In response to a reader's request, this post discusses key facts and mechanics of the Bitcoin spot ETFs. I use BlackRock's IBIT specifically but the same breakdown can be accomplished for all other ETFs. We delve into the construction of the ETF, clarifying the valuation of shares against Bitcoin's market price, and articulate the daily interplay among investors, market makers, and ETF issuers. I walk through an example using Alice and Bob to show the trading, hedging, and settling processes. Let’s get started.
Each IBIT share represents 0.0005695 BTC. We get this amount by taking the Basket Bitcoin Amount of 22.78, which is the denomination used by Authorized Participants for creations and redemptions, and dividing it by the number of shares in a basket, that being 40,000 for IBIT. At a current market price of $71,550, that works out to $40.75 a share. That checks out because, at the same time, the price of IBIT was $40.91. You would need approximately 1,756 IBIT shares to equal 1 BTC.
Since the launch of Bitcoin spot ETFs, a consistent settlement pattern has developed. While the ETFs' official documents permit a settlement timeframe of up to T+2 days, actual practices have seen daily settlements. Notably, these are often conducted on Coinbase Prime the following morning. For those interested in real-time insights, HODL15Capital on X is a recommended follow, offering daily updates.
Market makers and issuers reference the CME CF Bitcoin Reference Rate (BRRNY), a standardized reference rate published by CF Benchmarks Ltd., designed to reflect the performance of bitcoin in USD. It is a once-a-day benchmark rate of the USD price of bitcoin, calculated as of 4:00 p.m. ET, and was created to facilitate financial products based on bitcoin. Each day, market makers and issuers use this rate to determine necessary settlement figures. Additionally, market makers remain active throughout trading hours to effectively manage their risk exposure.
The market for Bitcoin spot ETFs, like BlackRock's IBIT, involves a nuanced interaction among investors, market makers, issuers, and trading platforms. Market makers are crucial in this system, ensuring liquidity by facilitating buy and sell orders, and hedging their positions using Bitcoin futures or direct purchases.
For instance, when an investor buys shares in a Bitcoin spot ETF, a market maker may need to purchase Bitcoin in the spot market to maintain a balanced position, directly influencing Bitcoin's price. Conversely, if an investor sells ETF shares, a market maker might need to short Bitcoin futures to hedge. Issuers of these ETFs, responsible for the product's structure and compliance, interact with various market platforms to manage the fund's holdings, ensuring the ETF's price aligns with Bitcoin's market value.
This interconnected ecosystem not only enhances market depth and efficiency but also provides a structured and regulated environment for Bitcoin exposure. There are, of course, trade-offs. When you gain Bitcoin exposure through an ETF, you are several steps removed from owning the actual Bitcoin. However, the ETFs enable the market to accommodate a range of strategies and investor preferences, and it integrates Bitcoin ownership into the incentive structure of the global financial system...
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