What Are Bitcoin In-Kind Creations and Redemptions?
In-kind creation/redemption is a process where an exchange-traded product (ETP) or ETF issues or redeems shares in exchange for the underlying asset itself (Bitcoin), rather than cash. In a Bitcoin ETF context, this means Authorized Participants (APs) can deliver actual BTC to the fund to create new shares, or receive BTC from the fund when redeeming shares . This differs from cash transactions where APs would exchange dollars for shares and the fund would then buy or sell Bitcoin in the market. The U.S. SEC initially approved spot Bitcoin ETFs with cash-only creations/redemptions in early 2024, but by mid-2025 regulators allowed full in-kind transactions for crypto ETPs . This brought crypto ETFs in line with standard ETF practice, improving efficiency and cost. For investors, in-kind redemptions mean that when large institutions pull out of a Bitcoin ETF, the outflow is settled by delivering bitcoins instead of forcing the fund to liquidate holdings for cash. Likewise, inflows can be met by accepting BTC without the fund itself having to buy on the open market . This mechanism helps keep the ETF’s price closely tracking the spot BTC price by enabling APs to arbitrage price gaps with minimal friction.
Mechanically, how it works: In-kind transactions occur in large blocks (e.g. “creation units” or baskets of 40,000 shares for BlackRock’s iShares Bitcoin Trust) by approved APs . To create shares, an AP assembles the requisite BTC (equal to the basket’s net asset value) and transfers it to the trust’s custodian. In return, the ETF issues new shares to the AP at NAV. Conversely, to redeem, an AP returns a basket of ETF shares to the trust and receives the proportional amount of BTC from the fund’s holdings . Individual retail investors cannot directly request in-kind redemptions; they trade ETF shares on the stock exchange, while APs handle the primary market creations/redemptions on behalf of the market. This two-tier structure (primary market for APs, secondary market for investors) is what keeps the ETF’s share price aligned with its underlying holdings through arbitrage. Crucially, the BlackRock iShares Bitcoin Trust and similar funds now explicitly allow both cash and in-kind exchanges with APs, giving flexibility to use whichever is more efficient . In practice, in-kind is expected to dominate because it avoids extra trading steps. Industry experts note that enabling APs to “deliver or receive bitcoin in exchange for shares” can tighten spreads and reduce tax exposure compared to cash processes . It essentially allows the ETF to function as a pass-through vault for Bitcoin, rather than having to act as a constant buyer/seller of coins.
Bitcoin Flow: From Spot Market to ETF and Back (Mechanics Illustrated)
When new shares of a Bitcoin ETF are created in-kind, bitcoins must flow from the open market into the ETF’s custodial vaults. The process starts with an AP acquiring BTC from the spot market (e.g. via exchanges or OTC desks). The AP then delivers the bitcoin to the ETF’s custodian, who safekeeps it on behalf of the trust. Once the custodian verifies receipt, the ETF issues a corresponding block of new shares to the AP at NAV . The AP can then sell those shares on the stock exchange to satisfy investor demand. This creation process is summarized in Figure 1 below. Importantly, the trust will not issue shares until the exact amount of BTC required for the basket is in hand (for example, as of Jan 2025 BlackRock’s basket was ~22.7 BTC for 40,000 shares, adjusting over time for fees) . The in-kind approach means the AP, not the fund, handles sourcing the bitcoin – a more efficient mechanism that avoids slippage and large fund-level trades.
Figure 1: Creation process for a Bitcoin ETF (in-kind). The Authorized Participant (AP) acquires bitcoin in the spot market and transfers it to the ETF’s custodian. The ETF trust issues new shares to the AP, who can then sell them on the stock exchange.
