In-Kind Bitcoin and Ether ETFs: The Game-Changer Wall Street Didn’t See Coming

Brace for impact—physical Bitcoin and Ether ETFs are about to rewrite the rules of crypto investing. No more synthetic exposure or dodgy custody workarounds. The big players are going direct.

Why This Isn't Your Grandpa's ETF

Forget paper promises—these funds hold actual crypto. That means no more tracking errors when markets go vertical (or nosedive). Institutions get the real thing without the headache of self-custody. Retail investors? They just got a backdoor into cold storage.

The Liquidity Earthquake

Market makers are salivating. With billions poised to flood into these vehicles, bid-ask spreads could tighten to levels that make traditional finance blush. Volatility might finally grow up—or get turbocharged by ETF arbitrage.

The Regulatory Tightrope

SEC approval was just the first hurdle. Now comes the real test: can these products handle a crypto winter without triggering mass redemptions? (Spoiler: Wall Street always finds a way to collect fees either way.)

Prepare for the domino effect—when pension funds start allocating 1% to crypto, that 'meme asset' narrative dies forever. The suits won this round. But at least they're bringing real assets to the party.

Smoother trading

Since the switch to an in-kind mechanism eliminates the intermediate step of converting between cash and assets, the result is a more organic, less disruptive FLOW between the ETF and its underlying holdings.

Kssis called the SEC's approval a watershed moment for the digital assets industry.

"When large volumes are created or redeemed through cash mechanisms, authorized participants must execute massive buy or sell orders in the underlying crypto markets, which amplifies volatility precisely when markets are already under stress," he said.

In-kind creation and redemption breaks the volatility cycle, he said.

"Instead of forcing market transactions, we simply transfer the underlying assets directly, removing what was essentially a volatility multiplier. This isn't theoretical —we've observed this dampening effect first hand in European markets where in-kind mechanisms have operated seamlessly," Kssis said.

"The acquisition or disposal of the underlying assets by the APs can happen more flexibly over time, minimizing their market impact and thus helping to dampen price volatility in the underlying asset.""ETFs that create and redeem shares through in-kind transfers of underlying securities tend to minimize capital gains distributions and allow ETFs to trade closer to their net asset value."

According to the New York Digital Asset Investment Group (NYDIG), the switch not only simplifies ETF operations it also has implications for secondary markets and the financial aspects of ETFs, as well as second-order effects on market participants.

"For secondary market trading, because creation and redemption orders can be satisfied by the underlying crypto and not just shares, it may reduce the trading of the ETF shares, especially during the critical NAV index calculation windows. In addition, the change should also lead to tighter spreads to NAV, lower tracking error, lower create/redeem costs, and potential tax benefits," NYDIG said in an explainer.

Cash model is inefficient

The setup leaves the door open for high volatility around the daily fix, particularly on days of large redemptions and creations, which require significant buying and selling of securities. A 2024 study said that cash redemptions can exacerbate market volatility during times of market stress or downturn.

Additionally, analysts told CoinDesk that arbitrageurs tend to congregate in the market around the daily fix window, resulting in increased volatility.

"Since in-cash ETFs lack the precise arbitrage mechanism of in-kind ETFs to keep prices aligned with the NAV, there can be wider bid-ask spreads and more noticeable deviations from NAV during volatile periods. This can lead to increased price swings.""During times of extreme market stress, the process of cash redemptions can exacerbate volatility. To meet redemption requests, ETF managers need to sell securities quickly, which can depress prices in the underlying market and create a feedback loop, amplifying volatility."