U.S. Bitcoin ETFs Q1: Major institutions hold $10.7 billion, but…

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    U.S. Bitcoin ETFs saw massive demand from investment firms in Q1
    Off-chain transactions linked to BTC ETFs have raised eyebrows, but they are part of the ‘cash redemption’ feature. 

As an analyst with a background in blockchain technology and experience in following the digital asset market closely, I believe that while the massive demand for U.S. Bitcoin ETFs from investment firms in Q1 is a positive sign for the mainstream adoption of cryptocurrencies, the off-chain transactions linked to these ETFs raise some concerns.

In Q1, major financial institutions significantly increased their investment in Bitcoin [BTC] ETFs, collectively holding assets valued at approximately $10.7 billion based on data from Bitwise Asset Management’s Chief Investment Officer, Matt Hougan.

As an analyst, I’ve reviewed Hougan’s data revealing that a total of 944 firms managing assets exceeding $100 million disclosed ownership of U.S.-listed Bitcoin spot Exchange-Traded Funds (ETFs).

As a financial analyst, I’ve observed an intriguing development in the hedge fund community. Notable firms such as Point72 Asset Management led by Steven Cohen, Citadel Advisors, Millennium Management, and Elliot Investment Management have expressed interest in Bitcoin Exchange-Traded Funds (ETFs). These financial powerhouses are exploring opportunities in this emerging asset class, potentially positioning themselves to reap potential benefits from the growing popularity of Bitcoin ETFs.

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As a Bloomberg ETF analyst, I can share that Millennium Management held more than $2 billion in assets spread across four Exchange-Traded Funds (ETFs) on my list.

U.S. Bitcoin ETFs’ cash redemptions and off-chain transactions

As a crypto investor keeping a close eye on market trends, I’ve observed that many transactions, according to the astute market commentator Tyler Durden, have been executed off-chain.

“Coinbase allows Blackrock to transfer an unlimited amount of Bitcoin without recording the transaction on the blockchain.”

Dave Weisberger from Coinroutes pointed out that off-the-chart transactions are integrated into the cash withdrawal function of U.S. Bitcoin spot ETFs.

As a crypto investor, I understand that due to regulatory requirements imposed by the SEC, they had no choice but to implement “cash conversion mechanisms” instead of directly handling Bitcoin in the spot market. Consequently, these Automated Public Offerings (APOs) are compelled to carry out transactions off the Bitcoin blockchain.

Bloomberg ETF analyst James Seyffart echoed Weisberger’s take.

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For those unfamiliar with the term, the “cash redemption or creation feature” refers to a mechanism in U.S. Bitcoin Exchange-Traded Funds (ETFs) that allows transactions in these funds to be settled exclusively in cash. This means that when buying or selling shares of the fund, the exchange of assets is done with cash rather than with bitcoin itself.

According to Weisberger’s perspective, having a 1:1 relationship between an ETF and the underling Bitcoin does not necessarily imply that the ETF issuers directly hold each Bitcoin token.

“Has no impact on the Bitcoin holdings of the ETFs. This observation does not alter the requirement that all settled shares of the ETFs be fully collateralized with Bitcoin held by the custodian.”

As an intelligence data analyst, I frequently monitor and analyze the wallet activities of Bitcoin Exchange-Traded Fund (ETF) issuers in the United States, such as Arkham. This practice allows us to gain valuable insights into their operations. However, it’s important to acknowledge that a significant portion of these transactions occur off-chain, which can create transparency challenges and deviate from the core principles of blockchain technology – openness and visibility.

Industry experts generally believe that the process for exchanging securities, known as “in-kind” redemptions and creations, could be improved in terms of efficiency, clarity, and overall effectiveness. However, Hong Kong’s newly introduced spot ETFs address these concerns by offering a more streamlined and transparent approach.

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“An ‘in kind’ redemption allows for the settlement of transactions through the actual cryptocurrency asset itself, such as Bitcoin or Ethereum [ETH]. Consequently, instead of using cash, ETF shares are exchanged using these crypto assets.”

As a researcher studying blockchain technology, I’ve discovered that on-chain transactions offer several advantages. One of these benefits is their transparency and efficiency. This is achieved through the ability to trace each transaction using blockchain explorers like Etherscan. By doing so, we can easily follow the flow of digital assets from one address to another, ensuring a clear and unambiguous record of every transaction that takes place on the network.

As a crypto investor, I’ve noticed that U.S. spot Bitcoin ETFs could have benefited from greater transparency through the use of the ‘in kind’ feature. However, the off-chain transactions involved in this process will persist as per SEC’s current guidelines.

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2024-05-18 11:03