On the flip side, when ETF shares are redeemed in-kind, bitcoins flow out of the trust back into the market. In a redemption, an AP will buy up a large block of ETF shares (often when the ETF is trading at a discount to NAV), then present that block to the ETF sponsor for redemption. The fund’s custodian will release the corresponding amount of BTC from the trust’s reserves to the AP, and the ETF shares submitted are cancelled (reducing shares outstanding) . The AP typically then sells those returned bitcoins into the market (or uses them to fill client orders), which can add supply to spot exchanges. Figure 2 illustrates this redemption flow. Recent on-chain data confirms this process in action: for example on Jan 12, 2026, BlackRock’s ETF saw a redemption of ~2,791 BTC (worth over $300M), and blockchain records showed thousands of BTC moving from BlackRock’s custodian wallets to Coinbase Prime within hours . In other words, the APs received actual Bitcoin from the trust and routed it to an exchange (Coinbase Prime) to sell or redistribute, making the ETF outflow a direct source of sell-side liquidity in the market . This exemplifies how in-kind redemptions translate ETF investor outflows into real Bitcoin moving and trading in the broader market.
Figure 2: Redemption process for a Bitcoin ETF (in-kind). The AP accumulates ETF shares and submits them to the trust for redemption. The ETF’s custodian releases the underlying bitcoins to the AP, who can then sell the BTC on the open market.
Through these creation/redemption flows, institutional demand and supply are transmitted to the Bitcoin market. In 2024, the launch of spot ETFs meant large inflows (creations) that absorbed BTC from sellers, contributing to price rallies. By 2025–2026, with in-kind redemptions active, the reverse also holds: when investors pull out, the ETFs return BTC to the market, which can add downward pressure . Over 1.29 million BTC were held across U.S. spot Bitcoin funds by early 2026 , so even small percentage outflows can involve thousands of bitcoins moving out of custody in a single day, as we saw with BlackRock’s ~2.8k BTC redemption event. This mechanism effectively makes ETF flows a new channel of institutional liquidity impacting Bitcoin’s price. Industry analysts have noted that Bitcoin’s market plumbing has entered a new phase: ETF creations and redemptions now “drive physical settlement flows that ripple directly into spot liquidity,” meaning institutional allocation decisions can swiftly affect supply-demand balance in the market .
Role of Authorized Participants and Market Makers
Authorized Participants are at the heart of the in-kind redemption process. APs are typically large broker-dealers, banks, or specialized trading firms authorized by the ETF sponsor to transact directly with the fund. They are the only parties who can create or redeem ETF shares in bulk (usually 1 basket = 10s of thousands of shares) . In practice, APs often also function as market makers for the ETF on exchanges: they provide liquidity by posting buy/sell quotes for the ETF shares, and they arbitrage any price discrepancies between the ETF and the underlying Bitcoin price. If the ETF share price is higher than the NAV (premium), an AP can buy BTC, trade it for new shares (creation), then sell those shares at the premium – this arbitrage profit brings the price back in line. If the ETF trades at a discount, an AP can buy up cheap shares, redeem them for BTC in-kind, and sell the BTC, again profiting and tightening the discount. This arbitrage process, enabled by in-kind creation/redemption, is what keeps an ETF’s market price tightly coupled to its net asset value .
In the Bitcoin ETF era, APs include not only crypto-native firms but also household-name banks. BlackRock’s iShares Bitcoin Trust (IBIT) by 2025 had around a dozen APs, seven of which were major global banks (e.g. JPMorgan, Goldman Sachs, BofA, Citi, UBS, ABN AMRO, BMO) . These banks likely partnered with crypto custodians or have internal trading desks to handle the BTC. Their involvement as APs means traditional finance players are now directly interfacing with Bitcoin – sourcing liquidity, managing private keys (via custodians), and transacting in the asset – to facilitate ETF flows. Non-bank market makers (crypto trading firms) are APs as well, often handling day-to-day liquidity. The APs must enter contracts with the ETF sponsor and trustee to uphold certain standards and usually need to be registered broker-dealers . Market makers, whether APs themselves or working with APs, play a crucial role in the secondary market by ensuring tight bid-ask spreads and sufficient volume. The introduction of in-kind redemptions has been praised for further empowering APs/market makers to keep the ETF efficient: “Part of the genius of ETFs is how APs help funds trade more efficiently, but cash-only mechanisms limited that. In-kind creation is one of the final pieces needed for crypto ETPs to reach full efficiency,” noted Bitwise’s CIO Matt Hougan . With in-kind enabled, APs can manage inventory in actual BTC, which reduces the cost and risk of arbitrage (no need for as many cash-for-BTC market transactions by the fund).
