SEC’s in-kind endorsement could trigger significant $710 billion supply shortage for Bitcoin ETFs.

On July 29, the U.S. Securities and Exchange Commission sanctioned in-kind creation and redemption processes for spot Bitcoin and Ethereum exchange-traded products (ETPs), representing a significant transformation in the foundational framework supporting crypto investment vehicles.

This decision replaces the cash-only approach utilized in the initial phase of crypto ETPs and aligns the regulatory framework for digital asset funds with current standards applicable to commodity ETPs, such as those for gold. SEC Chair Paul S. Atkins, who took office in April, characterized this action as part of a larger initiative to create a “fit-for-purpose” framework for cryptocurrency.

The SEC’s order also progressed a series of related approvals, including mixed BTC+ETH ETP applications, options on specific spot Bitcoin ETPs, and increased position limits for these derivatives, reaching the standard 250,000-contract threshold observed in traditional commodity markets.

These modifications aim to synchronize the crypto derivatives landscape with that of well-established physical-asset ETPs. This initiative follows a series of filings in July from exchanges that indicated regulatory preparedness for in-kind operations.

In contrast to cash-based frameworks, where authorized participants (APs) provide fiat currency and depend on a fund’s agent to carry out crypto acquisitions in open markets, in-kind mechanisms enable APs to directly deliver or receive the underlying asset, Bitcoin or Ethereum.

This eliminates the necessity for fund-driven market transactions and allows participants to utilize existing sourcing channels such as over-the-counter (OTC) desks, internal inventory, or borrowing arrangements. The outcome is generally lower transaction costs, narrower bid-ask spreads, and improved net asset value (NAV) tracking, as is well established in commodity ETFs like SPDR Gold Shares.

How in-kind creations and redemptions change the model

The operational transition reconfigures primary market flows for arbitrage-focused APs. With the in-kind model, they can short the ETF and source crypto directly for creation when premiums arise or redeem ETF shares for crypto when discounts occur. This removes the execution delay and basis risk linked to cash settlements, creating more straightforward hedging opportunities using CME futures. With open interest in CME Bitcoin derivatives approaching record levels in mid-2025, liquidity seems adequate to support these adjustments.

The updated mechanism also modifies how ETF flows interact with the spot crypto markets. In the prior model, fund-side purchases or redemptions exerted direct buy/sell pressure on exchanges, often affecting short-term price fluctuations.

Now, APs can meet their asset obligations through OTC channels, thereby minimizing the market footprint and potentially reducing volatility during periods of heavy flow. This reflects the bullion market’s utilization of OTC networks to settle gold ETP flows, alleviating stress on public order books.

Opening the door to significant inflows

As the infrastructure evolves, several indicators will gauge the market impact of the SEC’s decision. These include ETF premium and discount behavior relative to NAV, the spread between CME futures and spot prices, and on-exchange depth metrics on major USD trading platforms. Analysts will monitor whether OTC market activity rises on high-creation days and whether public exchange liquidity becomes more robust.

Mechanically, the transition may slightly lessen the direct exchange impact of ETF flows, mitigating short-term price effects from primary market activity. However, the broader implications suggest increased scalability.

Reduced costs, cleaner arbitrage, and enhanced hedging tools elevate the vehicle’s attractiveness to institutional investors. If these benefits lead to sustained net inflows, the upward pressure on spot Bitcoin and Ethereum demand could be considerable.

ETF flow data from earlier in 2025 already shows a strong correlation between net inflows and Bitcoin price increases. By streamlining fund operations, the in-kind model lowers barriers for larger allocations and facilitates more predictable pricing behavior.

The introduction of options and higher derivative limits further bolsters institutional positioning, reflecting how access innovations previously aided in scaling commodity exposures.

The regulatory reform effectively modernizes the infrastructure surrounding crypto ETPs.

By allowing in-kind creations and redemptions, the SEC has established a pathway for demand to flow more efficiently into digital assets, minimizing friction without altering the fundamental premise: flows influence markets, and structure determines how much of that flow reaches the chain.

Ultimately, for Bitcoin ETFs to compete in size with the largest funds by AUM globally, in-kind creations and redemptions are essential. The operational opportunities are vast, and the efficiency brought by this change is crucial for attracting additional capital.

The largest ETF by AUM is Vanguard’s S&P 500 ETF (VOO), which holds $714 billion. In contrast, the largest spot crypto ETF, BlackRock’s (IBIT), currently manages $86 billion.

ETF leaderboard (Source: VettaFi)

Could in-kind creations and redemptions enable Bitcoin ETFs to reach a level comparable to VOO’s $700 billion? Achieving that would require a tenfold increase from the current position, but if Bitcoin prices continue to rise against the dollar, future developments remain uncertain.

At a Bitcoin price of $200,000, IBIT would already rank among the top 10 ETFs by assets, even without any additional inflows. If inflows persist alongside BTC price appreciation over the next few years, a supply squeeze becomes nearly unavoidable.

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