Bitcoin News Today: SEC approves in-kind Bitcoin ETFs sparking $710B supply squeeze potential

The U.S. Securities and Exchange Commission’s recent approval of in-kind creation and redemption mechanisms for spot Bitcoin and Ethereum exchange-traded products (ETPs) has triggered significant speculation about the potential for a $710 billion supply squeeze in the cryptocurrency market. The decision, announced on July 29, replaces the cash-only model used in earlier crypto ETPs and aligns the regulatory structure with that of commodity ETFs, such as those for gold. This shift, described by SEC Chair Paul S. Atkins as part of a broader effort to create a “fit-for-purpose” crypto framework, allows authorized participants (APs) to directly exchange Bitcoin or Ethereum for ETF shares, bypassing the need for fund-driven market trades. The change is expected to reduce transaction costs, narrow bid-ask spreads, and improve net asset value (NAV) tracking, mirroring the efficiency seen in traditional commodity ETFs [1].

The in-kind mechanism alters the operational dynamics for arbitrage-focused APs, enabling them to respond to price premiums or discounts by directly sourcing or delivering crypto assets through over-the-counter (OTC) desks, internal inventory, or borrowing arrangements. This reduces execution lag and basis risk associated with cash settlements, while also leveraging CME Bitcoin futures for hedging. With open interest in these derivatives near record highs, liquidity appears sufficient to support the transition. Additionally, the shift is expected to reduce the direct market footprint of ETF flows by channeling asset obligations through OTC networks, akin to the gold ETP model, potentially softening volatility during high-volume days [1].

The regulatory overhaul introduces new metrics for assessing market impact, including ETF premium/discount behavior relative to NAV, the spread between CME futures and spot prices, and on-exchange liquidity depth. Analysts will monitor whether OTC activity surges during high-creation periods and whether public exchange liquidity becomes more resilient. While the immediate effect may dampen short-term price volatility from primary market activity, the long-term implications point to enhanced scalability for crypto ETPs. Lower costs and improved hedging tools are expected to attract institutional allocators, particularly if sustained net inflows drive upward pressure on Bitcoin and Ethereum demand. Early 2025 ETF flow data already shows a strong correlation between net inflows and Bitcoin price appreciation, suggesting the in-kind model could facilitate larger, more predictable allocations [1].

The potential scale of this shift is underscored by the current disparity between crypto and traditional ETFs. Vanguard’s S&P 500 ETF (VOO), the largest fund by assets under management (AUM), holds $714 billion, while the largest spot crypto ETF, BlackRock’s IBIT, manages $86 billion. If Bitcoin ETFs were to grow to match VOO’s size, a 10x increase in assets would likely require a corresponding surge in Bitcoin demand, potentially triggering a supply squeeze. At a Bitcoin price of $200,000, IBIT would rank among the top 10 ETFs by AUM, even without additional inflows. Sustained price appreciation and continued ETF inflows could make such a scenario inevitable, reshaping the dynamics of the crypto market [1].

The approval also advances related measures, including mixed BTC+ETH ETP applications, options on spot Bitcoin ETPs, and higher position limits for derivatives. These changes aim to harmonize the crypto derivatives ecosystem with established physical-asset ETPs, supporting institutional adoption through improved risk management tools. By streamlining fund operations and reducing friction, the SEC’s decision positions Bitcoin ETFs to compete more effectively with traditional asset classes, provided market conditions align with the projected growth trajectory [1].

Source: [1] SEC’s in-kind approval can spark HUGE $710 billion supply squeeze for Bitcoin ETFs (https://cryptoslate.com/secs-in-kind-approval-can-spark-huge-710-billion-supply-squeeze-for-bitcoin-etfs/)