Importantly, APs also serve as the conduit for institutional flows to hit the market. When a large investor wants to redeem, they typically sell their ETF shares in the open market; APs buy those shares (pushing price to discount), then redeem in-kind to extract the BTC. The AP’s sell of those redeemed BTC on exchanges translates the initial selling of ETF shares into direct selling of bitcoin. For example, when BlackRock’s IBIT had significant outflows in January 2026, it was APs who triggered “a wave of real BTC transfers to Coinbase Prime” as they redeemed shares and received thousands of BTC which were promptly moved to exchange . Thus, APs and market makers are the key facilitators linking ETF share demand/supply with underlying bitcoin demand/supply. Their incentives (arbitrage profit) align with keeping the ETF liquid and tracking, and in-kind tools give them an efficient way to do so.
Custody, “iBit”, and Technical Infrastructure
Custody & security: Bitcoin ETFs rely on specialized custodians to hold the fund’s BTC reserves safely. The custodian’s job is to securely store the private keys and manage receipt/delivery of bitcoins for the trust. For instance, the Bitcoin Custodian for BlackRock’s IBIT is Coinbase Custody Trust Company, a New York-regulated trust company . Coinbase Custody keeps the bulk of the ETF’s coins in “cold storage” – offline vaults where private keys are held in air-gapped hardware for maximum security . Per the prospectus, “the Bitcoin Custodian keeps all of the private keys associated with the Trust’s bitcoin… in ‘cold storage’” to protect against online threats . A small portion might be held in a secure “Trading Balance” with an execution agent to facilitate quick transfers during creations/redemptions . The ETF’s trust accounting is structured such that the custodian holds the assets segregated for the benefit of the trust – if the custodian were to fail, the trust’s bitcoins are segregated from the custodian’s own assets .
Liquidity and prime brokers: Many Bitcoin ETFs also use a prime broker or execution agent to handle the buying and selling of bitcoin when needed (especially for cash creations/redemptions or intra-day liquidity). BlackRock’s trust, for example, has an arrangement with Coinbase, Inc. as its “Prime Execution Agent,” which is an affiliate of the custodian . This means Coinbase provides a full-service platform (Coinbase Prime) where the ETF can execute large trades or facilitate BTC transfers with APs. In practice, when an AP delivers cash for a creation, Coinbase Prime executes the market purchase of BTC for the trust . Likewise, for cash redemptions, the trust would sell BTC via Coinbase’s platform to raise dollars. Even in in-kind scenarios, the Prime Agent often serves as the settlement venue for BTC transfers – indeed “Coinbase Prime is the primary settlement venue used by U.S. spot Bitcoin ETF issuers”, and APs’ in-kind Bitcoin deliveries/redemptions are typically “routed through Prime” for custody and liquidity . This was evident when IBIT redemptions in 2026 saw Coinbase Prime receive the coins before they hit the broader market .
