How a physically backed bitcoin ETP works, from order to custody

A physically backed bitcoin exchange-traded product (ETP) rests on a chain of counterparties, each with one defined job, between the order screen and the asset itself. A committee evaluating any bitcoin ETP is approving that chain, not a ticker.

A bitcoin ETP order settles in a brokerage account, not on a crypto exchange

A bitcoin ETP order never reaches a crypto exchange. It follows the same route as an order for any listed security.

The broker routes the order to the exchange where the ETP is listed, using the same infrastructure that handles orders for an Apple share or an S&P 500 index fund. A market maker, a specialized trading firm that quotes prices so orders fill quickly and cheaply, takes the other side of the trade if no seller is available. The position then settles in the investor’s brokerage account.

This is the secondary market, where existing ETP units change hands. Because it only moves existing units, a separate mechanism must supply new ones.

Authorized participants create new units and anchor the ETP price to bitcoin

New ETP units are created by an authorized participant (AP), a large financial institution with a formal agreement with the issuer.

When demand outstrips supply, the AP delivers cash or bitcoin to the issuer. The issuer creates new units and returns them to the AP, who releases them into the market. Equity, bond and gold exchange-traded funds have used the same creation and redemption process for decades. Only the underlying asset differs.