buy across those 4 exchanges would have been $4,373,568.58, which is $7,114.93 more expensive. That equates to 0.16% more expense to buy the same 100,000 shares in this example. This example also shows the technology hurdle faced by the issuers, as the calculation required traversing 206 individual market/price level combinations. Most traditional financial systems do not need to look beyond a handful of price levels as the fragmentation in Bitcoin is much larger.
It is worth noting that it is unlikely the major issuers will opt to trade on a single exchange, but it is likely that some will do so or opt to trade over the counter with market makers that will charge them an additional spread. Some will opt to use algorithmic trading providers such as CoinRoutes or our competitors, which are capable of trading at less than the quoted spread on average. Whatever they choose, we do not expect all the issuers to do the same thing, meaning there will be potentially significant variation in the pricing and costs between issuers.
Those with access to superior trading technology will be able to offer tighter spreads and superior performance.
So, considering all of this difficulty that will be borne by the issuers, why did the SEC effectively force the use of Cash Creation/Redemption. The answer, unfortunately, is simple: APs, by rule are broker dealers regulated by the SEC and an SRO such as FINRA. So far, however, the SEC has not approved regulated broker dealers to trade spot Bitcoin directly, which they would have needed to do if the process was “in kind”. This reasoning is a far more simple explanation than various conspiracy theories I’ve heard, that do not deserve to be repeated.
In conclusion, the spot ETFs will be a major step forward for the Bitcoin industry, but the devil is in the details. Investors should research the mechanisms each issuer chooses to quote and trade the creation and redemption process in order to predict which ones might perform best. There are other concerns, including custodial processes and fees, but ignoring how they plan to trade could be a costly decision.
This is a guest post by David Weisberger. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.
There has been a lot of debate and confusion around the nature of cash creation based ETFs, here is an explanation of the market dynamics involved.
The day Bitcoiners have been waiting for is finally here. Donald Trump, the first-ever pro-Bitcoin president of the United States, is officially being inaugurated today, January 20, 2025. After a historic campaign in which he famously turned his stance around and championed Bitcoin and crypto throughout 2024, Bitcoiners are eagerly watching to see his promises come to life.
Trump’s campaign was filled with bold commitments to the Bitcoin and crypto industry: national bitcoin reserves, freeing Ross Ulbricht, making the United States the crypto capital of the world, and more. Today marks the beginning of his presidency, and these promises are expected to roll out in the days ahead.
Bitcoin Magazine is thrilled to celebrate this monumental moment in Bitcoin history by bringing you live coverage of the inauguration from PubKey NYC starting at 10:00 a.m. EST.
LIVE: DONALD TRUMP INAUGURATION | AMERICA’S FIRST #BITCOIN PRESIDENT https://t.co/KuwGYgUukP
— Bitcoin Magazine (@BitcoinMagazine) January 20, 2025
The livestream will feature a recap of Trump’s campaign trail, highlighting key moments when he voiced his support for Bitcoin. We’ll be joined by well-known leaders in the Bitcoin space, who will share their predictions and debate the potential impact of the Trump administration on Bitcoin’s future.
This celebratory event brings together Bitcoin and crypto community members to discuss, debate, and reflect on what Trump’s presidency could mean for Bitcoin adoption and regulation.
Don’t miss the action—Catch the Bitcoin Magazine livestream coverage on X, YouTube and Rumble starting today, January 20, 2025, at 10:00 a.m. EST.
Donald Trump’s inauguration as the first pro-Bitcoin U.S. president is here—join Bitcoin Magazine’s live coverage at 10 a.m. EST!
Today, the BTCPay Server Foundation was awarded a $25,000 grant paid directly in bitcoin from Unbank, a cash focused Bitcoin exchange, according to a press release sent to Bitcoin Magazine. The grant will be paid out to contributors working on developing new features, open-source payment innovation, and maintenance of BTCPay Server’s Greenfield APIs and codebase.
“Unbank’s support is a testament to the growing recognition of open-source payment solutions in the Bitcoin ecosystem,” said BTCPay Server core contributor R0ckstar Dev. “This grant will help our efforts to enhance BTCPay Server’s capabilities and reach.”
Unbank, which has become a leading bitcoin ATM network with over 830 ATMs and over 30,000 partner locations, is also utilizing BTCPay Server to process bitcoin sell transactions within their app.
“We love using BTCPay Server in our operations,” Emilio Pagan-Yourno, CEO and COO of Unbank. “When customers buy Bitcoin at our ATMs, we rely on their API to batch and broadcast transactions every 15 minutes. Supporting BTCPay Server is not just essential for our business — it’s a privilege to contribute to the FOSS ecosystem that powers financial freedom.”