The role of “iBit”: The term “iBit” can refer to a couple of things in this context, which is worth clarifying. IBIT is the ticker symbol for BlackRock’s iShares Bitcoin Trust ETF (traded on Nasdaq as $IBIT) . However, itBit (with a lowercase “t”) is the name of a cryptocurrency exchange operated by Paxos Trust Company. Paxos’s itBit exchange is a regulated venue included among the “Constituent Platforms” that feed pricing data into the CME CF Bitcoin Reference Rate (the index used by many ETFs to value Bitcoin) . For example, as of the prospectus date, the IBIT trust’s benchmark index drew data from Coinbase, Bitstamp, itBit, Kraken, Gemini, LMAX Digital, and Bullish – a volume-weighted composite of these major USD-BTC markets . The role of itBit for ETFs, therefore, is mainly as one of the reference exchanges ensuring the index price is robust and not easily manipulated (Paxos itBit has moderate volume and is NYDFS-regulated, making it a reliable data source). There is no evidence that BlackRock’s ETF uses itBit as a custody or primary liquidity partner – its custodians are Coinbase (and now Anchorage), and its trading tends to route via Coinbase Prime or other OTC venues. However, itBit could indirectly be used by APs or the prime broker for liquidity; for instance, Coinbase Prime’s smart order routing might tap external exchanges like itBit or others if needed. Generally, though, Coinbase itself is a major liquidity source, and APs also have numerous OTC connections. So, to avoid confusion: IBIT (all caps) is BlackRock’s fund itself, whereas itBit is a Paxos-run exchange contributing to price discovery. The custody partners for notable ETFs have included Coinbase Custody (for BlackRock, Fidelity’s proposed fund, Bitwise, etc.), with some diversification over time. In April 2025 BlackRock added Anchorage Digital as a second custodian to complement Coinbase, in order to spread risk and capacity . (Anchorage is a federally chartered digital asset bank and was already custodian for other BlackRock products, so this was a natural expansion .) This move came amid industry discussions that traditional banks were constrained from offering crypto custody (due to regulatory capital treatment like SAB 121), leading ETF issuers to rely on crypto-native custodians . Other ETF sponsors have similarly adopted multi-custodian models; for example, WisdomTree’s Bitcoin Trust appointed both Coinbase and Bank of New York Mellon as custodians for different roles .
From a technology standpoint, ETF sponsors have heavily invested in integration with custodians and trading systems. BlackRock touted a “multi-year technology integration developed with Coinbase Prime” as a backbone of its Bitcoin Trust’s operations . This integration likely covers secure API connections for reporting and initiating transfers, real-time monitoring of custody balances, and compliance oversight (e.g. whitelisted wallet addresses for APs). The ETF trust’s administrator (e.g. BNY Mellon for BlackRock, or similar for others) coordinates with the Bitcoin custodian and execution agent to process each creation/redemption order . When an AP places an order to create or redeem, there are cut-off times and protocols: for instance, an “In-Kind Order Cutoff Time” might be set at 3:59 PM ET on a trading day , after which any requests roll to next day. By that time, the AP must have either delivered the BTC or confirmed details for receipt, and the fund then processes the basket issuance or redemption. All movements of Bitcoin in/out of the trust are tracked meticulously. BlackRock’s prospectus notes that Bitcoin deposits (from creations) remain with the custodian or prime agent until either delivered out for a redemption or sold for cash to pay expenses . This ensures a clear chain of custody. Moreover, many funds now publish Proof-of-Reserves or daily holding reports. For example, Bitwise’s Bitcoin ETF (BITB) publishes daily audited reports of its BTC holdings vs. outstanding shares , and BlackRock’s IBIT holdings can be tracked via filings and independent websites (as of Jan 2026 IBIT held roughly 774k BTC, ~3.7% of total supply) . Such transparency, combined with reputable custody, is key to institutional comfort with in-kind handling of crypto assets.
In summary, the technical infrastructure supporting in-kind redemptions includes: secure custodians (Coinbase Custody, Anchorage, etc.) using cold storage vaults ; prime brokerage platforms (Coinbase Prime) for execution and settlement liquidity ; robust pricing indexes (with itBit and other exchanges contributing data) to fairly value the BTC; and integrated administration systems to coordinate it all in real-time. This plumbing ensures that when an AP hands over (or receives) bitcoins, the transaction is seamless, secure, and compliant.
