SEC approves in-kind creations for spot Bitcoin, Ethereum, and XRP ETFs

Investing in a spot crypto exchange-traded fund (ETF) may seem straightforward. Investors typically open a brokerage account, purchase shares, and gain exposure to assets such as Bitcoin, Ethereum, or XRP without directly handling digital wallets.

The mechanics behind crypto ETFs

However, the process supporting these transactions is far more complex than it appears at first glance. Multiple entities—including authorized participants, market makers, liquidity providers, and institutional custodians—play critical roles in the background.

A common misconception is that buying $1,000 of a Bitcoin ETF prompts the fund to immediately purchase an equivalent amount of Bitcoin. Instead, most ETF trades occur between investors on an exchange, meaning the buyer’s funds primarily go to the seller, not the ETF manager.

The underlying cryptocurrency comes into play when rising demand for ETF shares causes the available supply to shrink or their market price to deviate from the value of the assets in the fund’s portfolio.

The role of authorized participants

Authorized participants (APs) are designated financial institutions with the exclusive ability to create or redeem significant blocks of ETF shares, known as baskets. For instance, BlackRock, a leading global asset manager, restricts this function for its Bitcoin and Ethereum ETFs to authorized participants.