Authorized participants can now create and redeem shares of spot bitcoin exchange-traded products by delivering or receiving bitcoin directly, instead of cash, under a mechanism the SEC approved on July 29, 2025, according to the agency's own announcement. The change, called in-kind creation and redemption, keeps an ETF's share price tracking its underlying asset.
Creation and redemption are the two operations that let a spot bitcoin ETF's share count expand and contract to match investor demand, preventing the fund's market price from drifting far from the value of the bitcoin it holds. A small group of large financial institutions called authorized participants, or APs, are the only entities permitted to deal directly with the fund; everyday investors buy and sell shares on an exchange, never with the fund itself.
How does the creation and redemption process work?
An authorized participant creates new ETF shares by assembling a “creation basket” — a fixed bundle of the underlying asset, sized to the fund's per-share net asset value — and delivering it to the fund in exchange for a block of new shares, typically 25,000 or more at a time. Redemption runs the same process in reverse: the AP hands back shares and receives the basket's assets, then removes those shares from circulation.
This two-way mechanism is what economists call the arbitrage loop. If an ETF's market price rises above the value of the bitcoin it holds, APs can profit by creating new shares with cheaper underlying assets and selling them at the higher market price, which pushes supply up and price back down. If the price falls below net asset value, the reverse trade pulls shares out of the market. The tighter and cheaper this loop, the closer the fund tracks its benchmark.
Each fund sets its own creation unit size and basket composition in its prospectus, and only authorized participants that have signed a participant agreement with the fund's distributor can place creation or redemption orders, which are typically processed once per trading day at a cutoff time tied to the fund's net asset value calculation. Retail brokerage orders, by contrast, execute continuously on the exchange at whatever price buyers and sellers agree to, which is one reason a fund's intraday market price can briefly diverge from its net asset value even while the arbitrage mechanism works to close the gap.
How did the cash-only model work before the SEC's order?
When the first spot bitcoin ETFs launched in the United States in January 2024, the SEC had approved them on a cash-only basis: authorized participants delivered or received U.S. dollars, and the fund itself — through the issuer or a designated broker — handled the actual buying or selling of bitcoin on the open market. That structure added a layer of transactions the fund had to execute and pay for on every creation or redemption, according to the SEC's July 29, 2025 press release describing the change it approved. The approval followed a request BlackRock filed in January 2025, and applied to funds from issuers including Fidelity and Ark Invest as well, according to CoinDesk.
Bitwise, one of the issuers whose bitcoin and ether funds received approval to move to in-kind transactions, described the prior arrangement in a July 31, 2025 newsroom statement: authorized participants “could only exchange U.S. dollars for new shares,” with the fund's operator standing in the middle of every cryptocurrency trade the cash-only structure required.
What changed with in-kind creation and redemption?
Under the mechanism the SEC approved, authorized participants can now deliver or receive bitcoin itself when creating or redeeming ETF shares, removing the fund's need to buy or sell the underlying asset on the open market for that purpose, per Bitwise's statement on the approval. The change brings spot bitcoin ETPs in line with how most commodity-based exchange-traded products, such as those holding physical gold, have long operated, according to the SEC's press release.
The same July 29, 2025 SEC action also approved options on certain spot bitcoin ETPs, increased position limits to 250,000 contracts for listed bitcoin ETP options, and cleared exchange applications covering mixed spot bitcoin-and-ether products, the agency said. SEC Chair Paul Atkins said in the release that “investors will benefit from these approvals, as they will make these products less costly and more efficient,” while the agency's Division of Trading and Markets director, Jamie Selway, said in-kind creation and redemption “provide flexibility and cost savings to ETP issuers, authorized participants, and investors.”
Why does the mechanism matter for investors?
The in-kind switch does not change how retail investors buy or sell ETF shares — that still happens on a stock exchange, with no direct exposure to the creation-and-redemption process, Bitwise noted in its statement. What it changes is what happens behind the scenes: with authorized participants no longer forced through a cash conversion step, Bitwise said the shift could support tighter bid-ask spreads, lower operating costs for the fund, and reduced tax exposure tied to in-fund bitcoin sales. Bitwise Chief Investment Officer Matt Hougan called in-kind creation “one of the final structural pieces that spot crypto ETPs need to reach their full potential as a mainstream investment,” according to the company's newsroom statement.
A tighter arbitrage loop generally means an ETF's market price tracks its net asset value more closely, which matters most to investors trading in size or those sensitive to the small but persistent costs that accumulate from a fund's day-to-day cash trading activity. None of this changes the underlying volatility of bitcoin itself, and a fund's tracking mechanics are separate from the price risk of holding it — a distinction worth keeping in mind before treating any structural upgrade as a signal about where bitcoin's price is headed.
What are the limits of the in-kind mechanism?
Not every ETF share class or issuer necessarily uses the same basket composition or AP roster, and the SEC's order was structured through individual exchange rule changes and issuer requests rather than a single blanket rule covering all products, per the agency's press release. Authorized participants remain a small, defined set of institutions; the mechanism does not open direct bitcoin delivery to retail shareholders. Custody of the bitcoin delivered or received in-kind still runs through the fund's designated custodian, and the operational shift does not alter the fund's disclosed fee structure or its risk disclosures around bitcoin's price volatility.
Frequently Asked Questions
- What is an authorized participant? An authorized participant is a large financial institution with a contractual agreement to create and redeem ETF shares directly with the fund, the only entities permitted to do so; retail investors trade shares on an exchange instead.
- Did in-kind approval change how retail investors buy bitcoin ETF shares? No. Individual investors still buy and sell shares through a broker on an exchange; the in-kind mechanism applies only to the wholesale creation and redemption process run by authorized participants, per Bitwise's statement on the change.
- When did the SEC approve in-kind creation and redemption for bitcoin ETPs? The SEC's approval was announced July 29, 2025, covering spot bitcoin and ether exchange-traded products, according to the agency's press release.
- Does in-kind creation reduce bitcoin's price volatility? No. The mechanism affects how efficiently a fund's share price tracks its underlying bitcoin holdings; it does not reduce the price volatility of bitcoin itself.
For a related bitcoin perspective, read Why Bitcoin Self-Custody Still Matters in a Connected Market.
For more context, read Why Bitcoin Self-Custody Still Matters in a Connected Market.
For more context, read bitcoin transactions.