Regulatory and Tax Implications
The shift to in-kind redemption required regulatory clearance, which was achieved in 2025. On July 30, 2025, the SEC voted to approve in-kind creation/redemption for crypto ETPs, recognizing that it “provides efficiencies and cost savings” by letting ETF issuers transact in the underlying asset directly . Prior to this, U.S. crypto ETFs (from the first launches in Jan 2024 through mid-2025) had been using cash-only processes as a stopgap. The SEC’s approval brought crypto ETFs in line with standard ETF operations “that institutions trust most” and was heralded as a breakthrough in integrating crypto with traditional markets . Both Nasdaq and NYSE Arca (the exchanges listing these products) filed rule changes to accommodate in-kind settlements for Bitcoin trusts, which the SEC approved . These rules ensure that an ETF exchange’s clearinghouse can handle the delivery of Bitcoin to/from APs in a secure manner, often involving authorized crypto custodians. They also enforced that only APs that are registered broker-dealers (and likely subject to certain crypto custody guidelines) can participate, which indirectly brought large banks and brokers into closer touch with crypto. A side effect noted was that banks would have more “indirect” crypto exposure – by serving as or for APs, banks might temporarily hold Bitcoin or facilitate its transfer . This was acceptable to regulators especially after guidance that broker-dealers could custody crypto under certain conditions, and after carve-outs to stringent accounting rules (like the SAB 121 update) were made for ETFs . In essence, the regulatory stance evolved to consider in-kind ETF flows as low-risk, since the crypto never sits unaccounted; it moves between regulated entities (ETF trust’s custodian and AP’s custodian accounts) with full transparency.
From a tax perspective, in-kind redemptions are generally favored for their efficiency. In U.S. equities ETFs, in-kind transfers allow funds to purge low-cost-basis stocks without triggering taxable gains – a feature that makes ETFs more tax-efficient for investors. In the case of Bitcoin ETPs structured as grantor trusts (like IBIT or BITB), the trust itself is not a taxable entity that distributes capital gains, so the comparison is a bit different. However, even here, in-kind redemptions mean the trust does not have to sell bitcoin to meet redemptions. If the trust were forced to sell BTC (as in a cash redemption) and realize gains, those could eventually be reflected in investors’ tax liability (either via fewer BTC per share or via the passthrough nature of the trust). In-kind avoids that by handing off the asset itself. Bitwise noted that allowing APs to transact in-kind “could contribute to… reduced tax exposure” for investors. Essentially, any appreciated bitcoin leaves the fund as bitcoin, not as a sale-for-cash, so the realized gain happens outside the fund (when the AP eventually sells the BTC). APs, being professional traders, can manage that on their own books (and often they might have tax-exempt status on inventory, or they can net against other positions). Meanwhile, remaining ETF shareholders are not hit with taxable events inside the fund. This mirrors the tax advantage long enjoyed by commodity and stock ETFs with in-kind creation/redemption mechanisms. Investors who hold the Bitcoin ETF in a taxable account would generally only owe capital gains tax when they sell their ETF shares (just as they would if they held actual BTC), and not be surprised by any year-end capital gain distributions from the fund. Another benefit: some institutional investors (like certain pension or endowment funds) prefer in-kind because it can be treated as an asset swap rather than a sale, potentially deferring or avoiding immediate tax on that transaction depending on jurisdiction.
It’s worth noting that the legal structure of many Bitcoin ETFs (e.g. grantor trust or commodity trust) means they don’t enjoy the same special tax treatment as ’40 Act equity ETFs, but the in-kind process still minimizes unnecessary trading. The trusts do periodically sell tiny amounts of BTC to cover management fees, which is a taxable event for holders (e.g. the prospectus warns that the BTC sales for fees will slowly diminish the BTC per share and could create tax liabilities) . In-kind redemptions do not change that dynamic but ensure that larger inflows/outflows beyond fees are handled by asset transfers.
On the regulatory compliance side, each in-kind transfer of BTC between APs and the trust’s custodian is subject to strict AML/KYC procedures. APs must be financial institutions in good standing, and they or their agents typically have whitelisted wallet addresses with the ETF custodian. This prevents any tainted coins or unknown parties from interacting with the fund. The SEC’s approval of in-kind creations was partially predicated on comfort that broker-dealers can control crypto custody risks and that there are sufficient “surveillance sharing” agreements in place (e.g. Nasdaq/Cboe working with exchanges like Coinbase to monitor for market manipulation). Indeed, BlackRock’s ETF proposal highlighted its surveillance agreement with Coinbase and robust custody controls as mitigants, which likely helped the SEC get comfortable with physical Bitcoin handling.
