After the SEC preferred the “Cash (Cash) Creation” method for Bitcoin Spot ETFs, the differences between In-Kind ETFs and Cash ETFs were put under the spotlight.
Cash ETFs involve authorized participants creating or repurchasing shares in exchange for cash. This method usually requires selling the underlying asset, such as Bitcoin, to raise the necessary cash. However, this method has two important disadvantages:
- Tax Inefficiency: The ETF incurs capital gains or losses when selling Bitcoin for cash to manage the creation or redemption of shares. These gains or losses are distributed among shareholders, giving rise to potential tax liabilities regardless of whether they sell their ETF shares.
- Price Tracking Error: The need to sell Bitcoin for cash can lead to a discrepancy between the performance of the ETF and the actual performance of Bitcoin. This discrepancy is especially noticeable in volatile market conditions.
In contrast, the In-Kind ETF allows authorized participants to create or redeem shares via direct exchange, eliminating the need to sell the underlying Bitcoin for cash. This method offers two important advantages:
- Tax Efficiency: Since there is no sale of the underlying asset, ETF buyers are only taxed when they sell their shares.
- Accurate Price Tracking: In In-Kind ETFs, 1 BTC equals 1 BTC, ensuring the performance of the ETF accurately reflects the performance of Bitcoin.
Bloomberg's ETF analysts Eric Balchunas and James Seyffart also said in their statement that ETFs based on the “Cash Creation” system have actually lost the tax advantage, which is the “superpower” of the ETF industry.
*This is not investment advice.