Last summer, BTCPay filmed and released a documentary covering the use of bitcoin as a means of exchange at the world’s largest Bitcoin conference in Nashville. BTCPay, in collaboration with Jack Maller’s company Strike, enabled every vendor at the conference to accept bitcoin as payment.
The grant will help BTCPay continue to work on open-source payment development.
When the $TRUMP meme coin dropped Friday evening, no one was surprised. Or at least, they shouldn’t have been. He has a knack for jumping headfirst into endeavors he thinks he can make money on, in self-promoting fashion, that often end in disaster. Some of these ventures include Trump Airlines, Trump Vodka, Trump Steaks, Trump University, Trump Magazine, Trump Plaza Hotel and Casino, Trump Mortgage, Trump: The Game. Crypto is the next game in town he’s decided to throw his hat into.
I’ve already written articles and talked at various lengths about Trump leaning into the crypto space to earn votes in this past election that in many ways was quite successful. At Bitcoin Nashville this past summer, in an effort to garner support for his presidential candidacy, Trump said some notable things including that America will become “the crypto capital of the planet and bitcoin superpower of the world,” that he would fire Gary Gensler, and that he wants all remaining bitcoin to be made in America (concerning from a decentralized point of view, and highly implausible in reality). He also famously said that he would commute the sentence of Ross Ulbricht on Day one, which if he does I will be the first to give credit where credit is due. (For more on this I recommend watching the recent Reason documentary on why Ross should be freed).
Crypto is Donald Trump’s next frontier and combines several things he absolutely loves when it comes to business deals – Quick easy money, self-promotion, America first messaging, and little bureaucratic friction standing in his way. So, what is $TRUMP coin?
It’s built on the Solana blockchain with a total supply of 1 billion tokens. Initially, 200 million tokens are available for circulation, while the remaining 800 million are held by CIC Digital, a Trump Organization affiliate, subject to a three-year lock-up period (which means the Trump family holds 80% of supply…). Following its launch, the $TRUMP coin’s market cap surged, reaching approximately $6 billion. The coin’s price peaked at $33.7. The $TRUMP coin was marketed as a means for supporters to express their alignment with Trump’s ideals, rather than as an investment opportunity, which is hogwash for the pump and dump self-enrichment scheme that he is in my opinion immoral and unethical for creating, and investors (oops, guess we should say “fans”) are stupid for taking part in.
With inauguration on Monday, we’re entering uncharted territory where it’s likely Trump will issue Executive Orders relating to bitcoin and crypto, and now emboldened by the presidency, lack of legal worries, and supporters that I truly believe would be fine with whatever he does. As he famously quoted, “I could stand in the middle of Fifth Avenue and shoot somebody, and I wouldn’t lose any voters, OK?”
Some of these actions could be positive for the Bitcoin industry and advocates in the United States. But many of his actions could also equally benefit the broader crypto space that is rife with pump-and-dump scam coins and useless get rich quick schemes for wealthy insiders and people who have lobbied him throughout this last cycle. The pump and dump crypto landscape, his goofy coins and NFT’s, make sense to Trump. In fact, I’m betting he truly believes this is crypto’s purpose, while knowing little about Bitcoin. Trump has repeatedly said he has “fun with crypto” and ended his keynote address at the Bitcoin Conference this past summer by saying “have a good time with your bitcoin and your crypto and everything else that you’re playing with.” Trump’s experience in and views of crypto and bitcoin are around fun and making easy money. But with Bitcoin, many of us in the space are fighting for much more, which includes Bitcoin’s many use-cases as censorship resistance digital currency, digital gold, a medium of exchange to use in self-custody and via privacy preserving tools, a powerful tool for human rights, and much more. This isn’t a gamble for us…it’s the future of money that challenges the dollar and central bank rule.
If Trump really began to grasp this, based on his track record and previous statements on Bitcoin, he’d be quite against this use of Bitcoin. Or perhaps he knows what Bitcoin is at some level, and would rather promote the “fun” meme coins, and maybe Bitcoin as digital gold, but nothing more. He did after all say in 2021, quite clearly, “Bitcoin, it just seems like a scam. I don’t like it because it’s another currency competing against the dollar.” He added that he wanted the dollar to be “the currency of the world.” (For more on this concept I’d highly recommend following Mark Goodwin and his work on the bitcoin dollar.)
Trump wants you to keep playing with crypto, funneling money to his organizations, but it’s unlikely he’d be a fan of anyone using bitcoin as a competitor to the dollar, circumventing traditional finance or using privacy tools (particularly if you are an adversary or from what he deems a left/woke cause, which perhaps one day he’d classify our nonprofit The Progressive Bitcoiner as). I’ll keep promoting Bitcoin as resistance money, and hope you’ll join me, rather than endlessly gambling on crypto “and everything else you’re playing with.”
This is a guest post by Trey Walsh. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.
$TRUMP Coin is nothing more than a way to extract money from the crypto ecosystem.
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