In sum, the move to in-kind redemptions was a major positive development: regulators allowed it to improve fairness and efficiency, and it aligned crypto ETFs with best practices. The tax implications are favorable – no forced taxable sales inside the fund – enhancing the appeal to investors. One caveat is that with real BTC moving out of custodians, large redemptions can affect market liquidity (whereas cash redemptions might have been buffered by OTC selling over time). But given Bitcoin’s increasing market depth and the transparency of ETF flows, the market can adjust. Observers have indeed started treating ETF on-chain withdrawal/deposit signals (from custodians) as important market indicators, akin to how traditional finance watches fund flow data. Regulatory oversight will continue to monitor these mechanisms, but so far in-kind processes have functioned as intended: providing a “rational regulatory framework for crypto, leading to a deeper and more dynamic market”, in the words of one SEC commissioner .
Examples and Case Studies of In-Kind Redemptions
Since approval, almost all U.S. Bitcoin spot ETFs have utilized in-kind creations and redemptions. BlackRock’s iShares Bitcoin Trust (IBIT) is the largest and most prominent example. Launched in January 2024, IBIT initially operated with cash creations/redemptions only. In early 2025, BlackRock filed a post-effective amendment to enable in-kind transactions , marking a shift from the original cash-only model. Both Nasdaq and NYSE Arca submitted rule changes to accommodate this, and by mid-2025 IBIT had the flexibility for APs to deposit or receive Bitcoin directly . BlackRock’s filing emphasized that APs “will deliver only bitcoin or cash to create Shares and will receive only bitcoin or cash when redeeming Shares”, underlining that no other assets would be used . IBIT’s creation/redemption unit size is 40,000 shares, and as of late 2025 each basket was roughly 22–23 BTC (valued around $2+ million) . This size may evolve, but it sets a high bar ($$$) ensuring only significant players participate in primary transactions.
Growth and flows: IBIT grew to an AUM of ~$70 billion by Jan 2026, holding about 774k BTC (nearly 3.7% of all Bitcoin) . Creation activity was heavy during 2024’s bull run, as many institutions gained Bitcoin exposure via the ETF. For example, IBIT’s BTC holdings jumped by thousands of BTC on several days in late 2025 (e.g. +5,198 BTC on Oct 1, 2025, and even +25,286 BTC on Oct 7, 2025 during especially large inflows) . Each of those increases reflects APs delivering huge amounts of bitcoin to the trust in-kind. Conversely, IBIT also saw days of net redemptions (e.g. -5,628 BTC on Nov 18, 2025, and -7,489 BTC on Nov 14, 2025) . Those outflows coincided with Bitcoin price pullbacks and profit-taking. The January 12, 2026 episode has become an illustrative case study: Bitcoin’s price rally stalled at ~$91k, seemingly due in part to ETF redemptions. On that day, U.S. spot BTC ETFs in aggregate had a net outflow of 3,734 BTC, with BlackRock’s IBIT accounting for the bulk (2,791 BTC redeemed) . Blockchain analytics showed IBIT’s custodian wallets sending a series of 300 BTC chunks to Coinbase Prime soon after, totaling over 3,400 BTC moved to the exchange . This strongly indicates APs were redeeming and promptly moving the coins to sell. Indeed, Coinbase Prime is where these transfers landed, as it’s the common venue for ETF settlement . The timing coincided with Bitcoin’s intraday price reversal from $92k down to $91k, suggesting the ETF redemption acted as immediate sell pressure on the market . Such examples demonstrate how in-kind redemptions make ETF flows an active factor in market dynamics: ETFs not only absorb BTC during inflows, but also distribute BTC into the market on outflows, effectively functioning as large swing traders based on investor demand.
