SEC’s In-Kind Approval Ignites $710B Bitcoin ETF Supply Crunch – Here’s Why It Matters

The SEC just greenlit in-kind creations for Bitcoin ETFs—and Wall Street’s about to feel the squeeze.

The $710 Billion Pressure Cooker

Forget ‘supply shock.’ This is a supply stranglehold. With in-kind approvals, authorized participants can now create ETF shares using actual Bitcoin instead of cash. That means every new share minted pulls more BTC off the open market—fast.

Why TradFi Just Got Punk’d

Institutions wanted a ‘clean’ way into crypto? Congrats. They’re now competing with their own ETFs for the same dwindling Bitcoin supply. Poetic justice for the suits who thought they could outsmart Satoshi’s scarcity playbook.

The Cynic’s Corner

Watch hedge funds pay 20% premiums to FOMO into ETFs… while pretending they ‘always believed’ in digital gold. Classic finance theater.

Bottom line: The SEC didn’t just approve a mechanism—they lit the fuse on Bitcoin’s next parabolic move. Buckle up.

How in-kind creations and redemptions changes the model

The operational shift reconfigures primary market flows for arbitrage-focused APs. Under the in-kind model, they can short the ETF and source crypto directly for creation when premiums arise or redeem ETF shares for crypto when discounts emerge. This eliminates the execution lag and basis risk associated with cash settlements, creating cleaner hedging opportunities using CME futures. With open interest in CME Bitcoin derivatives NEAR record highs in mid-2025, liquidity appears sufficient to support these changes.

The revised mechanism also alters how ETF flows interact with the spot crypto markets. In the previous model, fund-side purchases or redemptions introduced direct buy/sell pressure on exchanges, often influencing short-term price movements.

Now, APs can fulfill their asset obligations through OTC channels, thereby reducing the market footprint and potentially softening volatility during heavy FLOW days. This mirrors the bullion market’s use of OTC networks to settle gold ETP flows, limiting public order book stress.

Opening the door to massive inflows

As the infrastructure matures, several metrics will inform the market impact of the SEC’s decision. These include ETF premium and discount behavior relative to NAV, the spread between CME futures and spot prices, and on-exchange depth metrics on major USD trading venues. Analysts will be watching whether OTC market activity increases on high-creation days and whether public exchange liquidity becomes more resilient.

Mechanically, the shift may slightly reduce the direct exchange impact of ETF flows, dampening short-term price effects from primary market activity. However, the broader implications point toward increased scalability.

Lower costs, cleaner arbitrage, and enhanced hedging tools improve the vehicle’s appeal to institutional allocators. If these advantages translate into sustained net inflows, the upward pressure on spot Bitcoin and Ethereum demand could be substantial.

ETF flow data from earlier in 2025 already indicates a tight correlation between net inflows and Bitcoin price appreciation. By streamlining fund operations, the in-kind model lowers barriers for larger allocations and enables more predictable pricing behavior.

The addition of options and higher derivative limits further supports institutional positioning, echoing how access innovations helped scale commodity exposures in the past.

The regulatory overhaul effectively modernizes the infrastructure around crypto ETPs.

By permitting in-kind creations and redemptions, the SEC has created a pathway for demand to flow more efficiently into digital assets, reducing friction without altering the underlying thesis: flows MOVE markets, and structure determines how much of that flow reaches the chain.

Ultimately, for Bitcoin ETFs to compete in size against the largest funds by AUM in the world, in-kind creations and redemptions are a necessity. The operational opportunities are immense, and the efficiency the change brings is essential to attracting additional capital.

The largest ETF by AUM is Vanguard’s S&P 500 ETF (VOO), which holds $714 billion. By comparison, the largest spot crypto ETF, BlackRock’s (IBIT), currently controls $86 billion.

Could in-kind creations and redemptions allow Bitcoin ETFs to mature to a level comparable with VOO’s $700 billion giant? That requires a 10x explosion from where we’re at, but should bitcoin price continue its ascension against the dollar, who knows what’s next.

At $200,000 Bitcoin, IBIT would already sit in the top 10 ETFs by assets even without another dollar of inflows. If inflows continue alongside BTC price appreciation for the next few years, a supply squeeze becomes almost inevitable.