Other institutions have embraced the in-kind model as well. Bitwise Asset Management, which launched the Bitwise Bitcoin ETP (BITB) and Bitwise Ethereum ETP (ETHW) in 2024, announced in July 2025 that it received SEC approval to begin in-kind creations/redemptions for those funds . Bitwise heralded this as a win for investors, noting it would likely tighten spreads and eliminate certain taxable events . BITB’s custodian is also Coinbase Custody, with BNY Mellon as administrator . Fidelity’s Wise Origin Bitcoin Trust (once approved) and others like VanEck’s and WisdomTree’s Bitcoin ETFs all similarly planned to use in-kind processes, typically naming trusted crypto custodians (Coinbase, Gemini, etc.) in their filings. In Canada and Europe, physically-backed Bitcoin ETPs have actually operated with in-kind creation/redemption from the start (for example, Canada’s Purpose Bitcoin ETF allowed redemptions for BTC). Those international products provided early lessons – they generally traded very close to NAV, validating the efficacy of in-kind mechanisms. The U.S. catching up has now standardized this approach across major markets.
Institutional usage: Large investors (such as hedge funds or corporate treasuries) who want to convert significant bitcoin holdings into an ETF (or vice versa) particularly benefit from in-kind swaps. For instance, if a firm already holds a large amount of BTC but prefers the ETF for regulatory or custody reasons, an AP can facilitate an in-kind creation: the firm delivers BTC (possibly via the AP) and receives ETF shares, without incurring the market impact of selling BTC for cash then buying ETF shares. Similarly, a big holder of ETF shares can redeem in-kind to take possession of underlying bitcoins – this might appeal to entities that decide to self-custody the asset or use it elsewhere. There was speculation that some institutional players might arbitrage between the Grayscale Bitcoin Trust (GBTC) and the new ETFs by redeeming GBTC for BTC (if allowed in the future) and then contributing that BTC to a cheaper ETF via in-kind creation. While GBTC’s conversion to an ETF is still pending, the existence of an in-kind route will make such arbitrage more straightforward and tax-efficient if it happens.
Lastly, it’s notable that multi-custodian setups and partnerships are becoming the norm as the sector matures. BlackRock adding Anchorage in 2025 , WisdomTree adding Coinbase alongside traditional custodians – these moves aim to ensure that if one custodian or liquidity provider faces an issue, creations/redemptions can continue smoothly with another. The ETF sponsors also maintain backup arrangements with market makers: for example, if one AP is unable to fulfill orders, another can step in. This redundancy is important because the stakes are high – a disruption in the creation/redemption mechanism could cause an ETF to trade at a steep premium/discount. So far, the infrastructure (Custody + AP network + prime brokers) has proved resilient, even during volatile crypto market conditions.
In conclusion, Bitcoin in-kind redemptions have become a cornerstone of how institutional flows interact with the crypto market. They allow large volumes of BTC to move between the market and secure ETF vaults with relative ease, guided by the arbitrage incentives of APs. The process delivers the benefits of the ETF structure – liquidity, convenience, and (in the U.S.) potentially favorable tax treatment – while directly involving the underlying asset. By examining IBIT and its peers, we see that in-kind mechanisms are not just a back-office technicality, but a driver of market supply-demand dynamics and a bridge bringing together Wall Street institutions, crypto-native firms, and regulators under a common framework. As one report put it, “Bitcoin has entered a new phase of market plumbing… ETF inflows and outflows now drive physical settlement flows”, underscoring that the maturation of Bitcoin ETFs and their in-kind redemption process has truly interlinked traditional finance with the Bitcoin network .
Sources: Connected references provide detailed information from ETF issuers, regulatory filings, and news analyses on the above topics , among others. These include BlackRock’s IBIT prospectus and factsheets, SEC and Federal Register documents, the Bitwise press release, Ledger Insights and AMBCrypto articles on SEC rulings and ETF flows, and data from Bitbo and Coinbase indicating actual Bitcoin movements. All evidence points to in-kind redemptions being a well-founded, beneficial practice now entrenched in Bitcoin ETF operations.